<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 2000
REGISTRATION NO. 333-XXXXX
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SITESMITH, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 77-0522276
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3283 SCOTT BLVD.
SANTA CLARA, CA 95054
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
--------------
MARK F. SPAGNOLO
CHIEF EXECUTIVE OFFICER AND PRESIDENT
3283 SCOTT BLVD.
SANTA CLARA, CA 95054
(408) 987-6400
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
--------------
COPIES TO:
JEFFREY Y. SUTO STEPHEN L. BURNS
DAVID C. LEE CRAVATH, SWAINE & MOORE
RICHARD G. CHISHOLM WORLDWIDE PLAZA
DANIEL M. FRIEDLAND 825 EIGHTH AVENUE
VENTURE LAW GROUP NEW YORK, NY 10019
A PROFESSIONAL CORPORATION
2800 SAND HILL ROAD
MENLO PARK, CA 94025
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, 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, please check the following box. / /
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C>
====================================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 $40,000,000 $10,560
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
********************************************************************************
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
********************************************************************************
SUBJECT TO COMPLETION, DATED AUGUST 11, 2000
Shares
[SITESMITH LOGO]
Common Stock
--------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $ and $ per share. We have applied to list our
common stock on The Nasdaq Stock Market's National Market under the symbol
"STSM".
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SITESMITH
------------- ---------------- --------------
Per Share.................. $ $ $
Total...................... $ $ $
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
ROBERTSON STEPHENS
The date of this prospectus is , 2000.
<PAGE>
[INSIDE FRONT COVER--GRAPHICS AND TEXT]
{Top Center--SiteSmith URL--www.sitesmith.com}
{Left column art work and headlines without body copy from 3 advertisements that
SiteSmith ran in national publications.}
Headlines
{Image 1. Salt & Pepper Shakers}
You Provide the Internet Site
We Provide the Tools,
The People and the Seasoning
To Really Make it Cook
{Image 2. Alarm Clock}
If Your Site
Isn't Running Like Clockwork,
Consider This
Your Wakeup Call
{Image 3. Pressure Gauge}
Nobody Is
Better Equipped To Manage
High Pressure
Internet Infrastructure Management
The Tools, People and Experience To Keep Internet Sites Up and Running
Whether an Internet site gets 100 hits a day or several million, SiteSmith has
the tools, people and experience you need to ensure quality operations on your
Internet site.
SiteSmith is a leading provider of comprehensive, cutting-edge Internet
infrastructure management services. Our services are designed to maximize the
performance, reliability and security of large-scale, complex Internet sites. In
order to build a large-scale Internet operation, a company must not only design
an Internet site but must also establish a complex Internet infrastructure that
consists of web and application servers, network-connectivity, operating
systems, databases, storage, security, monitoring, and other appropriate
hardware and software. We design and architect the Internet infrastructure for
our customers, install the necessary hardware and software, recommend and
establish network connectivity, and perform ongoing monitoring and security
services.
{Bottom Center--SiteSmith tag line--Sites Don't Work Without Us}
[INSIDE BACK COVER--TEXT AND GRAPHIC]
Text--SiteSmith is a leading provider of comprehensive, cutting-edge Internet
infrastructure management services designed to maximize the performance,
reliability and security of large-scale, complex Internet sites. Our core
services include establishing and maintaining the infrastructure of our
customer's Internet operations. Our premium services currently include automated
monitoring, security and network redundancy.
Graphic--illustration of the typical infrastructure of an Internet site with the
components covered under SiteSmith core and premium services color coded and
keyed to a legend.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
------ ------
<S> <C> <C> <C>
PROSPECTUS SUMMARY.............................. 1 RELATED PARTY TRANSACTIONS.......................... 43
RISK FACTORS.................................... 5 PRINCIPAL STOCKHOLDERS.............................. 47
SPECIAL NOTE REGARDING FORWARD-LOOKING DESCRIPTION OF CAPITAL STOCK........................ 49
STATEMENTS................................... 13 SHARES ELIGIBLE FOR FUTURE SALE..................... 51
USE OF PROCEEDS................................. 14 U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
DIVIDEND POLICY................................. 14 NON-U.S. HOLDERS................................. 53
CAPITALIZATION.................................. 15 UNDERWRITING........................................ 55
DILUTION........................................ 16 NOTICE TO CANADIAN RESIDENTS ....................... 58
SELECTED FINANCIAL DATA......................... 17 LEGAL MATTERS....................................... 59
MANAGEMENT'S DISCUSSION AND EXPERTS............................................. 59
ANALYSIS OF FINANCIAL CONDITION AND WHERE YOU CAN FIND ADDITIONAL INFORMATION........... 59
RESULTS OF OPERATIONS........................ 18 INDEX TO FINANCIAL STATEMENTS....................... F-1
BUSINESS........................................ 25
MANAGEMENT...................................... 33
--------------
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL _______________ , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), 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 DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS
AND RELATED NOTES, BEFORE INVESTING IN OUR COMMON STOCK.
THE COMPANY
SiteSmith is a leading provider of comprehensive, cutting-edge Internet
infrastructure management services. Our services are designed to maximize the
performance, reliability and security of large-scale, complex Internet sites. In
order to build a large-scale Internet operation, a company must not only design
an Internet site but must also establish a complex Internet infrastructure that
consists of web and application servers, network connectivity, operating
systems, databases, storage, security, monitoring, and other appropriate
hardware and software. We design and architect the infrastructure for our
customers' Internet operations, install the necessary hardware and software,
recommend and establish network connectivity, and perform ongoing monitoring and
security services. Because we overcome the complexities of managing Internet
operations, we get our customers' Internet operations up and running quickly,
and keep them running. By relying on us to manage their mission-critical
Internet operations, businesses can focus on their strategic initiatives and
core competencies. According to Aberdeen Group, the Internet infrastructure
management and related services market will grow from $700 million in 1998 to
$14 billion in 2002. We believe that our role in creating the Internet
infrastructure management services market positions us to secure engagements
with a large number of Internet companies and traditional businesses.
We offer our customers an outsourced Internet infrastructure management
solution. Our offerings consist of core services and premium services. Our core
services include establishing and maintaining the infrastructure for our
customers' Internet operations. Our premium services currently include automated
monitoring, security and network redundancy.
Our solution combines broad technical expertise with a singular emphasis
on maximizing the performance, reliability and security of our customers'
Internet operations. We have relationships with leading hardware, software, web
hosting and other Internet infrastructure companies, including Cisco, Sun
Microsystems, StorageNetworks, Oracle and AboveNet. Key elements of our solution
include:
o comprehensive service offerings,
o experience with large-scale, complex Internet operations,
o expertise in a wide range of operating systems, hardware, software
and services tailored to customer requirements, and
o 24x7 Internet infrastructure support and geographical proximity to
data centers.
Our technical personnel focus exclusively on analyzing, recommending,
implementing and supporting our customers' Internet infrastructure. Our
customers include both Internet companies and traditional businesses. To date,
we have worked with over 100 customers, including About.com, Critical Path,
Electronic Arts, Microsoft Hotmail, and Ogilvy & Mather. We maintain a permanent
presence near major data centers, with offices in Silicon Valley, Los Angeles,
New York City, Newark, Herndon (Virginia), Chicago, and London. Our founders
have extensive experience in Internet infrastructure management and our Chief
Executive Officer, Mark F. Spagnolo, was formerly President and Chief Executive
Officer of UUNET.
Our goal is to become the leading global provider of outsourced Internet
infrastructure management services by:
o offering high-quality services,
o growing recurring revenue by providing value-added services that
enhance the performance of our customers' Internet operations,
o expanding our global presence, and
o growing the SiteSmith brand.
1
<PAGE>
SiteSmith, Inc. was incorporated as SiteBrigade in Delaware on September
8, 1999. On November 15, 1999, we changed our name to SiteSmith, Inc. Our
principal executive offices are located at 3283 Scott Blvd., Santa Clara,
California 95054. Our telephone number at that location is 408-987-6400.
SITESMITH, SITEBRIGADE, SITES DON'T WORK WITHOUT US and the sprocket
design logo are pending trademarks or service marks of SiteSmith, Inc. All other
brand names or trademarks appearing in this prospectus are the property of their
respective holders.
THE OFFERING
EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES
THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
Common stock offered............... __________ shares
Common stock to be
outstanding after this offering.... __________ shares
Use of proceeds.................... For general corporate purposes including
working capital, operating expenses and,
although we have no current plans to do
so, to fund potential acquisitions.
Proposed Nasdaq
National Market symbol............. STSM
Risk factors....................... See "Risk Factors" beginning on page 5
for a discussion of factors you should
carefully consider before deciding to buy
our common stock.
THE NUMBER OF SHARES OF COMMON STOCK TO BE OUTSTANDING AFTER THIS
OFFERING IS BASED ON OUR SHARES OUTSTANDING AS OF AUGUST 1, 2000. THIS
INFORMATION EXCLUDES:
o 6,254,107 shares issuable upon the exercise of options outstanding
pursuant to our 1999 Stock Option Plan as of August 1, 2000 at a
weighted average exercise price equal to $0.63 per share,
o 1,590,475 shares issuable upon the exercise of options outstanding
pursuant to our 2000 Executive Stock Incentive Plan as of August 1,
2000 at a weighted average exercise price equal to $1.75 per share,
and
o 530,833 shares issuable upon the exercise of warrants outstanding as
of August 1, 2000 at a weighted average exercise price equal to
$1.82 per share.
2
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents our summary financial data and has been
derived from our audited financial statements for the period from September 8,
1999 (inception) to December 31, 1999 and from our audited interim financial
statements for the six month period ended June 30, 2000, all of which are
included in this prospectus. The pro forma balance sheet data give effect to the
automatic conversion in connection with this offering of our preferred stock
outstanding as of June 30, 2000 into our common stock. The subsequent
transaction balance sheet data gives further effect to the issuance on July 20,
2000 of 4,717,372 shares of Series C preferred stock, and the subsequent
automatic conversion in connection with this offering of such shares of
preferred stock into shares of common stock on a 1:1 basis. The pro forma as
adjusted balance sheet data give further effect to our issuance and sale of
___________ shares of common stock in this offering and our receipt of the net
proceeds from the sale of these shares after deducting underwriting discounts
and commissions and estimated offering expenses payable by us. You should read
the following summary financial data together with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements and the related notes, each of
which is included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999 SIX MONTHS
(INCEPTION) THROUGH ENDED JUNE 30
DECEMBER 31, 1999 2000
------------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenue:
Service revenue......................................................... $ 98 $ 3,842
Equipment revenue....................................................... -- 3,546
------------- -----------
Total revenue......................................................... 98 7,388
Costs and expenses:
Cost of service revenue................................................. 484 7,867
Cost of equipment revenue............................................... -- 3,300
Research and development................................................ 67 345
Sales and marketing..................................................... 147 5,301
General and administrative.............................................. 861 7,416
Stock-based compensation................................................ 663 4,829
------------- -----------
Total costs and expenses.............................................. 2,222 29,058
------------- -----------
Loss from operations....................................................... (2,124) (21,670)
Interest income, net....................................................... 21 327
------------- -----------
Net loss................................................................... (2,103) (21,342)
Accretion of redemption premium on mandatorily redeemable
convertible preferred stock............................................. (60) (1,119)
------------- -----------
Net loss attributable to common stockholders............................... $ (2,163) $ (22,462)
============= ===========
Net loss per share attributable to common stockholders,
basic and diluted (1)................................................... $ (1.17) $ (6.68)
============= ===========
Weighted average number of shares attributable to common stockholders,
basic and diluted....................................................... 1,847 3,361
============= ===========
Pro forma net loss per share attributable to common stockholders,
basic and diluted (unaudited)........................................... $ (0.30) $ (1.25)
============= ===========
Pro forma weighted average number of shares attributable to
common stockholders, basic and diluted (unaudited)...................... 7,247 17,942
============= ===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------------------------------------
SUBSEQUENT PRO FORMA
ACTUAL PRO FORMA TRANSACTION(2) AS ADJUSTED
------------ ------------ -------------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents............................ $ 6,431 $ 6,431 $28,058
Working capital...................................... (2,810) (2,810) 23,817
Total assets......................................... 24,396 24,396 46,023
Current liabilities.................................. 17,428 17,428 12,428
Mandatorily redeemable convertible preferred stock... 25,201 -- --
Total stockholders' (deficit) equity................. (18,234) 6,968 33,595
--------------
</TABLE>
(1) This information is based on the number of shares outstanding as of
June 30, 2000. This table excludes 6,475,639 shares issuable upon
exercise of outstanding options at a weighted average exercise price
of $0.57 per share as of June 30, 2000.
(2) The issuance of the 4,717,372 shares of Series C preferred stock
On July 20, 2000 consisted of the following:
o 3,827,818 shares of Series C preferred stock sold to 17 investors
for cash proceeds of $21,627,000, and
o 889,554 shares of Series C preferred stock issued upon the
conversion of $4,999,999 in promissory notes and accrued interest.
4
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN INVESTMENT DECISION. ANY OF THE
FOLLOWING RISKS COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS. AS A RESULT, THESE RISKS COULD CAUSE THE DECLINE OF THE
TRADING PRICE OF OUR COMMON STOCK, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS.
We were incorporated in September 1999 and began providing services to
customers in October 1999. Our limited operating history makes an evaluation of
our business and prospects very difficult. Companies in an early stage of
development frequently encounter enhanced risks and unexpected expenses and
difficulties. These risks and difficulties relate to our potential inability to:
o develop long-term relationships with existing customers,
o acquire new customers,
o reduce costs associated with the delivery of services,
o expand and maintain our pipeline of sales prospects in order to
utilize our technical resources,
o increase awareness of our brand, and
o maintain our current and develop new strategic relationships.
Our long-term success will depend on our ability to execute our business
strategy and adequately address each of these risks. Our business is too new to
have formed long-term customer relationships, and we cannot determine yet
whether customers will perceive our work as being beneficial to their
businesses. Also, our business reputation is based on a limited number of
customer engagements. All of our customers have only limited experience with the
solutions we have developed for them. Accordingly, we cannot assure you that the
limited number of companies whose Internet operations we have managed will be
successful in the longer term. If the Internet sites of one or more of our
customers suffers a significant failure or setback, our business reputation
could be severely damaged and we may incur liability to our customers, whether
or not such failure or setback was caused by our work or was within our control.
Our ability to obtain new engagements, retain customers and recruit and retain
highly-skilled employees could be seriously harmed if our work product or our
customers' Internet operations fail to meet expectations.
WE HAVE A HISTORY OF LOSSES, AND EXPECT TO INCUR SIGNIFICANT OPERATING LOSSES
AND NEGATIVE CASH FLOW AND MAY NEVER BE PROFITABLE.
We incurred net losses of $2.1 million for the period from September 8,
1999 (inception) to December 31, 1999, $7.7 million for the fiscal quarter ended
March 31, 2000 and $13.6 million for the fiscal quarter ended June 30, 2000. As
of June 30, 2000, we had an accumulated deficit of $23.4 million. We have spent,
and expect to continue to spend, significant funds to develop new and refine
current services and to develop our sales and marketing resources. To achieve
operating profitability, we will need to increase our customer base and our
revenue per customer and decrease our overall costs of providing services,
including the costs of our licensed technology and the costs of customer
acquisition. We may be unable to increase our revenue or operating efficiencies
in this manner. Moreover, because we expect to continue to increase our
investment in our business faster than we anticipate growth in our revenues, we
may continue to incur significant operating losses and negative cash flow for
the foreseeable future and we may never be profitable.
5
<PAGE>
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our quarterly revenues and operating results have varied since inception
and are likely to vary significantly from quarter to quarter. As a result, we
believe that period-to-period comparisons of our revenues and results of
operations are not a good indication of our future performance. A number of
factors are likely to cause these variations to continue, including:
o the number, size and scope of our customer engagements,
o unanticipated delays, deferrals or cancellations of major customer
engagements,
o unanticipated changes in the scope of major customer engagements,
o the efficiency with which we use our technical resources, plan and
manage our existing and new customer engagements and manage future
growth,
o variability in market demand for Internet services,
o changes in pricing policies by us or our competitors,
o the introduction of new services by us or our competitors,
o our ability to manage costs, including costs of personnel and support
services,
o costs related to opening or expanding our offices, and
o general economic conditions.
Our revenues are generally recognized as our services are provided.
Inefficient use of our core technical resources, including personnel, may cause
significant reductions in our operating results for a particular quarter and
could result in losses for such quarter. In addition, we have hired a large
number of personnel in knowledge management, recruiting, technology
infrastructure and finance and administration, in order to support our
anticipated growth. As a result, a significant portion of our operating expenses
are fixed in the short term. Furthermore, we incur operating expenses based
largely on anticipated revenue trends, which are difficult to predict in our
market. Therefore, any failure to generate revenues according to our
expectations in a particular quarter could result in losses or greater than
expected losses for the quarter.
OUR SERVICES MAY BECOME OBSOLETE AND UNMARKETABLE IF WE FAIL TO KEEP PACE WITH
THE LATEST TECHNOLOGICAL CHANGES AND CUSTOMER PREFERENCES.
Our business and the market for Internet infrastructure management
services are characterized by rapid technological change. We must respond
successfully on a timely and cost-effective basis to changes in technology,
industry standards and customer preferences to remain competitive and serve our
customers effectively. We may experience technical or other difficulties that
prevent or delay our development or the introduction of solutions that address
these changes. These difficulties could cause our current services to become
obsolete and unmarketable.
WE MAY BE UNABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL AT COSTS ACCEPTABLE TO
US.
Our future success depends in large part on our ability to hire and retain
project and engagement managers, technical architects, strategists, engineers,
design personnel, other technical personnel and sales and marketing personnel at
various experience levels. Qualified personnel are in short supply, and this
shortage is likely to continue for some time. As a result, competition for these
people is intense, and the industry turnover rate for them is high. In addition,
we believe that prospective employees may perceive the stock option component of
our compensation package as less valuable after this offering. Consequently, we
may have more difficulty hiring our desired numbers of qualified personnel.
Moreover, even if we are able to attract qualified personnel, we must employ a
significant proportion of our resources to train and retain such employees and
this may adversely affect our business results. Any inability to hire and retain
a sufficient number of qualified personnel could hinder the growth of our
business.
In addition, some companies have adopted a strategy of suing or
threatening to sue former employees and their new employers to discourage those
employees from leaving or to remain competitive. As we hire new employees from
our current or potential competitors we may become a party to one or more of
such lawsuits involving one or more of our employees. Any future litigation
against us or our employees, regardless of the
6
<PAGE>
outcome, may result in substantial costs and expenses to us and may divert
management's attention away from the operation of our business.
OUR EXECUTIVE MANAGEMENT TEAM HAS LIMITED EXPERIENCE WORKING TOGETHER, WHICH MAY
MAKE IT DIFFICULT TO CONDUCT AND GROW OUR BUSINESS.
Our Chief Executive Officer joined us in July 2000, and seven of the other
ten members of our executive team have been appointed to their positions since
March 2000. Therefore, there has been little or no opportunity to evaluate the
effectiveness of our executive management team as a combined unit. In addition,
our Chief Executive Officer will maintain his principal office in Dallas, Texas.
The failure of executive management to function effectively as a team would have
an adverse effect on our ability to obtain and execute customer engagements,
maintain a cohesive culture and compete effectively.
WE DEPEND ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY ADVERSELY
AFFECT OUR BUSINESS.
We believe that our success will depend on the continued employment of
our key management and technical personnel. Personal relationships are a
critical element of obtaining and maintaining customer engagements, so the loss
of one or more members of our senior management team could have a direct adverse
impact on our future sales. In addition, if any of these key employees joins a
competitor or forms a competing company, some of our customers might choose to
use the services of that competitor or new company instead of our own. We do not
have any key-person life insurance. Furthermore, customers or other companies
seeking to develop in-house capabilities may hire away some of our key
employees, resulting in the loss of a customer relationship or a new business
opportunity. Any loss of customer relationships could adversely affect our
business.
OUR CONTINUED OPERATIONS MAY REQUIRE US TO OBTAIN ADDITIONAL FINANCING, WHICH
MAY NOT BE AVAILABLE TO US.
We may need to raise additional funds in order to:
o fund rapid expansion,
o pursue customer sales,
o promote our brand identity,
o develop or enhance services and implementation,
o respond to competitive pressures, or
o acquire complementary businesses, technologies or services.
We cannot be certain that additional financing will be available on terms
favorable to us, if at all. If adequate funds are not available on acceptable
terms, we may be unable to fund our expansion, or respond to competitive
pressures. Any inability to do so could have an adverse effect on our business,
revenues, financial condition and results of operations.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND MAY ADVERSELY AFFECT OUR
BUSINESS.
We have grown rapidly and expect to continue to grow rapidly by hiring
new employees, adding new customers and expanding into other geographic markets.
Our growth has placed, and will continue to place, a significant strain on our
management and our operating and financial systems. We recently opened several
offices and expect to open additional offices in the future.
Our employees, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate the increased number of
engagements and the increased size of our operations, we will need to hire,
train and retain the appropriate personnel to manage our operations. We will
also need to adapt our financial and management controls, reporting systems and
operating systems.
7
<PAGE>
MANY OF OUR CUSTOMERS ARE NEW BUSINESSES WITH LIMITED OPERATING HISTORIES AND
UNPROVEN BUSINESS MODELS, WHICH COULD LIMIT OUR ABILITY TO COLLECT FEES IN A
TIMELY MANNER OR AT ALL.
Our current customer base consists largely of emerging high-growth and
middle-market companies, including several e-commerce and "dot-com" companies.
These companies may be more likely than other companies to be acquired,
experience financial difficulties or cease operations. In particular, these
companies may experience difficulties in raising capital needed to fund their
operations when required or at all. As a result, our customer base likely will
be more volatile. If we experience greater than expected customer loss or cannot
collect fees from our customers in a timely manner because of this volatility,
our operating results could be seriously harmed.
SALES EFFORTS INVOLVING TRADITIONAL BUSINESSES MAY LENGTHEN OUR SALES CYCLE.
Sales to traditional businesses typically have a longer sales cycle than
sales to Internet companies. As a result, sales efforts involving traditional
businesses may lengthen our average sales cycle, causing difficulty in
forecasting our revenue and planning our expenditure. The period between our
initial contact with a potential customer and their purchase of our products and
services may be relatively long due to several factors, including:
o our need to educate potential customers about the uses and benefits
of our services,
o budget cycles that may affect the timing of customer purchases, and
o use of competitive evaluation and internal approval procedures.
The delay or failure to complete sales in a particular quarter would
reduce our revenue in that quarter, as well as subsequent quarters over which
revenue for the sale would likely be recognized. If we were to experience a
delay of several weeks on a number of large customers, it could harm our
operating results.
WE RELY ON STRATEGIC RELATIONSHIPS THAT COULD BE TERMINATED EASILY.
We currently have strategic relationships with leading hardware,
software, web hosting and other Internet infrastructure companies, including
Cisco, Sun Microsystems, StorageNetworks, Oracle and AboveNet. The loss of any
one of these strategic relationships would deprive us of the opportunity to gain
early access to leading-edge technology, cooperatively market products,
cross-sell additional services and gain enhanced access to vendor training and
support. These companies generally have the right to terminate their respective
contracts with us at will. In the event that any strategic relationship is
terminated, our business may be adversely affected.
OUR PLANNED INTERNATIONAL OPERATIONS WILL BE EXPENSIVE AND MAY NOT SUCCEED.
We have no experience in promoting and selling our solutions within
foreign countries or in integrating international operations into our company.
As we begin pursuing international opportunities, including acquisitions, we
will face a number of potential difficulties, including cultural differences,
currency exchange risks, underdeveloped Internet infrastructure in some foreign
countries and different government regulatory schemes. Additionally, we will
need to devote significant managerial and financial resources to locate and
retain qualified personnel for international operations, as well as to obtain
the necessary technical and strategic support for international expansion. As a
result, we may not be able to promote our services or perform customer
engagements successfully in international markets. If we fail to expand our
international operations in a timely and effective manner, it may hinder our
growth and ability to compete effectively and could harm our business
reputation.
Moreover, international operations are subject to a variety of additional
risks that could seriously harm our financial condition and operating results.
These risks include the following:
o problems in collecting accounts receivable,
o the impact of recessions in economies outside the United States,
o longer payment cycles,
o fluctuations in currency exchange rates,
o seasonal reductions in business activity in certain parts of the
world, such as during the summer months in Europe, and
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<PAGE>
o greater regulatory instability.
POTENTIAL ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND
ADVERSELY AFFECT OUR OPERATING RESULTS.
We may acquire other businesses in the future, which may complicate our
management tasks or divert management's attention. We may need to integrate
widely dispersed operations with distinct corporate cultures. Such integration
efforts may not succeed or may distract our management from servicing existing
customers. Our failure to manage acquisitions successfully may adversely affect
our operating results. Also, acquisition costs may cause our quarterly operating
results to vary significantly. Furthermore, your ownership interest in us would
be diluted if we finance the acquisitions by issuing equity or equity-linked
securities. Also, if we receive offers to be acquired, our business could be
disrupted and management's attention may be diverted as we respond to those
offers.
OUR EFFORTS TO BUILD THE SITESMITH BRAND MAY NOT BE SUCCESSFUL.
An important element of our business strategy is to develop and maintain
widespread awareness of the SiteSmith brand. To promote our brand, we plan to
increase our advertising and marketing expenditures, which may cause our
operating margins to decline. Moreover, our brand may be closely associated with
the business success or failure of some of our high-profile customers, many of
whom are pursuing unproven business models in competitive markets. As a result,
the failure or difficulties of one of our high-profile customers may damage our
brand. If we fail to successfully promote and maintain our brand name, our
operating margins and our growth may decline.
RISKS RELATED TO OUR MARKET
THE MARKET FOR INTERNET INFRASTRUCTURE MANAGEMENT SERVICES IS NEW AND MAY NOT
DEVELOP AS WE EXPECT.
The market for Internet infrastructure management services is new and may
not grow or be sustainable. Potential customers may choose not to purchase these
services from a third party provider due to concerns about security,
reliability, system availability or independence. It is possible that our
services may never achieve market acceptance. If this market does not develop,
or develops more slowly than we expect, our business, results of operations and
financial condition will be seriously harmed.
THE MARKET FOR INTERNET INFRASTRUCTURE MANAGEMENT SERVICES IS RAPIDLY EVOLVING,
HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY. IF WE CANNOT EFFECTIVELY
COMPETE IN THIS MARKET, WE WILL NOT BE ABLE TO INCREASE REVENUE, OPERATING
MARGINS AND MARKET SHARE.
We compete in the rapidly evolving and increasingly competitive market
for Internet infrastructure management services. Our competitors include
companies with Internet site design or web hosting as their core business, as
well as companies which maintain and improve their Internet sites in-house. We
expect this competition to intensify as this market evolves.
Many of our competitors have longer operating histories, more customers,
longer relationships with their customers, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. As a result, our competitors may respond more quickly to
new or emerging technologies and changes in customer requirements. They may also
develop and promote their products and services more effectively than we do.
Certain competitors offer more standardized services than we do and may have a
substantial cost advantage, which could adversely affect our ability to increase
revenue, operating margins and market share. In addition, potential customers
may choose to build and operate their Internet sites using their internal staff.
There are relatively low barriers to entry into our market. As a result,
new and unknown market entrants could pose a threat to our business. Current or
future competitors may develop or offer services that are comparable or superior
to ours at a lower price. Because we generally contract with our customers on an
annual basis, our customers may choose a competitor rather than renew their
contracts with us. If we do not compete successfully, our business could be
harmed.
9
<PAGE>
In addition to the low barriers to entry, our competitors and other
companies may form strategic relationships with each other to compete with us.
These relationships may take the form of strategic investments, joint marketing
agreements, or other contractual agreements, which arrangements may increase our
competitors' ability to address customer needs with their product and service
offerings. We believe that there is likely to be consolidation in our market,
which could lead to increased competition on price and other factors that could
cause our business to suffer.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH IN THE USAGE OF THE INTERNET.
The future of our business depends upon continued growth in Internet
usage by our customers, prospective customers and their customers and suppliers.
Growth in Internet usage has caused capacity constraints which may potentially
impede further growth if left unresolved. Factors which may affect Internet
usage include:
o actual or perceived lack of security of information,
o congestion of Internet traffic or other usage delays, and
o reluctance to adopt new business methods.
If the usage and volume of commercial transactions on the Internet does
not continue to increase, demand for our services may decrease and our business
and results of operations could materially suffer.
INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS.
There are few existing laws or regulations directly applicable to the
Internet or electronic commerce. Due to its increasing popularity, however, the
Internet may become subject to laws and regulations covering issues such as:
o user privacy,
o the pricing and taxation of goods and services offered over the
Internet,
o the content of Internet sites,
o consumer protection, and
o the characteristics and quality of products and services offered over
the Internet.
Any such law or regulation could adversely affect the growth of the
Internet and decrease its acceptance as a communications and commercial medium.
If such a decline occurs, companies may decide in the future not to use our
services. This decrease in the demand for our services would adversely affect
our business and operating results.
RISKS RELATED TO THIS OFFERING
THE MARKET PRICE FOR OUR COMMON STOCK WILL LIKELY BE VOLATILE AND YOU MAY SUFFER
A LOSS ON YOUR INVESTMENT.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies generally, and
Internet-related companies particularly, have been extremely volatile. Recent
initial public offerings by technology companies have been accompanied by
exceptional share price and trading volume changes in the first days and weeks
after the securities were released for public trading. Investors may not be able
to resell their shares at or above the initial public offering price. In the
past, following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted against
that company. Such litigation could result in substantial costs to us and a
diversion of our management's attention and resources.
The market price may vary in response to any of the following factors:
o changes in financial estimates or investment recommendations relating
to our stock by securities analysts,
o changes in market valuations of other internet operations and
services businesses, and
o fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector.
10
<PAGE>
In addition, an active public trading market may not develop or be
sustained after this offering. If an active and liquid trading market does not
develop, you may have difficulty selling your shares.
A FEW INDIVIDUALS AND THEIR AFFILIATES OWN MUCH OF OUR STOCK AND MAY VOTE THIS
STOCK IN A WAY WITH WHICH YOU DO NOT AGREE.
After this offering, our directors, executive officers and their
affiliates will beneficially own, in the aggregate, approximately __% of our
outstanding common stock. As a result, these stockholders will exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, such as
acquisitions, and to block an unsolicited tender offer. Accordingly, this
concentration of ownership could have the effect of delaying or preventing a
third party from acquiring control over us and could adversely affect the price
that investors might be willing to pay in the future for shares in our common
stock.
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS THAT MAY OFFER YOU A PREMIUM, WHICH COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Provisions of our certificate of incorporation, our bylaws and Delaware
law make acquiring control of us without the support of our board of directors
difficult for a third party, even if the change of control would be beneficial
to you. The existence of these provisions may deprive you of any opportunity to
sell your shares at a premium over the prevailing market price for our common
stock. The potential inability of our stockholders to obtain a control premium
could adversely affect the market price for our common stock. For example, our
certificate of incorporation provides that the board of directors will be
divided into three classes as nearly equal in size as possible with staggered
stockholders to change the composition of the board of directors. In addition,
our certificate of incorporation authorizes our board of directors to issue up
to 10 million shares of "blank check" preferred stock. This means that, without
stockholder approval, the board of directors has the authority to attach special
rights to this preferred stock, including voting and dividend rights. With these
rights, preferred stockholders could make it more difficult for a third party to
acquire our company. A special meeting of stockholders may only be called by a
majority of the board of directors or by our president, chief executive officer
or chairman. In addition, a stockholder proposal for an annual meeting must be
received within a specified period of time to be placed on the agenda. Because
stockholders do not have the ability to require the calling of a special meeting
of stockholders and are subject to timing requirements in submitting stockholder
proposals for consideration at any annual meeting, any third-party takeover not
supported by the board of directors would be subject to significant delays and
difficulties.
THE TRADING MARKET PRICE OF OUR STOCK MAY DECLINE AS A RESULT OF SUBSTANTIAL
SALES OF OUR COMMON STOCK AFTER THE OFFERING.
Sales of a substantial number of shares of our common stock after the
offering could negatively affect the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. Upon completion of this offering, we will have _____ shares of
common stock outstanding or subject to currently exercisable options (______
shares if the underwriters' over-allotment option is exercised in full). The
_______ shares sold in this offering (______ shares if the underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or further registration under the federal securities laws unless
purchased by our "affiliates" as that term is defined in Rule 144. The remaining
_______ shares of common stock outstanding upon completion of the offering will
be "restricted securities" as that term is defined in Rule 144. Stockholders
holding approximately ___ of the outstanding common stock and options to
purchase common stock exercisable within 180 days after the date of this
prospectus have executed lock-up agreements that limit their ability to sell
common stock. These stockholders and option holders have agreed not to sell or
otherwise dispose of any shares of common stock for a period of at least 180
days after the date of this prospectus without the prior written approval of
Credit Suisse First Boston Corporation. When the lock-up agreements expire,
these shares and the shares underlying the options will become eligible for
sale, in some cases only pursuant to the volume, manner of sale and notice
requirements of Rule 144.
In addition, some of our current stockholders have "demand" and
"piggyback" registration rights in connection with future offerings of our
common stock. "Demand" rights enable the holders to demand that their shares be
registered and may require us to file a registration statement under the
Securities Act at our expense. "Piggyback" rights provide for notice to the
relevant holders of our stock if we propose to register any of our securities
under the Securities Act, and grant such holders the right to include their
shares in the registration
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<PAGE>
statement. All holders with registrable securities have agreed not to exercise
their registration rights until 180 days following the date of this prospectus
without the consent of Credit Suisse First Boston Corporation.
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING.
We have not designated any specific use for the net proceeds of this
offering. We expect to use the proceeds primarily for working capital and
general corporate purposes. We currently estimate that we will incur
approximately $____ million in cash expenses during the next twelve months on
marketing and sales, research and development, other operating expenses and
capital expenditures, as a whole. We expect to finance these expenditures
through our current cash and cash equivalents balance of $6.4 million at June
30, 2000, and expected service revenue. If our service revenue is less than
anticipated, we will be required to utilize a portion of the $___ million in
proceeds from this offering to fund these expenses. We may also use a portion of
the net proceeds to acquire additional businesses, products and technologies or
to establish joint ventures that we believe will complement our current or
future business. However, we currently have no specific agreements or
commitments to do so. As a result, our management and board of directors will
have broad discretion in spending the proceeds of this offering.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our common stock is substantially
higher than the book value per share of the outstanding common stock immediately
after this offering. At the initial public offering price of ____ per share,
dilution to new investors will be ____ per share. Accordingly, if you purchase
shares of our common stock in this offering, you will suffer immediate and
substantial dilution. In addition, the issuance or exercise of additional
options or warrants to purchase our capital stock could be dilutive to
purchasers of shares in this offering.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends. We anticipate that for
the foreseeable future we will follow a policy of not declaring dividends on
common stock and instead retaining earnings, if any, for use in our business. If
we do not pay dividends, your return on an investment in our common stock likely
will depend on your ability to sell our stock at a profit.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results.
13
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the ____________
shares of common stock we are offering will be approximately $__________
million assuming an initial public offering price of _____, after deducting the
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $ _____ million. The principal purposes of
this offering are to increase our working capital, fund our operating expenses,
and, although we have no current plans to do so, fund potential acquisitions. We
will retain broad discretion in allocating the net proceeds of this offering.
Pending the use of the net proceeds, we will invest them in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
o the "Pro Forma" column gives effect to the automatic conversion in
connection with this offering of all shares of preferred stock
outstanding as of June 30, 2000 into 15,810,861 shares of common
stock,
o the "Subsequent Transaction" column gives further effect to (i) the
issuance on July 20, 2000 of 4,717,372 shares of Series C preferred
stock as follows: (a) 3,827,818 shares of Series C preferred stock
sold to 17 investors for cash proceeds of $21,627,000, and (b) 889,554
shares of Series C preferred stock issued upon the conversion of
$4,999,999 in promissory notes and accrued interest, and (ii) the
automatic conversion in connection with this offering of such shares
of preferred stock into shares of common stock on a 1:1 basis, and
o the "Pro Forma As Adjusted" column gives effect to the sale of
___________________ shares of common stock at an assumed initial
public offering price of $ __________________ per share in this
offering, and our receipt of the net proceeds from the sale of these
shares after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
--------------------------------------------------
SUBSEQUENT PRO FORMA AS
ACTUAL PRO FORMA TRANSACTION ADJUSTED
---------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents................................... $ 6,431 $ 6,431 $ 28,058
========== =========== ============
Current liabilities......................................... 17,428 17,428 12,428
Mandatorily redeemable convertible preferred stock, par
value $0.0001 per share; 15,900,000 shares authorized,
15,810,861 shares issued and outstanding, actual;
15,900,000 shares authorized, none issued and
outstanding, pro forma; 10,000,000 shares authorized,
none issued and outstanding, pro forma as adjusted....... 25,201 -- -- --
Stockholders' (deficit) equity:
Common stock, par value $0.0001 per share; 30,000,000
shares authorized, 13,180,389 shares issued and
outstanding, actual; 30,000,000 shares authorized,
28,991,250 issued and outstanding, pro forma;
500,000,000 shares authorized, ______________ shares
issued and outstanding, pro forma as adjusted........... 1 3 3
Additional paid-in capital............................... 20,232 45,432 72,085
Unearned stock based compensation........................ (15,022) (15,022) (15,022)
Accumulated deficit...................................... (23,445) (23,445) (23,471)
---------- ----------- ------------
Total stockholders' (deficit) equity.................. (18,234) 6,968 33,595
---------- ----------- ------------ -----------
Total capitalization................................ $ 6,968 $ 6,968 $ 33,595 $
========== =========== ============ ===========
</TABLE>
--------------
This table excludes 6,475,639 shares issuable upon exercise of outstanding
options at a weighted average exercise price of $0.57 per share as of June 30,
2000.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$6,968,000, or $0.24 per share of common stock. Pro forma net tangible book
value per share represents the amount of our pro forma total tangible assets
less pro forma total liabilities divided by the pro forma number of shares of
common stock outstanding as of June 30, 2000, assuming the conversion of all our
outstanding preferred stock into common stock at that date. Our subsequent
transaction net tangible book value would have been $33,595,000, or $1.00 per
share of common stock, assuming the additional conversion into shares of common
stock of 4,717,372 shares of Series C preferred stock issued in July 2000.
Without taking into account any other changes in pro forma net tangible book
value, other than to give effect to our sale of the _____________ shares of
common stock in this offering and the receipt and application of the net
proceeds from this offering, the pro forma net tangible book value as of June
30, 2000 would have been approximately $ ____________ , or $ ____________ per
share of common stock.
This represents an immediate increase in pro forma net tangible book value
of $ ____________ per share to existing stockholders and an immediate dilution
in pro forma net tangible book value of $ ____________ per share to investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share........................................ $
Pro forma net tangible book value per share as of June 30, 2000......................
Subsequent transaction net tangible book value before this offering..................
Increase in pro forma net tangible book value per share attributable
to new investors..................................................................... ---------
As adusted pro forma net tangible book value per share after this offering.............
------------
Dilution per share to new investors.................................................... $
============
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and by new investors, assuming an initial public offering
price of $ per share and before deducting the underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ----------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- -------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. $ $
Subsequent Transaction investors...................
---------- -------- ------------ -------- --------------
New investors......................................
---------- -------- ------------ -------- --------------
Total......................................... 100.0% $ 100.0%
========== ======== ============ ========
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options and warrants. As of June 30,
2000, options to purchase 6,475,639 shares of common stock were outstanding at a
weighted average exercise price of $0.57 per share. To the extent that these
options are exercised, new investors will experience further dilution.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read with our financial
statements and the notes to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the period from September
8, 1999 (inception) through December 31, 1999 and for the six months ended June
30, 2000 and the balance sheet data at December 31,1999 and June 30, 2000, are
derived from our audited financial statements included elsewhere in this
prospectus. You should note that historical results are not necessarily
indicative of the results to be expected in the future, and results of interim
periods are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) THROUGH SIX MONTH ENDED
DECEMBER 31, 1999 JUNE 30, 2000
------------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue........................................................... $ 98 $ 3,842
Equipment revenue......................................................... -- 3,546
-------------- ---------------
Total revenue......................................................... 98 7,388
Costs and expenses:
Cost of service revenue................................................... 484 7,867
Cost of equipment revenue................................................. -- 3,300
Research and development.................................................. 67 345
Sales and marketing....................................................... 147 5,301
General and administrative................................................ 861 7,416
Stock-based compensation.................................................. 663 4,829
-------------- ---------------
Total costs and expenses.............................................. 2,222 29,058
-------------- ---------------
Loss from operations......................................................... (2,124) (21,670)
Interest income, net......................................................... 21 327
-------------- ---------------
Net loss..................................................................... (2,103) (21,342)
Accretion of redemption premium on mandatorily redeemable convertible
preferred stock........................................................... (60) (1,119)
-------------- ---------------
Net loss attributable to common stockholders................................. $ (2,163) $ (22,462)
============== ===============
Net loss per share attributable to common stockholders, basic and diluted $ (1.17) $ (6.68)
Weighted average number of shares attributable to common stockholders, ============== ===============
basic and diluted......................................................... 1,847 3,361
============== ===============
Pro forma net loss per share attributable to common stockholders, basic
and diluted (unaudited)................................................... $ (0.30) $ (1.25)
============== ===============
Pro forma weighted average number of shares attributable to common
stockholders, basic and diluted (unaudited).............................. 7,247 17,942
============== ===============
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
1999 2000
------------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 1,416 $ 6,431
Working capital.............................................................. 1,140 (2,810)
Total assets................................................................. 2,793 24,396
Current liabilities.......................................................... 613 17,428
Mandatorily redeemable convertible preferred stock........................... 3,625 25,201
Total stockholders' (deficit) equity......................................... (1,445) (18,234)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN
EVALUATING THESE RESULTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS,
INCLUDING THE RISKS OUTLINED UNDER "RISK FACTORS." THESE FACTORS MAY CAUSE OUR
ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD LOOKING STATEMENTS
CONTAINED IN THE FOLLOWING DISCUSSION.
OVERVIEW
We are a leading provider of comprehensive, cutting-edge Internet
infrastructure management services that maximize the performance, reliability
and security of large-scale, complex Internet sites. We design and architect
the infrastructure for our customers' Internet operations, install the necessary
hardware and software, recommend and establish network connectivity and perform
ongoing monitoring and security services. We address the complexities of
managing Internet operations by providing an outsourced solution to get our
customers' Internet operations up and running quickly, and to keep them running.
Since our inception, we have devoted our resources to defining the market for
Internet infrastructure management services, developing our service offerings,
hiring key management and a large number of technical personnel, investing in
and expanding our information systems, opening new offices, securing alliances,
and acquiring new customers. We were incorporated on September 8, 1999 and
commenced operations in October 1999 with the opening of our office in Santa
Clara, California.
REVENUE
We derive our revenue primarily from providing Internet infrastructure
management services to our customers. We also derive revenue by purchasing
equipment on behalf of our customers and reselling it to them.
We sell our services under contracts that typically have terms of one
year. Customers pay monthly fees for the services utilized and one-time fees for
projects such as purchases of equipment. Monthly fees for our services are
generally recognized as they are performed. Generally, the pricing of our
one-year service contracts is based on the complexity of the engagement and the
resources required. We bill our customers a monthly rate based on the contract,
plus out of pocket expenses. If the services required in any given month exceed
the services we are contracted to perform, we bill our customers for any
incremental service. We report revenue inclusive of reimbursable expenses. Any
advanced billings are classified as deferred revenue. To date, we have worked
with over 100 customers. For the six months ended June 30, 2000, no customer
accounted for more than 10% of total revenues.
Revenue from equipment resales is not related to contracts for services.
Over time, we expect the percentage of revenue that we derive from equipment
resales to decrease substantially as we focus on revenues from services. In
addition, we plan to outsource the equipment sales function in the future.
COST OF SERVICE AND EQUIPMENT REVENUE
Our cost of service revenue consists of salaries and benefits for
technical personnel, rent, depreciation, network and local telecommunications
circuits and interconnections to other networks, plus other costs that are not
reimbursed directly by the customer. We expect to continue to incur significant
costs to hire personnel and obtain facilities and bandwidth in anticipation of
future revenue. In addition, we expect that salaries for our technical
personnel will increase over time due to the intense competition in our industry
for qualified personnel. Our cost of service revenue, as a percentage of service
revenue, is affected by the efficiency with which we use our technical
resources, including personnel, and our ability to incorporate increased costs
in the fees we charge our customers. Our cost of service revenue as a percentage
of service revenue could decline as customers increasingly use our premium
services.
Our cost of equipment revenue consists of the costs of third party
computer equipment resold to our customers. We expect this cost as a percentage
of total revenue to decrease as we focus on revenue from services and outsource
the equipment sales function in the future.
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RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses consist primarily of personnel
costs. Our efforts in research and development are primarily directed toward
evaluating software and hardware technologies for potential use by our
customers, and performing benchmark analysis on various products which might be
employed by us for the benefit of our customers.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses consist primarily of personnel costs,
sales commissions, advertising costs and public relations expenses. Most of our
marketing costs are directed towards programs designed to build brand name
recognition and attract new customers. We expect sales and marketing expenses as
a percentage of revenue to decline in the future.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses consist primarily of salaries and
benefits for our administrative and management information systems personnel,
recruiting, related costs for general corporate functions, fees for legal and
other professional services and facilities costs. We expect general and
administrative expenses as a percentage of revenue to decline in the future.
STOCK-BASED COMPENSATION EXPENSES
We recorded unearned stock-based compensation in connection with the
granting of options to purchase our common stock with purchase or exercise
prices that were subsequently determined to be less than the deemed fair market
value at the grant date. Options granted are typically subject to a four-year
vesting period. Stock-based compensation related to the issuance of these
options is being amortized on an accelerated basis over their respective vesting
periods in accordance with FASB Interpretation No. 28. As a result of the
cumulative effect of stock-based compensation, we expect stock-based
compensation expense, which is primarily attributable to amortization of
unearned stock-based compensation charges, to impact our reported results
through December 31, 2004.
INTEREST INCOME, NET
Interest income, net consists primarily of interest earned on cash and
cash equivalents we generated from private placements of convertible preferred
stock.
LOSS FROM OPERATIONS
Since we began operations in October 1999, we have experienced
significant operating losses and negative cash flows from operations in each
quarterly period. As of June 30, 2000, we had an accumulated deficit of $23.4
million. We also expect to continue to incur increasing sales and marketing,
infrastructure development and general and administrative expenses as the number
of our employees increase. As a result, we will need to generate significant
revenues to achieve profitability. If we do achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis in
the future. Although our revenue has grown since our inception, we do not
believe that we can sustain our historical growth rates. Accordingly, our
historical growth rates may not be indicative of our future revenue.
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OUR RESULTS OF OPERATIONS
The following table sets forth selected items from our audited statement
of operations for the periods indicated:
PERIOD FROM
SEPTEMBER 8,
1999
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1999 2000
-------------- -------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue........................... $ 98 $ 3,842
Equipment revenue......................... -- 3,546
-------------- -------------
Total revenue......................... 98 7,388
Costs and expenses:
Cost of service revenue................... 484 7,867
Cost of equipment revenue................. -- 3,300
Research and development.................. 67 345
Sales and marketing....................... 147 5,301
General and administrative................ 861 7,416
Stock-based compensation.................. 663 4,829
-------------- -------------
Total costs and expenses.............. 2,222 29,058
-------------- -------------
Loss from operations......................... (2,124) (21,670)
Interest income, net......................... 21 327
-------------- -------------
Net loss..................................... $ (2,103) $ (21,342)
============== =============
SIX MONTHS ENDED JUNE 30, 2000
REVENUE. Our service revenue increased to $3.8 million for the six months
ended June 30, 2000, from $98,000 for the period from inception through December
31, 1999. The increase in service revenue was due to the addition of
customers and increased revenue per customer, as we enhanced our sales and
marketing efforts. Equipment revenue was $3.5 million for the six
months ended June 30, 2000. There was no equipment revenue for the period from
inception through December 31, 1999. Equipment revenue was related to the
provisioning of equipment in connection with some of our service engagements.
COST OF SERVICE AND EQUIPMENT REVENUE. Our cost of service revenue
increased to $7.9 million for the six months ended June 30, 2000, from $484,000
for the period from inception through December 31, 1999. The increase in cost of
service revenue was primarily due to the hiring of additional technical
personnel. Cost of equipment revenue was $3.3 million for the six months ended
June 30, 2000. There was no cost of equipment revenue for the period from
inception through December 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
increased to $345,000 for the six months ended June 30, 2000, from $67,000 for
the period from inception through December 31, 1999.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased
to $5.3 million for the six months ended June 30, 2000, from $147,000 for the
period from inception through December 31, 1999. The increase in sales and
marketing expenses was primarily due to an increase in the number of sales and
marketing personnel and related recruiting costs and costs incurred in
connection with advertising and public relations.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administration
expenses increased to $7.4 million for the six months ended June 30, 2000, from
$861,000 for the period from inception through December 31, 1999. The increase
was primarily due to an increase in the number of general and administrative
personnel, facilities costs, recruiting costs, and professional service fees.
STOCK-BASED COMPENSATION EXPENSES. Our stock-based compensation expenses
increased to $4.8 million for the six months ended June 30, 2000, from $663,000
for the period from inception through December 31, 1999.
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INTEREST INCOME, NET. Our interest income, net increased to $327,000 for
the six months ended June 30, 2000, from $21,000 for the period from inception
through December 31, 1999. The increase in interest income, net, was primarily
due to the increase in cash and cash equivalents.
NET LOSS. Our net loss increased to $21.3 million for the six months
ended June 30, 2000, from $2.1 million for the period from inception through
December 31, 1999.
PERIOD FROM SEPTEMBER 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
REVENUE. We began providing our services in October 1999. For the period
from our inception to December 31, 1999, service revenue was $98,000 and we
derived no equipment revenue.
COST OF SERVICE AND EQUIPMENT REVENUE. For the period from our inception
to December 31, 1999, cost of services revenue was $484,000. Cost of revenue
exceeded revenue due to the hiring of technical personnel in anticipation of
future customer contracts, as well as acquisition of facilities.
RESEARCH AND DEVELOPMENT EXPENSES. For the period from our inception to
December 31, 1999, our research and development expenses were $67,000.
SALES AND MARKETING EXPENSES. For the period from our inception to
December 31, 1999, sales and marketing expenses were $147,000, resulting mainly
from the establishment of our sales and marketing department.
GENERAL AND ADMINISTRATIVE EXPENSES. For the period from our inception to
December 31, 1999, our general and administrative expenses were $861,000,
consisting mainly of general and administrative personnel salaries, facilities
costs, and professional service fees.
STOCK-BASED COMPENSATION EXPENSES. For the period from our inception to
December 31, 1999, stock-based compensation expenses were $663,000.
INTEREST INCOME, NET. For the period from our inception to December 31,
1999, interest income, net was $21,000.
NET LOSS. For the period from our inception to December 31, 1999, our net
loss was $2.1 million.
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QUARTERLY OPERATING RESULTS
The following table sets forth our quarterly operating results from
September 8, 1999 (inception) through June 30, 2000. The activity between
September 8, 1999 and September 30, 1999 was minimal, and as a result it is not
broken out for the purposes of this table. The quarterly data should be read in
conjunction with our financial statements and the notes to our financial
statements appearing elsewhere in this prospectus. In view of the rapidly
evolving nature of our business and our limited operating history, we believe
that period-to-period comparisons of revenue and operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance.
<TABLE>
PERIOD FROM
SEPTEMBER 8, 1999 THREE MONTHS ENDED
(INCEPTION) THROUGH -------------------------------
DECEMBER 31, 1999 MARCH 31, 2000 JUNE 30, 2000
----------------- --------------- --------------
(IN THOUSANDS)
Statement of Operations Data:
<S> <C> <C> <C>
Revenue:
Service revenue........................ $ 98 $ 911 $ 2,931
Equipment revenue...................... -- 960 2,586
--------------- --------------- --------------
Total revenue........................ 98 1,871 5,517
Costs and expenses:
Cost of service revenue................ 484 2,233 5,634
Cost of equipment revenue.............. -- 871 2,429
Research and development............... 67 171 174
Sales and marketing.................... 147 1,693 3,608
General and administrative............. 861 2,823 4,593
Stock-based compensation............... 663 1,985 2,844
--------------- --------------- --------------
Total costs and expenses............. 2,222 9,776 19,282
--------------- --------------- --------------
Loss from operations...................... (2,124) (7,905) (13,765)
Interest income, net...................... 21 209 118
--------------- --------------- --------------
Net loss.................................. $ (2,103) $ (7,696) $ (13,647)
=============== =============== ==============
</TABLE>
ANALYSIS OF QUARTERLY OPERATING RESULTS
The increase in quarterly service revenue is primarily due to the
addition of customers and increased revenue per customer, as we enhanced our
sales and marketing efforts and increased our ability to provide services by
hiring additional technical personnel. The increase in quarterly equipment
revenue is related to the provisioning of equipment in connection with some of
our service agreements. The increase in the cost of service revenue for the
quarters reflect the increase in technical personnel and the allocation of
increased overhead costs associated with our rapid growth. Cost of equipment
revenue is directly attributable to the cost of third party equipment resold to
our customers. The increase in sales and marketing expenses was primarily due to
increased personnel and recruiting costs, advertising and marketing programs.
The increase in quarterly general and administration expenses reflects the costs
associated with preparing for our rapid growth, including increased personnel,
facilities costs, recruiting costs and professional service fees.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception through June 30, 2000, we have financed our
operations by raising $24.0 million primarily through the private placement of
equity securities. In June 2000, we issued approximately $5.0 million in
convertible promissory notes. The notes bear interest at a rate of 9.5% per
annum. At December 31, 1999, we had $1.4 million in cash and cash equivalents
and at June 30, 2000, we had $6.4 million in cash and cash equivalents as well
as $1.0 million of restricted cash. We had significant negative cash flows from
operating activities for the period from inception to December 31, 1999 and for
the six months ended June 30, 2000.
Net cash used in our operating activities was $1.3 million for the period
from inception to December 31, 1999 and $11.8 million for the six months ended
June 30, 2000. Cash used in operating activities consisted primarily of net
operating losses and increases in accounts receivable and prepaid expenses,
which were partially offset by
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increases in accrued expenses and accounts payable. As we continue to grow, any
increases in our accounts receivable balance will adversely impact our ability
to generate positive cash flows from our operating activities.
Net cash used in our investing activities was $876,000 for the period
from inception to December 31, 1999 and $9.3 million for the six months ended
June 30, 2000. Net cash used in investing activities in these periods consisted
primarily of capital expenditures for computer equipment, purchased software,
office equipment, and leasehold improvements.
Net cash provided by our financing activities was $3.6 million for the
period from inception to December 31, 1999, and $26.1 million for the six months
ended June 30, 2000. Net cash provided by financing activities was principally
attributable to the private sale of 7,200,000 shares of Series A mandatorily
redeemable convertible preferred stock and 8,610,861 shares of Series B
mandatorily redeemable convertible preferred stock, as well as the issuance of
approximately $5.0 million of convertible promissory notes. This preferred stock
is voting stock with a dividend and liquidation preference over the common
stock, and is redeemable after January 13, 2005 at cost plus 10% per year
outstanding prior to redemption. All outstanding shares of Series A and Series B
preferred stock will be converted into 15,810,861 shares of common stock upon
consummation of this offering.
As of June 30, 2000, our principal commitments consisted of obligations
outstanding under a number of facility and equipment leases. We have entered
into facility lease agreements for our corporate headquarters in Santa Clara,
California, as well as for office space in Illinois, New York, New Jersey, and
Virginia, with expiration dates through the year 2010. In addition, we lease
equipment under noncancellable lease agreements through 2002. The total minimum
lease payments under these facilities and equipment agreements are $13.5
million. In March, 2000, we entered into a two-year equipment rental agreement,
which provides for a line of credit up to $2.0 million secured by the assets
that we acquire during that time and by restricted cash balances equal to six
months of lease payments. As of June 30, 2000, we had utilized $1.5 million
under this agreement. Lease terms are 24 months, and may be extended by
agreement of the parties.
In July 2000, we completed the private sale of our Series C mandatorily
redeemable convertible preferred stock in the amount of $21.6 million. Upon the
closing of this financing, our outstanding convertible promissory notes were
automatically converted into 889,554 shares of the Series C preferred stock.
All outstanding shares of Series C preferred stock will be converted into
4,717,372 shares of common stock upon consummation of this offering.
In July 2000, we entered into an operating lease agreement for a new
facility in Santa Clara, California. The agreement is for a minimum of ten years
with annual rent payments increasing from $2.8 million to $3.9 million over the
lease term. Concurrent with the execution of the lease, we posted a letter of
credit in the amount of $2.9 million, which expires on October 1, 2001.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our operating
expenses, including our planned increases in our expenditures on sales and
marketing, research and development and international expansion, for at least
the twelve months following this offering. If we undertake any significant
acquisitions or make large strategic investments, we may need to raise
additional funds within that time. Although we do not have any present plans for
such acquisitions or investments, we may pursue such opportunities in the
future. We may also need to raise additional funds if competitive pressures
force us to make unforeseen expenditures, such as to acquire or develop new
technology. If we need to raise additional funds, we will likely do so through
the issuance and sale of equity securities. If this were to occur, the
percentage ownership of our stockholders could be reduced, our stockholders may
experience additional dilution and these securities may have rights, preferences
or privileges senior to those of our stockholders. We cannot assure you that
additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance services or products or otherwise respond to competitive
pressures would be significantly limited. Our business, results of operations
and financial condition could be materially adversely affected by these
limitations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any
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derivative instruments and does not engage in hedging activities. The Company
expects the adoption of SFAS No. 133 will not have a material impact on its
financial position, results of operations or cash flow. The Company will be
required to adopt SFAS No. 133 for the year ending December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin, or SAB 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 did not have a material effect on
the financial position or results of operations of the Company.
In March 2000, the FASB issued Interpretation, or FIN No. 44, Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of certain of the
conclusions of FIN 44 covering events occurring during the period after December
15, 1998 or January 12, 2000 did not have a material impact on the Company's
financial position and results of operations. The Company does not expect that
the adoption of the remaining conclusions will have a material effect on the
financial statements.
IMPACT OF YEAR 2000
As of August 1, 2000, we had not experienced any Year 2000 related
disruption in the operation of our systems. Although most Year 2000 problems
should have become evident on January 1, 2000, additional Year 2000 related
problems may become evident only after that date.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt or lease obligations
due to the fixed nature of the obligation.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term financial instruments. Due to the short-term nature of our
investments, we believe that we are not subject to any material market risk
exposure. We have limited foreign operations and so we believe that we are not
materially exposed to foreign currency fluctuations. We anticipate that as we
expand internationally the proportion of our revenues paid in foreign currencies
will increase. Accordingly, we may be subject to exposure from adverse movements
in foreign currency exchange rates in relation to those revenues.
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BUSINESS
OVERVIEW
We are a leading provider of comprehensive, cutting-edge Internet
infrastructure management services to Internet companies and traditional
businesses seeking to maximize the performance, reliability and security of
large-scale, complex Internet sites. We get our customers' Internet sites up and
running quickly, and keep them running. By relying on us to manage their
mission-critical Internet operations, our customers can focus on their strategic
initiatives and core competencies. Our core services include establishing and
maintaining the infrastructure for our customers' Internet operations, and our
premium services currently include automated monitoring, security and network
redundancy.
Our technical personnel focus exclusively on analyzing, recommending,
implementing and supporting our customers' Internet infrastructure. We have
relationships with leading hardware, software, web hosting and other Internet
infrastructure companies, including Cisco, Sun Microsystems, Storage Networks,
Oracle and AboveNet. To date, we have worked with over 100 customers, including
About.com, Critical Path, Electronic Arts, Microsoft HotMail, and Ogilvy &
Mather.
INDUSTRY BACKGROUND
The Internet has become a global medium for communication, content
delivery, business operations and commerce. International Data Corporation, or
IDC, estimates that global electronic commerce will grow from $131.0 billion in
1999 to $1.6 trillion in 2003, representing a compound annual growth rate of
approximately 87%.
As the Internet has grown, so have the breadth of Internet product and
service offerings and the complexity of the Internet infrastructure. A company
establishing an Internet presence must design and develop the Internet site;
obtain and install hardware and software; establish a high-speed, reliable
network infrastructure; establish connectivity with this infrastructure; and
maintain, improve and optimize the site. In particular, site reliability,
security and scalability have grown more important as online businesses have
become more sophisticated. Businesses must address these challenges in the
context of great time-to-market pressures, limited resources, rapid
technological change, and a shortage of qualified information technology (IT)
personnel. Moreover, rapid expansion by businesses has increased the need
for around-the-clock and around-the-globe Internet infrastructure support.
Many online businesses have responded to these challenges by outsourcing
pieces of their Internet operations, and numerous companies are providing
various Internet services and solutions to these online businesses. For example,
web hosting companies, including Exodus and GlobalCenter, sell connections to
fast, reliable networks and space in their data center facilities. In addition,
Internet-focused IT services firms such as Sapient, Scient and marchFIRST design
and develop complex Internet sites. IDC estimates that the markets for web
hosting services and Internet-focused IT services firms are expected to grow
from $1.8 billion and $16.2 billion in 1999 to an estimated $18.9 billion and
$84.3 billion in 2003.
Similarly, online businesses are increasingly outsourcing the management
of their Internet infrastructure. Internet infrastructure management services
generally fall outside the core competencies of web hosting firms and
Internet-focused IT services firms. These services include, for example:
o network design and architecture of site infrastructure,
o management of co-location services,
o evaluation and implementation of hardware, operating systems,
databases, and other software,
o monitoring and security management, and
o "24x7" emergency response and fault resolution.
The Aberdeen Group estimates that the market for Internet infrastructure
management and related services will grow from $700 million in 1998 to
$14 billion in 2002.
Some web hosting and IT services companies offer Internet infrastructure
management services, but only as an add-on to their core businesses. In
addition, obtaining these services from a web hosting company may force a
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<PAGE>
customer to host its Internet site with that web hosting company, which may not
necessarily be the optimal solution. The growing demand for providers of
high-quality, technology-focused Internet infrastructure management services
creates a significant opportunity for firms like us that combine broad technical
expertise with a singular emphasis on helping customers make and keep their
Internet operations secure, reliable, and efficient.
OUR SOLUTION
We provide comprehensive, cutting-edge Internet infrastructure management
services that maximize the performance, reliability and security of
large-scale, complex Internet sites for our customers. Key elements of our
solution include:
COMPREHENSIVE SERVICE OFFERINGS. We can handle all aspects of Internet
infrastructure management. To create or upgrade an Internet site quickly, we
design and architect the infrastructure, install the appropriate hardware
and software and establish reliable network connectivity. Once an Internet site
is up and running, we perform around-the-clock site monitoring and fault
resolution, as well as security audits, load balancing, site mirroring and data
replication. Because Internet infrastructure management is our core business, we
believe we can perform these services more effectively, and often at a lower
cost, than our customers can on their own.
EXPERIENCE WITH LARGE-SCALE, COMPLEX INTERNET SITES. Our founders have
extensive experience in Internet infrastructure management, and our technical
personnel focus exclusively on analyzing, recommending and implementing Internet
infrastructure management solutions for our customers worldwide. Our technical
personnel have experience in many technical disciplines, including
infrastructure design and architecture, database interface development, site
security, site availability and content distribution. To date, we have worked
with over 100 large-scale and complex Internet sites. We also are implementing a
sophisticated web-based knowledge management system we call our Knowledge
Network to share technology developments, best practices, and experiences from
prior customer engagements.
SOLUTIONS TAILORED TO CUSTOMER REQUIREMENTS. Each of our customers has
unique business requirements, which can be met by a variety of technology
solutions. We understand and employ a wide range of operating systems, hardware,
software and services. Our relationships with leading Internet infrastructure
providers including Cisco, Sun Microsystems, StorageNetworks, Oracle and
AboveNet give us access to a wide range of Internet infrastructure management
solutions and service solutions enabling us to select from a variety of options
without bias. By selecting from our standard offerings and best-of-breed
technologies and services, we can tailor solutions to best meet our customers'
specific needs.
24X7 HANDS-ON MANAGEMENT. Our Internet Customer Care Center, or IC3,
monitors our customers' Internet operations 24 hours a day, 365 days a year. The
IC3 is the first line of attack for problems with customers' Internet
operations. The IC3 serves as a filtering mechanism for minor problems, with
more serious problems being escalated to our Internet site management team. This
process gives our customers a single point of contact for all Internet
infrastructure management related issues. While we provide some services
remotely, we believe that timely installation, quick fault resolution, and
efficient maintenance of our customers' Internet operations require active
on-site management. We achieve this by maintaining a permanent presence near
major data centers where our customers' hardware resides. We currently have
offices in Silicon Valley, Los Angeles, New York City, Newark, Herndon
(Virginia), Chicago, and London.
OUR STRATEGY
Our goal is to become the leading global provider of outsourced Internet
infrastructure management services. The key elements of this strategy are:
AGGRESSIVELY GROW CUSTOMER BASE BY FOCUSING ON QUALITY AND RELIABILITY.
We believe that traditional businesses, including Fortune 500 Companies, have
just begun to take advantage of the Internet and will launch many large
cross-channel initiatives in the coming years as they seek to bring additional
business units and geographies online in the coming years. We anticipate that
online businesses will heavily invest in the management of their Internet
infrastructure as their businesses continue to mature. We believe that we are
positioned to become the leading provider of Internet infrastructure management
services over the long-term, due to our breadth of offerings, aggressive hiring
and marketing programs, and the experience of our management team. By providing
high-quality services to our current customers--with a particular focus on
maximizing the reliability and security of
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their Internet operations--we intend to grow our customer base aggressively
while our market is still in an early stage of growth.
GROW RECURRING REVENUES BY DEVELOPING AND SELLING PREMIUM SERVICES. Our
customers generally rely on us for ongoing management of their Internet
operations, providing us with regular and recurring revenues. We expect that
customers will purchase our premium services as their Internet businesses grow,
increasing our total service revenue per customer. As our customers increasingly
rely on us to manage their Internet infrastructure, our customer relationships
grow deeper and more solid, resulting in increased customer loyalty. We are
developing additional value-added services in the areas of site monitoring,
storage, security and network redundancy that can generate additional revenue
streams from existing customers. Because we expect these revenues to be achieved
without corresponding headcount growth, we also expect these offerings to
improve our operating results.
EXPAND GLOBAL PRESENCE. We believe that quality Internet infrastructure
management services require physical proximity to customer hardware and
solutions tailored to individual locales. Therefore, we intend to expand our
presence both domestically and overseas, with our ultimate goal to be in
substantially all major metropolitan areas worldwide that have or expect to have
a high concentration of data centers. We believe that being close to the data
centers positions us to better respond to disruptions in our customers' Internet
operations. In addition, expanding our geographical presence will assist us in
our sales efforts.
BUILD THE SITESMITH BRAND. We believe that the strength of the SiteSmith
brand is critical to our success. We will continue to invest in growing our
brand and building awareness of SiteSmith within the business and technology
communities. We have established a strategic marketing campaign to advertise and
promote our service offerings in newspapers, magazines and other media. In
addition, we have implemented a public relations program consisting of media
relations development, publication of articles, and participation in industry
events and other speaking engagements.
INVEST IN PEOPLE AND KNOWLEDGE-SHARING. We intend to devote substantial
resources to attracting and retaining skilled personnel, and promoting a
positive and collaborative corporate culture. We have a dedicated organization
whose sole responsibility is the development and maintenance of the Knowledge
Network that fosters sharing of intellectual capital among our personnel in all
of our offices. We also are developing processes that place our employees on the
leading edge of technology and techniques in our market, and help them put their
knowledge to work for our customers. In order to maintain and grow our emphasis
on customer-focused technology, we have also established labs to prototype and
evaluate new technologies and applications.
OUR SERVICES
We offer a comprehensive solution for the management of our customers'
Internet infrastructure. Our core services cover the range of activities
involved in establishing the infrastructure of an Internet site and managing its
ongoing operation. These offerings rely on the technical skills of our personnel
to help our customers design, build and maintain Internet infrastructures that
are reliable and high-performing. We also offer premium services designed to
maximize the performance of an Internet site, including such areas as
monitoring, network redundancy and security.
CORE SERVICES
Our core services can be classified into three areas:
INFRASTRUCTURE DESIGN AND ARCHITECTURE. We generally begin our work for
customers by analyzing their online business objectives and existing
applications, and recommending the configuration of hardware, software and
network components that best serves their current and anticipated future
requirements. Our technical personnel select an infrastructure design that
ensures that our customers' Internet operations:
o have no single point of failure,
o are scalable and allow for easy, low-cost expansion,
o have sufficient redundancy, and
o enjoy optimal performance with minimal system bottlenecks.
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Our experience with leading technology providers allows us to consider a
wide range of solutions for our customers. Examples of technologies that we work
with include:
o Clustering: VERITAS Cluster Server, Sun Cluster
o Databases: Oracle, MS SQL, Sybase
o Hardware: Sun Microsystems, Compaq, Cisco, Dell, Hewlett-Packard
o Load Balancing: Cisco, Foundry, Alteon, F5, Hydraweb, Radware
o Networking: Cisco, Nortel, Foundry, Alteon
o OS Support: Solaris, NT, Linux
o Security: Nokia, Check Point, Netscreen, Cisco
o Software: Apache, iPlanet Web Server, MS IIS
o Storage: StorageNetworks, EMC, Sun Microsystems, Compaq, StorageTek
IMPLEMENTATION. After finalizing the infrastructure design, we perform
the services necessary to begin operation of our customers' new or upgraded
Internet site. These services consist of:
o configuring components of our customers' Internet infrastructure,
o provisioning, installing and testing equipment, and
o arranging for web hosting.
Configuring Internet infrastructure components requires knowledge of
stable release levels, security complications, component interaction trade-offs
and business integration requirements. Our technical personnel work closely with
each customer to ensure that their systems are configured correctly for their
business application environment. For example, we ensure that all required
security updates are applied correctly and that security policies are applied
consistently across our customers' Internet infrastructure.
Provisioning is the management of purchasing, tracking, and taking
delivery of Internet infrastructure components. As part of this service, we also
arrange support for purchased equipment, including coordination of vendor
service agreements. We then help our customers install and test these
components.
Arranging for web hosting consists of working with multiple hosting
providers in order to provide a tailored package for each customer. Our
relationships with multiple hosting providers allow our customers to spread
their Internet operation across multiple data centers, maximizing Internet site
availability.
ONGOING MANAGEMENT. Ongoing management of Internet operations involves:
o day-to-day maintenance,
o performance optimization, and
o site fault resolution.
In order to keep our customers' Internet operations running efficiently
and problem-free, we perform regular maintenance including installation of
software patches and updates in response to vendor recommendations or security
alerts and system backups.
We also work closely with customers to refine and improve performance of
their Internet operations by recommending and implementing modifications and
upgrades to both hardware and software. As a customer's business grows, we help
them develop a solution to scale their business. In addition, we keep a record
of all revisions made to a customer's Internet infrastructure, which eliminates
inconsistent revisions to hardware and software.
Our technical personnel are on-call 24 hours a day, 365 days a year to
resolve problems quickly and minimize disruption to our customers' Internet
operations. We have offices close to data centers so we can respond quickly in
person when a remote resolution is not possible or would be sub-optimal.
28
<PAGE>
PREMIUM SERVICES
The key benefits of our premium services are to improve Internet site
availability, security and content distribution. Availability of Internet sites
can be improved by network redundancy, load balancing, monitoring, clustering,
and back-up and restore services. Security can be improved by the use of managed
firewalls, virtual private networks (VPNs), intrusion detection systems, system
hardening, and network filtering. Content distribution services include
distributed caching and geographic site replication, as well as load-balancing,
all of which can also improve availability.
Our premium services currently consist of:
MONITORING. Our monitoring service is designed to identify problems as
they occur. We offer two levels of Internet site monitoring to our customers.
Our basic monitoring service includes external monitoring of customer URLs,
mailboxes and servers, typically by verifying the viability of each component at
five-minute intervals. We generate reports for customers that include exception
details, as well as Internet site statistics such as total downtime and average
bandwidth use. Our premium monitoring service supplements these functions with
customized internal monitoring of hardware, databases and applications.
Subscribers to this service receive enhanced reports that discuss trends and
analyze Internet site performance from the user's perspective, allowing
customers to plan expansion of bandwidth or data storage capabilities.
SECURITY SERVICES. Our managed security services help provide a secure
environment for our customers' Internet operations. Our security services
offerings include managed firewalls, VPNs, and intrusion detection systems. Our
managed firewall services help protect Internet sites against unwanted
intrusions and can be installed without major modification to the customer's
existing site infrastructure. Our VPN services provide secure connections to our
customers' Internet sites for content maintenance and administration tasks.
NETWORK REDUNDANCY. Our network redundancy service connects customers to
multiple independent web hosting and bandwidth providers, reducing their
exposure to network failures. By using multiple network providers, online
businesses can avoid network degradations or outages caused by the failure of a
specific data center's network connection. Building connections to multiple
networks, referred to here as a Metropolitan Area Network, or MAN, is a complex
and expensive undertaking for even the most sophisticated online business. Our
network redundancy service gives customers the benefits of a MAN without the
attendant costs.
CUSTOMERS
As of August 1, 2000, we have worked with over 100 customers. Our
customers range from Fortune 500 companies, application service providers,
Internet content companies to Internet start-up companies. The following are
customers from which we have derived in excess of $50,000 of revenue as of June
30, 2000:
<TABLE>
<CAPTION>
<S> <C> <C>
About.com financialprinter.com SafeDisk
AdOne FreeSamples.com Shine
AppOnline Healinx Shigaba
Astaga Imagine Media SmoothSale
AudioBasket.com Jobscience Sonera
Bolt MarketTools Swan Systems
Bright Street Namezero.com Trapezo
Click2Send.com Nano.com travelbreak.com
CoolBoard.com NetCreations Trepp
Critical Path Ogilvy & Mather UBUBU
Electronic Arts Portera Systems Urban Box Office
eSCENE RedCart Technologies Website Pros
FileAmerica.com Rocketlinks wine.com
</TABLE>
For the six months ended June 30, 2000, no customer accounted for more
than 10% of total revenues.
CUSTOMER CASE STUDIES
The following case studies describe customer engagements that are
representative of the range of services we provide our customers.
29
<PAGE>
ABOUT.COM
About.com Inc is a platform comprised of a network of more than 700
highly-targeted, topic-specific Internet sites. According to Media Metrix,
approximately 18.0 million unique users visited About.com in May 2000 making
About.com the 7th largest Internet property overall in that month.
Challenge: In order to increase overall site reliability and
availability, About.com wanted to replicate its East Coast Internet site on the
West Coast. At the same time, About.com needed to integrate the Internet site of
Freeserver.com, a company in Utah recently acquired by About.com. As a New
York-based company, to accomplish these objectives on their own would have
required About.com to incur the costs of establishing and staffing a California
facility on an ongoing basis.
Solution: Working with About.com's New York-based IT departments, we
established a new site infrastructure in San Jose, California in order to
replicate their site on the West Coast. We also helped migrate Freeserver.com
from a Utah co-location facility to San Jose and integrated it into About.com's
existing infrastructure. We continue to manage their Internet infrastructure on
an ongoing basis.
WINE.COM
wine.com is an Internet retailer with a reputation for quality
selections and exceptional customer service.
Challenge: To design and implement wine.com's Internet infrastructure, to
ensure scalability and to complete a successful transition from one data center
to another with no down-time.
Solution: SiteSmith designed, implemented and tested a new Internet site
infrastructure for wine.com. Once the new site was ready, we managed the
transition of the site from the old to the new data center. We also are
responsible for ongoing management of their Internet infrastructure, including
the provisioning of components.
OGILVY & MATHER
Ogilvy & Mather, a subsidiary of WPP Group plc, is one of the world's
largest advertising companies, with 359 offices in 100 countries. Ogilvy &
Mather's roster of customers includes multi-national corporations such as IBM,
American Express, Hershey, BP Amoco, and Ford Motor Company.
Challenge: Ogilvy & Mather offers a new interactive product called
Solution Center to their Fortune 500 customers that allows these customers to
exchange data via extranet sites. Ogilvy & Mather required technical expertise
to design, implement, and manage their clients' individual extranets.
Solution: We design, implement, manage, and provide hosting for Ogilvy &
Mather's clients' extranet sites, ensuring reliability, security, scalability
and high availability. We provide Ogilvy & Mather's Fortune 500 clients such as
BP Amoco with a comprehensive solution for extranet infrastructure management on
an ongoing basis.
SALES AND MARKETING
SALES
We sell our services through an internal direct sales organization, which
establishes and maintains direct relationships with key accounts and strategic
customers. In addition, we maintain field offices in five major metropolitan
areas in the United States and one in London, England.
We derive sales leads from both our internal direct sales organization
and our channel partners. Our sales team generates its leads from our marketing
activities, including our Internet site, advertising, direct marketing and trade
show participation, as well as from telemarketing based on purchased prospect
lists. Companies with whom we have alliances generate leads through team selling
and co-marketing arrangements, which provide us with access to their customer
base.
MARKETING
Our marketing strategy is to build our brand in order to solidify our
competitive position in the market for Internet infrastructure management
services. Our marketing activities include:
30
<PAGE>
o establishing relationships with key trade analyst groups,
o advertising in trade and general business print media, regional
radio, and outdoor venues,
o employing direct marketing programs,
o participating in trade shows,
o speaking at industry and technology conferences, and
o hosting and participating in technical seminars.
We also plan to establish regional campaigns for the various metropolitan
areas that we serve, both domestically and internationally.
ALLIANCES
We have relationships with many leading hardware, software, storage,
hosting and value-added reseller (VAR) companies. We use these relationships to
enhance our service offerings, as well as to generate qualified sales leads.
These arrangements also can include co-marketing and cross-training activities.
Set forth below is a representative list of companies with which we have
alliances:
<TABLE>
<CAPTION>
HARDWARE SOFTWARE STORAGE HOSTING VARS
-------- -------- ------- ------------ ----
<S> <C> <C> <C> <C>
Cisco Argus Systems EMC AboveNet Comstor
Compaq Check Point StorageNetworks Colo.com IngramMicro
Dell Microsoft StorageTek Equinix Merisel
Foundry Networks Oracle Exodus
Nokia Peakstone GlobalCenter
RADWARE Red Hat Globix
Sun Microsystems VERITAS QwestCommunications
VA Linux Systems Vignette UUNET
</TABLE>
COMPETITION
We compete in the rapidly evolving and increasingly competitive Internet
infrastructure management services market. We compete against web hosting
companies, companies selling Internet site design services, and the development
efforts of companies seeking to maintain and improve their Internet
infrastructures in-house. We expect competition to intensify even further as
this market evolves.
We believe that the key competitive factors are:
o experience in Internet infrastructure management services,
o technological independence,
o focus on new and emerging technologies,
o global presence, and
o broad and deep relationships with customers.
We believe we compete favorably on these criteria and distinguish
ourselves from our competitors based on the breadth of our expertise, which
enables us to tailor a solution for customers from a variety of leading
technologies.
EMPLOYEES
As of August 4, 2000, we had 333 full-time employees. We have never
experienced a work stoppage or labor dispute that has interfered with our
operations. We consider our relations with our employees to be satisfactory.
31
<PAGE>
FACILITIES
Our principal executive offices are located at 3283 Scott Boulevard,
Santa Clara, California. Our lease on these premises covers approximately 11,200
square feet and expires in October 2004. We also have leases on an adjoining
building at 3281 Scott Boulevard, Santa Clara, California that covers
approximately 24,000 square feet and expires in February 2005, and a lease
covering approximately 48,275 square feet at 3250 Olcott Street, Santa Clara,
California that expires in June 2010. We also lease facilities in Chicago,
Herndon (Virginia), Los Angeles, New York City, Newark, and London. We
anticipate additional space will be required as our business expands and believe
that we will be able to obtain suitable space as needed.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our technology. Monitoring
unauthorized use of our intellectual property rights is difficult and costly,
and we cannot be certain that the steps we have taken will prevent
misappropriations of our technology, particularly in countries where the laws
may not protect our proprietary rights as fully as in the United States.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may
from time to time become a party to various legal proceedings arising in the
ordinary course of business.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their respective ages and
positions as of August 2, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
------- ----- -----------
<S> <C> <C>
Mark F. Spagnolo................. 48 President, Chief Executive Officer and Chairman of the Board
Robert John (Treb) Ryan IV....... 33 Senior Vice President, Operations and Director
David S. Bauer................... 40 Vice President, Operations
Mary M. Cortani.................. 43 Vice President, Business Integration
Richard H. Dym................... 53 Vice President, Marketing
Lee J. Finck..................... 41 Acting Vice President, Sales
Peter E. Hilliard................ 33 Vice President, Human Resources
Dan M. Rasmussen................. 38 Vice President, New Market Development
Michael E. Seifert............... 42 Vice President and Chief Financial Officer
Frank Slattery................... 39 Vice President, Business Development and General Counsel
David C. Winn.................... 50 Managing Director, Europe, Middle East and Africa
Carolyn V. Aver(1)............... 41 Director
Amal M. Johnson(1)............... 47 Director
James L. McLean(1)(2)............ 39 Director
Edward J. Sanderson, Jr.(2)...... 51 Director
Marvin Tseu...................... 52 Director
</TABLE>
--------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
MARK F. SPAGNOLO has served as our Chief Executive Officer since July
2000. Prior to joining us, Mr. Spagnolo served in various capacities at UUNET, a
provider of Internet communications solutions, and is a subsidiary of WorldCom,
Inc. From October 1998 to July 2000, Mr. Spagnolo was President and Chief
Executive Officer of UUNET. From August 1997 to September 1998, Mr. Spagnolo
served as President and Chief Operating Officer of UUNET. From 1973 to August
1997, Mr. Spagnolo held several positions with EDS Corporation, a company that
provides information technology services to the publishing, broadcasting, and
entertainment industries, including President of EDS' Infotainment business unit
in Plano, Texas. Mr. Spagnolo is currently a member of the Board of Directors of
Cobalt Networks, Inc., a developer of server appliances. Mr. Spagnolo holds a
B.S. in industrial engineering from Newark College of Engineering.
ROBERT JOHN (TREB) RYAN IV is a co-founder of SiteSmith and has served as
our Senior Vice President, Operations as well as a member of our Board of
Directors since October 1999. From April 1998 to September 1999, Mr. Ryan was
Vice President, Professional Services for Frontier GlobalCenter, the data and
Internet subsidiary of Frontier Communications Inc., a provider of integrated
communications services. From November 1997 to April 1998, Mr. Ryan was manager
and then director of technical account management for Frontier GlobalCenter and
GlobalCenter, Inc., a provider of business Internet solutions. From October 1996
to November 1997, Mr. Ryan was technical account manager for Internet Systems,
Inc., a web site hosting company. From September 1990 to September 1996, Mr.
Ryan was Operations Manager for Paramount's Great America division. Mr. Ryan
attended the University of California at Los Angeles.
DAVID S. BAUER has served as our Vice President, Operations since April
2000. From April 1999 to April 2000, Mr. Bauer was a Director and then First
Vice President of Corporate & Institutional Client Group Technology at Merrill
Lynch & Co., Inc., a global financial services firm. From March 1997 to March
1999, Mr. Bauer held a variety of positions at Deutsche Bank, a worldwide
full-service bank, including Managing Director, Global Head of Engineering. From
July 1994 to March 1997, Mr. Bauer was a Principal at Morgan Stanley Dean
Witter, a global financial services firm. Mr. Bauer holds a M.S. in computer
science from Rutgers University, a B.A. with high honors in computer science
from Rutgers University and an A.S. in data processing from Thames Valley State
Technical College.
33
<PAGE>
MARY M. CORTANI has served as our Vice President, Business Integration
since June 2000. She is responsible for our internal operations, including
information technology, methods and practices, quality insurance, culture, and
training. From April 2000 to June 2000, Ms. Cortani was our Director, Internal
Operations. From January 1999 to April 2000, Ms. Cortani was the Director of
Business Process Development for Kinetics Fluid Systems, a provider of gas and
chemical delivery systems. From May 1997 to January 1999, Ms. Cortani was the
Director of Information Technology and Facilities at Philips Mobile Computing
Group, the hand-held computing device business group of Philips North America.
From March 1991 to May 1997, Ms. Cortani was the Founder, Chief Executive
Officer and Chairman of the Board of Directors of Craftwork Solutions, Inc., an
information technology solutions company. Ms. Cortani holds an A.S. in computer
engineering from the Franklin Institute of Boston and an electronics certificate
from the Women's Institute of Boston.
RICHARD H. DYM has served as our Vice President, Marketing since January
2000. From December 1997 to December 1999, Mr. Dym was Vice President, Marketing
for Tribal Voice, a provider of instant messaging, Internet communications and
online-community solutions. From March 1993 to July 1997, Mr. Dym held a variety
of positions at ParcPlace-Digitalk, Inc., a software development tools company,
including Senior Vice President, Marketing, General Manager, International
Operations and General Manager of the Object Share Division. Mr. Dym holds a
B.A. in economics from Franklin & Marshall College and an M.A. in economics from
The American University.
LEE J. FINCK joined SiteSmith in April 2000, and was Regional Vice
President, Sales until he was appointed Acting Vice President, Sales in July
2000. From June 1998 to April 2000, Mr. Finck was Vice President of Worldwide
Sales and Business Development for Tribal Voice, a provider of Internet
communications and on-line community solutions. From August 1997 to June 1998,
Mr. Finck was Channels Manager for the JavaSoft Division of Sun Microsystems, a
computer hardware and software provider. From July 1995 to July 1997, Mr. Finck
was Director of North American Sales for Global Village Communications, a
communications software company. From 1988 to 1995, Mr. Finck held a variety of
positions, including Director of Reseller Sales, at Claris Corporation, a
subsidiary of Apple Computers. Mr. Finck holds a B.S. in education from
Washington State University.
PETER E. HILLIARD has served as our Vice President, Human Resources since
June 2000. From September 1999 to June 2000, Mr. Hilliard was a Partner and Vice
President of Client Services at 54th Street Partners, L.L.C., a management
consulting firm. From December 1999 to June 2000, Mr. Hilliard served as our
Acting Vice President, Human Resources while under contract with 54th Street
Partners. From September 1998 to September 1999, Mr. Hilliard was Director of
Recruitment & Retention for Chevy's Fresh Mex, Inc., a nationwide restaurant
chain. From March 1994 to September 1998, he was National Director of Employee
Relations and Development and then Vice President of Human Resources, Western
U.S. with Boston Chicken, Inc. From February 1993 to March 1994, Mr. Hilliard
was Director of Human Resources with the Fairmont Hotel Company. Mr. Hilliard
attended San Jose State University.
DAN M. RASMUSSEN is a co-founder of SiteSmith and has served as our Vice
President, New Market Development since May 2000. From October 1999 to May 2000,
he served as our Vice President, Business Development. From February 1998 to May
1999, Mr. Rasmussen was Senior Vice President, International Operations of
Frontier GlobalCenter, the data and Internet arm of Frontier Communications
Inc., a provider of integrated communications services. From April 1997 to
February 1998, Mr. Rasmussen was President of GlobalCenter, Inc., a provider of
business Internet solutions, and was responsible for operations and sales of
GlobalCenter, Inc.'s Digital Distribution division. In 1994, Mr. Rasmussen
founded Internet Systems, Inc., a web site hosting company, and served as the
company's President until April 1997 when the company merged with Global Center,
Inc. Mr. Rasmussen holds a B.S. in psychology from West Virginia University.
MICHAEL E. SEIFERT has served as our Vice President and Chief Financial
Officer since March 2000. From July 1998 to January 2000, Mr. Seifert was Vice
President of Finance and Chief Financial Officer of eN2Z Corporation, an
e-commerce infrastructure software company. From June 1997 to June 1998, Mr.
Seifert was Vice President of Finance and Chief Financial Officer at Wayfarer
Communications, Inc., a corporate webcasting technology company. From October
1993 to February 1997, Mr. Seifert held various positions, including Vice
President of Finance at Compression Labs, Inc., a visual communication systems
company. Mr. Seifert graduated magna cum laude from the University of Santa
Clara with a B.S. in commerce and is a Certified Public Accountant.
FRANK SLATTERY has served as our Vice President, Business Development,
and as General Counsel since May 2000. From May 1998 to May 2000, Mr. Slattery
held various positions with USWeb/CKS (now marchFIRST), an
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<PAGE>
Internet professional services firm, including Corporate General Counsel. From
June 1994 to April 1998, Mr. Slattery held various positions at
ParcPlace-Digitalk, Inc., a software development tools provider, including Vice
President of Business Development. Mr. Slattery holds a B.A. in economics, with
a minor in computer science, and a J.D. from the University of California at
Davis.
DAVID C. WINN has served as our Managing Director, Europe, Middle East
and Africa since August 2000. From October 1999 to July 2000, Mr. Winn was an
Executive at Business Innovation Services and Financial Services Sector at IBM.
From July 1997 to September 1999, Mr. Winn was Vice President, Marketing,
Europe, Middle East and Africa for IBM. From January 1995 to June 1997, Mr. Winn
was General Manager, Personal Computers, Europe, Middle East and Africa for IBM.
Currently, Mr. Winn is a member of the Board of Directors of ESG Re., Ltd., a
specialty reinsurer. Mr. Winn holds a B.A. in English from Yale University and
an M.B.A. from Harvard Business School.
CAROLYN V. AVER has been a director of SiteSmith since March 2000. From
May 1998 to April 2000, Ms. Aver was Chief Financial Officer and Executive Vice
President of USWeb/CKS (now marchFIRST), an Internet professional services firm.
From May 1997 to May 1998, Ms. Aver was Chief Financial Officer of Backweb
Technologies, a provider of software for e-business solutions. From March 1993
to May 1997, Ms. Aver was Chief Financial Officer of ParcPlace-Digitalk, Inc., a
software development tools provider. She holds a B.S. in accounting from
California State University, Hayward.
AMAL M. JOHNSON has been a director of SiteSmith since January 2000. Ms.
Johnson is a general partner at Weiss, Peck & Greer Venture Partners, a
technology-focused venture capital firm which she joined in March 1999. She
focuses on software and e-commerce investments. Prior to joining Weiss, Peck &
Greer Venture Partners, Ms. Johnson held several positions at Baan Company, a
provider of enterprise business solutions, including President of Baan Supply
Chain Solutions from January 1998 to December 1999, President of Baan Affiliates
from January 1997 to December 1998, and President of Baan Americas from October
1994 to December 1996. She serves on the Board of Directors of numerous private
companies She holds a B.A. in math and physics from Montclair College and
studied electrical engineering and computer science at Stevens Institute of
Technology.
JAMES L. MCLEAN has been a director of SiteSmith since October 1999. Mr.
McLean has been a partner at ComVentures, a venture capital firm specializing in
telecommunications and the Internet, since July 2000. Mr. McLean is also a
director and founder of Bedrock Capital Partners, where he heads the information
technology practice. Mr. McLean founded Bedrock Capital Partners in October
1997. From December 1993 to September 1997, Mr. McLean was a general partner at
Highland Capital Partners, a venture capital firm, where he led the firm's
investment activities in communications technologies. From April 1990 to
December 1993, Mr. McLean was an associate at Accel Partners, a venture capital
firm, where he focused on data communications and telecommunications technology
investments. Prior to joining Accel, Mr. McLean served as the Director of
Business Development for Network Equipment Technologies. Mr. McLean has served
as a director of several private and public companies. Mr. McLean holds an S.B.
in Engineering Sciences from Harvard College and an M.B.A. from the University
of California Berkeley Haas School of Management.
EDWARD J. SANDERSON, JR. has been a director of SiteSmith since March
2000. Mr. Sanderson is currently executive vice president of Oracle Corporation,
a supplier of software for information management, and has been with the company
since July 1995. At Oracle, Mr. Sanderson is responsible for the company's
consulting services, customer relationship management solutions, and Latin
America division. From February 1994 to June 1995, Mr. Sanderson was President
of Worldwide Services at Unisys, an information services and technology company.
From October 1988 to February 1994, Mr. Sanderson was a partner at McKinsey &
Company, a management consulting firm. Mr. Sanderson holds a B.S. in analytical
management from the U.S. Naval Academy and an M.S.A. in information technology
from George Washington University.
MARVIN TSEU is a co-founder of SiteSmith and has served as a member of
our Board of Directors since September 1999. Mr. Tseu served as our Chief
Executive Officer and President from September 1999 to July 2000. From September
1998 to July 1999, Mr. Tseu was President of Structured Internetworks, Inc., a
network communications hardware firm. From August 1996 to July 1998, Mr. Tseu
also served as Executive Vice President, Marketing and Sales at CIDCO, Inc., a
telecommunications products company. From November 1984 to July 1996, Mr. Tseu
held various positions at Plantronics, Inc., a headset manufacturer, including
Vice President, Marketing and Sales and President of one of the company's
subsidiaries, Walker Equipment Company. Currently, Mr. Tseu is
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<PAGE>
Chairman of the Board of Directors of Plantronics, Inc. and is a member of the
Board of Directors of CIDCO, Inc. Mr. Tseu holds a B.A. in economics from
Stanford University.
BOARD COMPOSITION
We have authorized a range of five to nine directors. The executive
officers serve at the discretion of the Board of Directors. There are no family
relationships among any of the directors or executive officers of SiteSmith.
Our Board of Directors will be divided into three classes effective upon
the closing of the offering. At each annual stockholder meeting, one-third of
the directors, or, if their number is not three or a multiple of three, then the
number nearest to but not exceeding one-third, will retire from office by
rotation. The directors to retire in every year will be those who have been in
office the longest since their last election.
BOARD COMPENSATION
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are employees of
SiteSmith are eligible to participate in our 1999 Stock Plan and, after this
offering, they will also be eligible to participate in our 2000 Employee Stock
Purchase Plan.
Edward J. Sanderson, Jr. and Carolyn V. Aver were each granted an option
to purchase 100,000 shares of common stock under our 1999 Stock Plan at an
exercise price of $0.50 per share on March 1, 2000. These options vest over a
four-year period. After this offering, directors who are not employees of
SiteSmith will be eligible to participate in our 2000 Directors' Stock Plan, and
will receive options to purchase 25,000 shares immediately after this offering.
BOARD COMMITTEES
COMPENSATION COMMITTEE. The compensation committee consists of Edward J.
Sanderson, Jr. and James L. McLean. The compensation committee:
o reviews and approves the compensation and benefits for our executive
officers,
o grants stock options under our stock option plans to executive
officers, and
o makes recommendations to the Board of Directors regarding these
matters.
AUDIT COMMITTEE. The audit committee currently consists of Carolyn V.
Aver, Amal M. Johnson and James L. McLean. The audit committee:
o makes recommendations to the Board of Directors regarding the
selection of independent auditors,
o reviews the results and scope of the audit and other services
provided by our independent auditors, and
o reviews and evaluates our audit and control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee of our Board of Directors are
currently Edward J. Sanderson Jr. and James L. McLean, neither of whom has ever
been an officer or employee of SiteSmith.
None of our executive officers serves as a member of the Board of
Directors or compensation committee of any entity that has one or more executive
officers serving on our Board of Directors or compensation committee.
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<PAGE>
TECHNICAL ADVISORY BOARD
In March 2000, our Board of Directors established a Technical Advisory
Board to assist our directors and management with certain issues and decisions
and to discuss advances in Internet site technology and their application to our
business. Each of the non-employee advisors were granted an option to purchase
25,000 shares of common stock at an exercise price of $0.50 that vests over a
four-year period.
<TABLE>
<S> <C> <C>
NAME COMPANY POSITION
------- ---------- --------
Brett Helsel F5 Networks Chief Technology Officer
Chris Lafferty NextVenue Director of Operations
Ron McCoy About.com Chief Technology Officer
Scott Westlake Cisco Manager of Business Development
Alex Winske Yahoo! Head of Networking
David Bauer SiteSmith Vice President, Operations
Robert John Ryan SiteSmith Co-founder and Senior Vice President, Operations
Alex Samonte SiteSmith Chief Engineer
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
in the fiscal year ended December 31, 1999 paid to our former and present Chief
Executive Officer and our next most highly compensated executive officers whose
total compensation exceeded $100,000 during the fiscal year ended December 31,
1999. As our date of inception was September 8, 1999, none of our three
executive officers serving in 1999 nor our Chief Executive Officer earned more
than $100,000 during the year ended December 31, 1999. Consequently, the
following table sets forth the compensation earned in 1999 and the compensation
on an annualized basis for 2000 for our former Chief Executive Officer and our
current Chief Executive Officer (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- -------------
NAME AND PRINCIPAL
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION Year ($) ($) ($) OPTIONS ($)(4)
------- ------------- ---------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Marvin Tseu(1)..................... 2000 $ 175,000* -- -- -- --
Co-founder and Director 1999 $ 42,852 -- -- 650,000 $ 126
Mark F. Spagnolo(2)(3)............. 2000 $ 350,000* $ 850,000* -- 3,000,000 --
Chief Executive Officer and
President
</TABLE>
--------------
* Annualized figure
(1) Mr. Tseu served as our Chief Executive Officer and President from
September 1999 to July 2000.
(2) Mr. Spagnolo became our President and Chief Executive Officer in July
2000.
(3) Mr. Spagnolo received a signing bonus of $500,000 and an annual bonus
of $350,000, which is generally payable upon achievement of performance
goals, but is guaranteed for his first year of service. Mr. Spagnolo will
be reimbursed for all reasonable expenses associated with traveling
to, and lodging near, our principal executive office.
(4) Consists of life insurance premiums actually paid by SiteSmith.
37
<PAGE>
OPTION GRANTS
The following table shows information regarding stock options granted to
the Named Executive Officers during the fiscal year ended December 31, 1999. No
stock appreciation rights were granted during the year.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(5)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR (3) ($/SHARE)(4) DATE 5% 10%
------- ------------- --------------- -------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marvin Tseu(1)............ 650,000 11.2% $0.05 12/21/2009 $ 20,439 $51,797
Mark F. Spagnolo(2)....... -- -- -- -- -- --
</TABLE>
--------------
(1) The shares issuable upon exercise by Mr. Tseu vest as to 1/36th of the
shares on October 15, 2000 and 1/36th each month thereafter.
(2) Mr. Spagnolo was granted an option to purchase 3,000,000 shares of common
stock on July 11, 2000 pursuant to our 2000 Executive Stock Incentive
Plan. The exercise price per share is $1.75, the fair market value of the
common stock as determined by the Board of Directors on the date of the
grant. The expiration date of the option is July 10, 2010 and the
potential realizable values at assumed rates of stock appreciation for
the option term are $3,301,697 at 5% and $8,367,148 at 10%. The shares
issuable upon exercise by Mr. Spagnolo vest as to 1/4th of the shares on
the date of grant of the option, 1/4th of the shares on the first
anniversary of his vesting commencement date and 1/36th of the remaining
shares each month thereafter. We have agreed to take all reasonable steps
to register Mr. Spagnolo's stock option shares following this offering so
that Mr. Spagnolo can sell any vested shares if he so chooses following
the expiration of the lock-up period.
(3) The percentage is based on a total of 5,807,500 shares subject to options
granted by SiteSmith during the year ended December 31, 1999 pursuant to
our 1999 Stock Plan to our employees and consultants.
(4) The exercise price per share was equal to the fair market value of the
common stock as determined by the Board of Directors on the date of the
grant.
(5) There is no assurance provided to any executive officer or any other
holder of our securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at
any other defined level.
OPTION EXERCISES AND HOLDINGS
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by the Named
Executive Officers as of December 31, 1999.
The value realized represents the difference between the fair market
value of the shares as of December 31, 1999 and the exercise price of the
option.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999(#) DECEMBER 31, 1999($)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Marvin Tseu.................. -- -- 650,000 -- -- --
Mark F. Spagnolo(1).......... -- -- -- -- -- --
</TABLE>
--------------
38
<PAGE>
(1) As of August 1, 2000, Mr. Spagnolo had exercised 1,409,525 of his
3,000,000 options to purchase common stock. The exercise price of the
option and the fair market value of the shares as of August 1, 2000 were
both $1.75.
STOCK PLANS
1999 STOCK OPTION PLAN. The 1999 Stock Option Plan, which we refer to as
our Option Plan, was adopted by our Board of Directors in December 1999 and
approved by our stockholders in December 1999. A total of 15,500,000 shares of
common stock has been reserved for issuance under the Option Plan as of the date
of this offering. We amended the Option Plan in July 2000 to provide that the
number of shares reserved for issuance under the Option Plan will be subject to
an automatic annual increase on the first day of each of our fiscal years
beginning in 2001 and ending in 2009 in an amount equal to the lesser of:
o 3,000,000 shares,
o 6% of our outstanding common stock on the last day of the immediately
preceding fiscal year, or
o a lesser number of shares as the Board of Directors determines.
We will submit this amendment to the Option Plan to our stockholders for
approval before the completion of this offering. The Option Plan will terminate
in 2009 unless the Board of Directors terminates it earlier.
As of August 1, 2000, options to purchase 6,254,107 shares of common
stock were outstanding at a weighted average exercise price of $0.63 per share,
4,993,072 shares had been issued upon exercise of outstanding options or
pursuant to restricted stock purchase agreements and 4,252,821 shares remain
available for future grant.
The purposes of the Option Plan are to attract and retain the best
available personnel, to provide additional incentives to our employees and
consultants and to promote the success of our business. The Option Plan provides
for the granting to employees, including officers and directors, of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, and for the granting to employees and consultants, including non-employee
directors, of non-statutory stock options and stock purchase rights. To the
extent an option holder would have the right in any calendar year to exercise
for the first time one or more incentive stock options for shares having a total
fair market value in excess of $100,000 any excess options shall be treated as
non-statutory stock options.
The Option Plan may be administered by the Board of Directors, a
committee of the Board or a combination thereof. The administrator determines
the number of options and stock purchase rights granted under the Option Plan,
including the number of shares subject to the award, exercise or purchase price,
term and exercisability. An individual employee may not receive awards for more
than 500,000 shares under the Option Plan in any calendar year.
The per share exercise price of any incentive stock option granted to (a)
an option holder who is a 10% stockholder must equal at least 110% of the per
share fair market value of our common stock on the date of the grant; or (b) any
other employee must equal at least 100% of the per share fair market value of
our common stock on the date of the grant. Before the effective date of this
offering, non-statutory stock options and stock purchase rights were required to
have an exercise price of at least 85% of the fair market value of our common
stock on the date of the grant. After the date of this offering, the exercise
price for non-statutory stock options and stock purchase rights will no longer
be subject to these restrictions, although non-statutory stock options and stock
purchase rights granted to our chief executive officer and our four other most
highly compensated officers will be at least 100% of the fair market value of
the common stock on the date of the grant if we intend the award to qualify as
performance-based compensation under applicable tax law. Payment of the exercise
price may be made in cash or other consideration as determined by the
administrator.
The administrator determines the term of the options, which may not
exceed 10 years, or 5 years in the case of an incentive stock option granted to
a 10% stockholder. Generally, an option may not be transferred by the option
holder other than by will or the laws of descent or distribution. However, after
the effective date of this offering, the administrator may grant non-statutory
stock options with limited transferability rights. Generally, each option may be
exercised during the lifetime of the option holder only by the option holder or
permitted transferee.
39
<PAGE>
Stock purchased under stock purchase rights granted under the Option Plan
is generally subject to a repurchase right at the purchaser's original purchase
price. SiteSmith may exercise this repurchase right upon termination of the
purchaser's employment or consulting relationship with us. This repurchase right
lapses according to the terms of the stock purchase right determined by the
administrator at the time of the grant.
In the event of a sale of all or substantially all of our assets, or a
merger, consolidation or other capital reorganization of SiteSmith with or into
another corporation, outstanding options and stock purchase rights may be
assumed or an equivalent option or right substituted by the successor
corporation. However, if the successor corporation does not agree to such
assumption or substitution, the outstanding options and stock purchase rights
shall terminate upon the consummation of the transaction. Upon the closing of
the transaction, outstanding repurchase rights will terminate unless assigned to
the successor corporation.
Outstanding awards will be adjusted in the event of a stock split, stock
dividend, or other similar change in our capital structure.
The Board of Directors may alter, suspend, discontinue or terminate the
Option Plan at any time with stockholder approval (to the extent required by
law) except no alteration, suspension, discontinuation or termination, which
materially and adversely affects the rights of any option holder or holder of
stock purchase rights, may be made without the consent of such holder.
2000 DIRECTORS' STOCK PLAN. The 2000 Directors' Stock Plan, which we
refer to as our Directors' Plan, was adopted by the Board of Directors in August
2000, and we intend to obtain stockholder approval for the Directors' Plan prior
to this offering. A total of 500,000 shares of common stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan becomes effective on
the effective date of the Registration Statement for this offering. As of the
date of this prospectus, no options to purchase shares of common stock have been
issued under the Directors' Plan. The Directors' Plan provides for the grant of
non-statutory stock options to nonemployee directors. The Directors' Plan is
designed to work automatically without administration; however, to the extent
administration is necessary, it will be performed by the Board of Directors. To
the extent they arise, it is expected that conflicts of interest will be
addressed by abstention of any interested director from both deliberations and
voting regarding matters in which the director has a personal interest. Unless
terminated earlier, the Directors' Plan will terminate in 2010.
The Directors' Plan provides that each person who becomes a nonemployee
director after the date of this prospectus will be granted a non-statutory stock
option to purchase 25,000 shares of common stock on the date on which the
optionee first becomes a nonemployee director of SiteSmith. This option will
become exercisable as to 25% of the total number of shares underlying the option
on the first anniversary of the date of the grant and as to 1/48th of the total
number of shares underlying the option each month thereafter. On the date of
SiteSmith's annual stockholder meeting each year, each nonemployee director will
be granted an additional option to purchase 5,000 shares of common stock, if, on
that date, he or she has served on the Board of Directors for at least six
months. The annual option will become exercisable as to 1/12th of the total
number of shares underlying the option per month. All options granted under the
Directors' Plan will have an exercise price equal to 100% of the fair market
value of the common stock as of the date of the grant. Options granted under the
Directors' Plan have a term of ten years. Outstanding options will adjust if
there is a stock split, stock dividend, or other similar change in our capital
structure.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method of
making a grant. No option granted under the Directors' Plan is transferable by
the optionee other than by will or the laws of descent or distribution pursuant
to a qualified domestic relations order, and each option is exercisable, during
the lifetime of the optionee, only by the optionee. If a nonemployee director
ceases to serve as a director for any reason other than death or disability, he
or she may, but only within 90 days after the date he or she ceases to be a
director of SiteSmith, exercise options granted under the Directors' Plan to the
extent that he or she was entitled to exercise those options at the date of
termination. If a director's service on the Board of Directors terminates as a
result of his or her disability, he or she may, but only within 12 months from
the date of his or her termination, exercise options granted under the
Directors' Plan to the extent that he or she was entitled to exercise the
options on the date of termination. If a director's service on the Board of
Directors terminates as a result of his or her death, for a period of 6 months
following the date of death, the director's estate will have the right to
exercise any option granted under the Directors' Plan as to all shares which
would have vested if the deceased director had
40
<PAGE>
continued in his or her position on the Board of Directors for an additional six
months following the date of death. If a director dies within three months after
termination of service of the Board, then for a period of 6 months following the
date of death, the director's estate may exercise the options granted under the
Directors' Plan to the extent that the director was entitled to exercise these
options on the date of termination.
In the event of a sale of all or substantially all of our assets or a
merger or consolidation of SiteSmith with or into another corporation in which
more than 50% of the shares entitled to vote are exchanged, each director
holding options under the Directors' Plan will have the right to exercise his or
her options immediately prior to the closing of the transaction as to all of the
shares of stock underlying these options, including shares that the director
would not otherwise be entitled to purchase.
The Board of Directors may amend or terminate the Directors' Plan at any
time; provided, however, that no action may adversely affect any outstanding
option and provided that stockholder approval for any amendments to the
Directors' Plan must be obtained to the extent required by applicable law.
2000 EMPLOYEE STOCK PURCHASE PLAN. Our 2000 Employee Stock Purchase Plan,
which we refer to as our Purchase Plan, was adopted by the Board of Directors in
August 2000, and we intend to obtain stockholder approval for the Purchase Plan
prior to this offering. A total of 750,000 shares of common stock has been
reserved for issuance under the Purchase Plan, plus an automatic annual increase
on the first day of each of our fiscal years beginning in 2001 and ending in
2010 in an amount equal to the lesser of:
o 500,000 shares,
o 1% of our outstanding stock on the last day of the immediately
preceding fiscal year, or
o a lesser number of shares determined by the Board of Directors.
The Purchase Plan becomes effective upon the effective date of the Registration
Statement for this offering. Unless terminated earlier by the Board of
Directors, the Purchase Plan will terminate in 2010.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of
approximately 24 months duration, with new offering periods commencing on May 1
and November 1 of each year, other than the first offering period. Except for
the first offering period, each offering period will consist of four consecutive
purchase periods of approximately six months' duration. The initial offering
period is expected to commence on the date of this offering and end on October
31, 2002; the initial purchase period is expected to begin on the date of this
offering and end on April 30, 2001.
The Purchase Plan will be administered by our Board of Directors or by a
committee appointed by the Board. Employees, including officer and employee
directors of SiteSmith, or of any majority-owned subsidiary designated by the
Board of Directors, are eligible to participate in the Purchase Plan if they are
employed by SiteSmith or any subsidiary for at least 20 hours per week and more
than five months per year. The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which in any event may not
exceed 15% of an employee's eligible compensation, at a price equal to the lower
of 85% of the fair market value of the common stock at the beginning of the
offering period or at the end of an offering period. Employees may end their
participation in the Purchase Plan at any time during an offering period, and
participation ends automatically on termination of employment.
No employee will be granted an option under the Purchase Plan if
immediately after the grant the employee would own stock or hold outstanding
options to purchase stock equaling 5% or more of the total voting power of all
classes of stock of SiteSmith or its subsidiaries, or this option would permit
an employee's rights to purchase stock under all employee stock purchase plans
of SiteSmith and its subsidiaries to accrue at a rate that exceeds $25,000 of
fair market value of the stock for each calendar year in which the option is
outstanding at any time. In addition, no employee may purchase more than 1,000
shares of common stock under the Purchase Plan in any one purchase period.
In the event of a merger or consolidation of SiteSmith with or into
another corporation or a sale of substantially all of SiteSmith's assets, each
right to purchase stock under the Purchase Plan will be assumed or an equivalent
right substituted by the successor corporation. If the successor corporation
does not agree to assume or substitute purchase rights, the offering period then
in progress would be shortened and a new exercise date occurring prior to
consummation of the acquisition would be set. The Board of Directors has the
power to amend or terminate
41
<PAGE>
the Purchase Plan and to change or terminate offering periods as long as this
action does not adversely affect any outstanding rights to purchase stock
thereunder, provided, however, that the Board may amend or terminate the
Purchase Plan or an offering period even if it would adversely affect
outstanding options in order to avoid SiteSmith incurring adverse accounting
charges.
2000 EXECUTIVE STOCK INCENTIVE PLAN. Our Board of Directors adopted the
2000 Executive Stock Incentive Plan, which we refer to as the Executive Stock
Plan, in July 2000, and we intend to obtain stockholder approval for the
Executive Stock Plan prior to this offering. A total of 4,000,000 shares of
common stock has been reserved for issuance under the Executive Stock Plan. As
of August 1, 2000, 2,409,525 options have been exercised, options to purchase a
total of 1,590,475 shares at a weighted average exercise price of $1.75 per
share were outstanding and no shares remained available for future option or
stock purchase right grants. We do not intend to grant any additional options or
stock purchase rights under the Executive Stock Plan after the date of this
offering. Unless terminated earlier, the Executive Stock Plan will terminate in
2010.
The terms of options and stock purchase rights under the Executive Stock
Plan are generally the same as those that may be issued under the 1999 Stock
Option Plan, except that the Executive Stock Option Plan does not impose a
limitation on the number of shares, options, and stock purchase rights that may
be issued to any individual employee.
In the event of a sale of all or substantially all of our assets, or a
merger, consolidation or other capital reorganization of SiteSmith with or into
another corporation, outstanding options and stock purchase rights may be
assumed or an equivalent option or right substituted by the successor
corporation. However, if the successor corporation does not agree to such
assumption or substitution, the outstanding options and stock purchase rights
shall terminate upon the consummation of the transaction. Upon the closing of
the transaction, outstanding repurchase rights will terminate unless assigned to
the successor corporation.
The Board of Directors may amend, modify or terminate the Executive Stock
Plan at any time as long as any amendment, modification or termination does not
impair vesting rights of plan participants and provided that stockholder
approval shall be required for an amendment to the extent required by applicable
law.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, we have included in
our amended and restated certificate of incorporation a provision to eliminate
the personal liability of our officers and directors for monetary damages for
breach or alleged breach of their fiduciary duties as officers or directors,
subject to certain exceptions. In addition, our bylaws provide that we are
required to indemnify our officers and directors under certain circumstances,
including those circumstances in which indemnification would otherwise be
discretionary, and we are required to advance expenses to our officers and
directors as incurred in connection with proceedings against them for which they
may be indemnified. We have entered into indemnification agreements with our
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require us, among other things,
to indemnify officers and directors against liabilities that may arise by reason
of their status or service as officers and directors, other than liabilities
arising from willful misconduct of a culpable nature, to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms. Upon the closing of this offering, we will have obtained
directors' and officers' liability insurance.
At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
42
<PAGE>
RELATED PARTY TRANSACTIONS
We have sold shares of our common stock and granted options to purchase our
common stock to our directors and executive officers. See "Principal
Stockholders."
PRIVATE PLACEMENT TRANSACTIONS
Since our inception, we have issued shares of our preferred stock as
follows:
o an aggregate of 7,200,000 shares of Series A preferred stock at $0.50 per
share in October 1999 to 27 investors,
o an aggregate of 8,610,861 shares of Series B preferred stock at $2.38 per
share in January and February 2000 to 50 investors, and
o an aggregate of 4,717,372 shares of Series C preferred stock at $5.65 per
share in July 2000 to 17 investors.
The following table summarizes the shares of preferred stock purchased by
our directors, executive officers and 5% stockholders and persons and entities
associated with them in these private placement transactions. Shares held by
affiliated entities have been aggregated.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK
------------ ----------- -----------
<S> <C> <C> <C>
Entities affiliated with
Bedrock Capital Partners(1).............................................. 3,000,000 2,100,840 941,831
Entities affiliated with
ComVentures(2) ......................................................... 3,000,000 2,100,840 941,830
Entities affiliated with
Weiss, Peck & Greer(3)................................................... -- 4,201,681 775,808
Dell USA, L.P. .......................................................... -- -- 1,769,912
Dan M. Rasmussen......................................................... 400,000 -- --
Immediate family members of
Robert John Ryan IV(4)................................................... 220,000 -- --
Marvin Tseu(5)........................................................... 100,000 -- --
</TABLE>
--------------
(1) See note (1) to "Principal Stockholders."
(2) See note (2) to "Principal Stockholders."
(3) See note (3) to "Principal Stockholders."
(4) Includes 100,000 shares issued to Mr. Ryan's father, 100,000 shares
issued to Mr. Ryan's mother-in-law, and 20,000 shares issued to Mr.
Ryan's sister.
(5) See note (4) to "Principal Stockholders."
43
<PAGE>
DEBT FINANCINGS
In June 2000, we issued and sold convertible promissory notes with 9.5%
interest to our following 5% stockholders in the amounts set forth opposite each
party's name. The promissory notes were canceled and converted into shares of
our Series C preferred stock at $5.65 per share in July 2000. The interest owed
was also paid in the form of shares.
<TABLE>
<CAPTION>
AMOUNT OF
STOCKHOLDER PROMISSORY NOTE
----------------- ------------------
<S> <C>
Entities affiliated with Bedrock Capital Partners(1)................... $ 1,770,712
Entities affiliated with ComVentures(2)............................... 1,770,711
Entities affiliated with Weiss, Peck & Greer(3)........................ 1,458,576
</TABLE>
--------------
(1) See note (1) to "Principal Stockholders."
(2) See note (2) to "Principal Stockholders."
(3) See note (3) to "Principal Stockholders."
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management--Limitation of Liability and
Indemnification Matters."
EMPLOYMENT, SEVERANCE AND CHANGE-OF-CONTROL AGREEMENTS
We have entered into agreements regarding compensation, severance, and
change-of-control arrangements with each of our executive officers.
Our agreement with Mark F. Spagnolo (entered into in June 2000) provides
for an annual salary of $350,000, a signing bonus of $500,000, an annual
performance-based bonus of up to $350,000, and options to purchase 3,000,000
shares of our common stock. The performance based bonus is guaranteed to Mr.
Spagnolo at the end of his first year so long as he is serving as our Chief
Executive Officer at that time. If within his first year of employment, Mr.
Spagnolo is terminated without cause (or he resigns because there is a reduction
in his salary or performance-based bonus, a material reduction in his benefits,
a material change in his position, or a relocation of his place of employment),
Mr. Spagnolo will be given the $350,000 bonus guaranteed to him at the end of
his first year of employment and the vesting of his stock options will be
accelerated as if his employment continued for twelve additional months. If the
same occurs anytime on or after his first year of employment, Mr. Spagnolo will
be given the same acceleration of vesting of his stock options, as well as (i)
twelve months of his then-current salary, (ii) payment of his annual
performance-based bonus for all milestones that have been achieved, and (iii)
continuation of medical coverage for twelve months. If Mr. Spagnolo's employment
terminates due to his death, (i) his estate shall receive a pro rata portion of
his annual performance-based bonus for the year in which the death occurred,
(ii) the promissory note Mr. Spagnolo used to exercise his stock options will
not become payable until a year after his death, and (iii) if his death occurs
during the first year of his employment, a portion of his stock options shall
vest immediately in an amount equal to 562,500 multiplied by the percentage of
the year he was employed by us.
If we undergo a change of control during his employment, Mr. Spagnolo will
receive full acceleration of the vesting of all of his stock options. If, within
twelve months of a change of control, Mr. Spagnolo is terminated without cause
(or he resigns because there is a reduction in his salary or performance-based
bonus, a material reduction in his benefits, a material change in his position,
or a relocation of his place of employment), Mr. Spagnolo will be given, in
addition to full acceleration of the vesting of his stock options, twelve months
of his then-current salary, payment of his annual performance-based bonus for
all milestones that have been achieved, and continuation of medical coverage for
twelve months.
Our agreement with David C. Winn (entered into in July 2000) provides for
an annual salary of $200,000, a signing bonus of $50,000, an annual
performance-based bonus of up to $200,000, an annual expatriate allowance of
$100,000, and an option to purchase 1,000,000 shares of common stock. For the
first twelve months of his
44
<PAGE>
employment, Mr. Winn will be reimbursed for (i) his reasonable travel costs to
his former residence, (ii) his relocation expenses, and (iii) his reasonable
living expenses, including an apartment and an automobile. If within his first
year of employment, Mr. Winn is terminated without cause, Mr. Winn will be given
(i) payment of twelve months of his then-current salary and expatriate
allowance, (ii) payment of his annual performance-based bonus for all milestones
that have been achieved, (iii) continuation of medical coverage for twelve
months, and (iv) acceleration of 50% of his then-unvested stock options. If the
same occurs anytime after his first year of employment, Mr. Winn will be given
(i) payment of six months of his then-current salary and expatriate allowance,
and (ii) acceleration of his stock options as if his employment continued for
twelve additional months.
If within twelve months of a change of control Mr. Winn is terminated
without cause (or he resigns because there is a reduction in his salary,
expatriate allowance, or performance-based bonus; a material reduction in his
benefits; a material change in his position; or a relocation of his place of
employment), Mr. Winn will be given (i) payment of twelve months of his
then-current salary and expatriate allowance, (ii) payment of his annual
performance-based bonus for all milestones that have been achieved, (iii)
continuation of medical coverage for twelve months, and (iv) acceleration of 50%
of his then-unvested stock options.
Our agreement with David S. Bauer (entered into in March 2000) provides for
an annual salary of $180,000, the opportunity to earn up to $50,000 per year in
performance-based bonuses, and an option to purchase 125,000
shares of common stock. Pursuant to the terms of the agreement, if within the
first year of Mr. Bauer's employment, we hire a new Chief Executive Officer and
Mr. Bauer's position is materially changed, Mr. Bauer will be given six months
of his then-current salary as well as six month acceleration of his stock
options with a minimum guarantee of one year of total vesting. If we undergo a
change-of-control and Mr. Bauer's position is materially changed, 50% of Mr.
Bauer's currently unvested options will vest.
Our agreement with Mary M. Cortani (entered into in March 2000) provides
for an annual salary of $150,000, a $10,000 sign-on bonus, the opportunity to
earn up to $25,000 per year in performance-based bonuses, an option to purchase
125,000 shares of common stock, and contains the same other provisions as Mr.
Bauer's agreement.
Our agreement with Richard H. Dym (entered into in December 1999) provides
for an annual salary of $150,000 and an option to purchase 300,000 shares of
common stock. Pursuant to the terms of the agreement, if Mr. Dym is terminated
for any reason other than cause, he will receive six months of his then-current
salary. Except in the case of termination with cause, if Mr. Dym's position is
materially changed within twelve months of the hiring of a new Chief Executive
Officer, Mr. Dym will receive six months of his then-current salary and 50% of
Mr. Dym's unvested options to purchase our common stock will become fully
vested. Lastly, if Mr. Dym's position is materially changed within twelve months
of a change of control of SiteSmith, Mr. Dym will receive six months of this
then-current salary and all of his options to purchase our common stock will
vest.
Our agreement with Lee J. Finck (entered into in February 2000) provides
for an annual salary of $125,000 on an annualized basis, a $25,000 sign-on
bonus, an option to purchase 50,000 shares of common stock, and the opportunity
to earn up to $75,000 per year in performance-based bonuses.
Our agreement with Peter E. Hilliard (entered into in May 2000) provides
for an annual salary of $150,000 and a $10,000 sign-on bonus, an option to
purchase 125,000 shares of common stock, and contains the same other provisions
as Mr. Bauer's agreement.
Our agreement with Dan M. Rasmussen (entered into in October 1999),
provides that in the event of a change in control of SiteSmith, 50% of his
unvested stock and stock options will vest immediately. In addition, if within
one year following a change in control, his employment is involuntarily
terminated other than for cause or there is a material change in his job
position, a reduction of his total current compensation by more than five
percent, or a relocation of his principal place of employment by more than fifty
miles, then all his remaining unvested stock and stock options will vest
immediately.
Our agreement with Robert John Ryan IV (entered into in October 1999)
includes the same change-of-control provisions as Mr. Rasmussen's agreement.
Our agreement with Michael E. Seifert (entered into in March 2000)
provides for an annual salary of $150,000, a $50,000 sign-on bonus, an option to
purchase 500,000 shares of common stock, and contains the same other provisions
as Mr. Bauer's agreement.
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Our agreement with Frank Slattery (entered into in May 2000) provides for
an annual salary of $150,000 on an annualized basis, $50,000 sign-on bonus, and
an option to purchase 200,000 shares of common stock. If we undergo a
change-of-control and Mr. Slattery's position is materially changed, Mr.
Slattery will receive six months of his then-current salary and 50% of his
unvested options to purchase our common stock will vest.
Our agreement with Marvin Tseu (entered into in October 1999), provides
that upon any termination, he will receive a severance package that includes a
cash payment of $87,000 and one year full forward vesting from the point of
termination on all unvested common stock options he holds. The agreement also
includes the same change-of-control provisions as Mr. Rasmussen's agreement.
In July 2000, we entered into a termination agreement with Kenneth D.
Epstein, our former Vice President of Sales, pursuant to which Mr. Epstein
received a severance payment of $93,750 and vesting of 62,500 of his options to
purchase our common stock.
OTHER TRANSACTIONS WITH MANAGEMENT
In October 1999, we entered into a letter agreement with Elizabeth Ryan,
the sister of Robert John Ryan IV, who serves as our Senior Vice President,
Operations and as a member of our Board of Directors, whereby we agreed to pay
Ms. Ryan $45,000 on an annualized basis and granted her an option to purchase
40,000 shares of common
stock pursuant to our 1999 Stock Plan in exchange for Ms. Ryan's agreement to
serve as an Office Manager for SiteSmith.
In December 1999, we entered into a letter agreement with Max Rasmussen,
the brother of Dan Rasmussen, who serves as our Vice President, New Market
Development, whereby we agreed to pay Max Rasmussen $55,000 on an annualized
basis and granted him an option to purchase 19,250 shares of common stock
pursuant to our 1999 Stock Plan in exchange for Max Rasmussen's agreement to
serve as an Office Manager for SiteSmith.
In March 2000, we entered into a letter agreement with Jay Hart, the
brother-in-law of Robert John Ryan IV, whereby we agreed to pay Mr. Hart $75,000
on an annualized basis and granted him an option to purchase 7,500 shares of
common stock pursuant to our 1999 Stock Plan in exchange for Mr. Hart's
agreement to serve as a Data Center Manager for SiteSmith.
Peter E. Hilliard, our Vice President, Human Resources, was employed by
54th Street Partners, L.L.C. in November 1999 when we entered into an agreement
to engage 54th Street Partners to provide us with business management and human
resource consulting. In addition to fees generated under this agreement, we
issued 54th Street Partners 42,000 shares of our common stock in January 2000 at
$0.05 per share.
In July 2000, Mr. Spagnolo exercised 1,409,525 of his options to purchase
our common stock by executing a full-recourse promissory note in the principal
amount of $2,466,527.80 and at an annual interest rate of 6.51% per annum,
compounded semiannually. The note is due in full on the earlier of July 1, 2004
or 60 days after Mr. Spagnolo's termination for any reason.
In July 2000, Mr. Winn exercised 1,000,000 of his options to purchase our
common stock by executing a full-recourse promissory note in the principal
amount of $1,749,900 and at an annual interest rate of 6.62% per annum,
compounded semiannually. The note is due in full on the earlier of September 1,
2004 or 30 days after Mr. Winn's termination for any reason.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 1, 2000 and as adjusted to reflect
the sale of the common stock offered by us under this prospectus by:
o each of our directors and named executive officers,
o all directors and executive officers as a group, and
o each person who is known to us to own beneficially more than 5% of our
common stock.
Except as otherwise noted, the address of each person listed in the table
is c/o SiteSmith, Inc., 3283 Scott Boulevard, Santa Clara, CA 95054. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting and investment power with respect to
shares. To our knowledge, except under applicable community property laws or as
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all shares beneficially owned. The applicable
percentage of ownership for each stockholder is based on 36,346,454 shares of
common stock outstanding as of August 1, 2000 and ________ shares outstanding
after the completion of this offering, in each case together with applicable
options for that stockholder. Shares of common stock issuable upon exercise of
options and other rights beneficially owned that are exercisable within 60 days
of August 1, 2000 are deemed outstanding for the purposes of computing the
percentage ownership of the person holding those options and other rights but
are not deemed outstanding for computing the percentage ownership of any other
person. A portion of the shares issuable upon exercise of the options is subject
to repurchase by SiteSmith at the original purchase price in the event of a
termination of the holder's relationship as an employee or director of
SiteSmith. This repurchase right lapses over time.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
---------------------------
TOTAL NUMBER BEFORE THIS AFTER THIS
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OFFERING OFFERING
------------------------------------------------------------------------- -------------- ------------- ------------
<S> <C> <C>
Entities affiliated with Bedrock Capital Partners
One Boston Place
Boston, MA 02108(1).................................................. 6,042,671 16.6%
Entities affiliated with ComVentures
505 Hamilton Avenue
Palo Alto, CA 94301(2)............................................... 6,042,670 16.6
Entities affiliated with Weiss, Peck & Greer
555 California Street, Suite 3130
San Francisco, CA 94104(3)........................................... 4,977,489 13.7
Dell USA L.P.
Mail Stop 8066
One Dell Way
Round Rock, TX 78682................................................. 1,769,912 4.9
Marvin Tseu(4).......................................................... 1,265,000 3.4
Mark F. Spagnolo(5)..................................................... 3,000,000 7.9
Carolyn V. Aver(6)...................................................... 100,000 *
Amal M. Johnson(3)...................................................... 4,977,489 13.7
James L. McLean(1)...................................................... 6,042,671 16.6
Robert John Ryan IV(7).................................................. 6,475,000 17.8
Edward J. Sanderson, Jr.(6)............................................. 100,000 *
All directors and executive officers as a group
(16 persons)............................................................ 21,963,8522 63.8
</TABLE>
--------------
* Less than one percent.
(1) Represents shares held by the following entities:
o 5,611,769 shares held by Bedrock Capital Partners I, L.P.,
o 235,121 shares held by Credit Suisse First Boston Bedrock Fund,
L.P., and
o 195,781 shares held by VWB Employee Bedrock Fund, L.P.
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The general partner of each of these funds is Bedrock General
Partner I, L.L.C. James L. McLean, a director of SiteSmith, is a
managing member of Bedrock Partner I, L.L.C. Mr. McLean disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest in the shares.
(2) Represents shares held by the following entities:
o 264,046 shares held by Communications Ventures III CEO &
Entrepreneurs Fund, L.P.,
o 5,280,902 shares held by Communications Ventures III, L.P.,
o 455,963 shares held by ComVentures IV, L.P.,
o 35,304 shares held by ComVentures IV CEO Fund L.P., and
o 6,455 shares held by ComVentures IV Entrepreneurs' Fund, L.P.
ComVen III, LLC is the general partner of Communications Ventures
III CEO & Entrepreneurs Fund, L.P. and Communications Ventures
III, L.P. ComVen IV, L.L.C is the general partner of ComVentures
IV, L.P., ComVentures IV CEO Fund, L.P., and ComVentures IV
Entrepreneurs' Fund, L.P. Mr. McLean, a director of SiteSmith, joined
ComVentures in July 2000 but is not a general partner of any of the
above funds.
(3) Represents shares held by the following entities:
o 3,987,857 shares held by Weiss, Peck and Greer Venture Associates
V, L.L.C.,
o 33,426 shares held by Weiss, Peck and Greer Venture Associates
V-A, L.L.C.,
o 818,912 shares held by Weiss, Peck and Greer Ventures Associates
V Cayman, L.P.,
o 84,924 shares held by WPG Information Sciences Entrepreneur Fund
II, L.L.C., and
o 52,370 shares held by WPG Information Sciences Entrepreneur Fund
II-A, L.L.C.
Amal M. Johnson, a director of SiteSmith, is a managing member of
WPG VC Fund Adviser II, L.L.C., which is the Fund Investment
Advisory Member of Weiss, Peck & Greer Venture Associates V,
L.L.C., Weiss, Peck & Greer Venture Associates V-A, L.L.C., WPG
Information Sciences Entrepreneur Fund II, L.L.C., and WPG
Information Sciences Entrepreneur Fund II-A, L.L.C. and the Fund
Investment Advisory Partner of Weiss, Peck and Greer Venture
Associates V Cayman, L.P. Ms. Johnson disclaims beneficial
ownership of these shares, except to the extent of her pecuniary
interest in the shares.
(4) Includes 433,333 shares issuable upon exercise of options exercisable
within 60 days of August 1, 2000, and 100,000 shares of Series A
preferred stock purchased in October 1999 by Pensco Pension Services,
Inc. Custodian FBO Marvin Tseu IRA, Mr. Tseu's investment retirement
account. Does not include an aggregate of 135,000 shares of common
stock transferred by Mr. Tseu to eight different individual
transferees and 100,000 shares of Series A preferred stock purchased
in October 1999 by Pensco Pension Services, Inc. Custodian FBO Marvin
Tseu IRA, Mr. Tseau's investment retirement account.
(5) Includes 1,590,475 shares issuable upon exercise of options
exercisable within 60 days of August 1, 2000.
(6) All shares issuable upon exercise of options exercisable within 60
days of August 1, 2000.
(7) Includes 200,000 shares transferred to Ryan Venture L.P. Mr. Ryan and
his wife are the trustees of the Ryan Management Trust, which is the
general partner of Ryan Venture L.P. Does not include an aggregate of
725,000 shares of common stock transferred by Mr. Ryan to nine
individual transferees.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
500,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000
shares of undesignated preferred stock, $0.0001 par value per share. All
currently outstanding shares of preferred stock will be converted into common
stock upon the closing of this offering.
COMMON STOCK
As of August 1, 2000, there were 36,346,454 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred
Stock, held of record by 236 stockholders. Options to purchase 7,844,582 shares
of common stock were also outstanding. There will be ____ shares of common stock
outstanding, assuming no exercise of the underwriter's overallotment option or
exercise of outstanding options under the stock plans after August 1, 2000 after
giving effect to the sale of the shares offered hereby.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. In the event of liquidation, dissolution or winding up of SiteSmith,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the prior distribution rights
of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into common stock on a one-to-one basis and automatically
retired. Thereafter, the Board of Directors will have the authority, without
further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock, $0.0001 par value per share, in one or more series. The Board
of Directors will also have the authority to designate the rights, preferences,
privileges and restrictions of each such series, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of SiteSmith without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. At present, we have
no plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
After the offering, the holders of 20,583,233 shares of common stock (the
"Registrable Securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act. These
rights are provided under the terms of an agreement between SiteSmith and the
holders of these securities. Subject to limitations in the agreement, the
holders of at least 20% of the Registrable Securities then outstanding may
require, on two occasions beginning six months after the date of this
prospectus, that SiteSmith use its best efforts to register these securities for
public resale, provided that the proposed total offering price is at least
$5,000,000. If SiteSmith registers any of its common stock either for its own
account or for the account of other security holders, the holders of the
Registrable Securities are entitled to include their shares of common stock in
that registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. In addition, the holders of at least
10% of these securities then outstanding may also require SiteSmith, not more
than twice in any 24 month period, to register all or a portion of these
securities on Form S-3 under the Securities Act when the use of that form
becomes available to SiteSmith, provided, among other limitations, that the
proposed aggregate selling price, net of any underwriters' discounts or
commissions, is at least $1,000,000. All holders of Registrable Securities have
agreed not to exercise their registration rights until 180 days following the
date of this prospectus without the consent of Credit
49
<PAGE>
Suisse First Boston Corporation. All fees, costs and expenses of these
registrations must be borne by SiteSmith, and all selling expenses (including
underwriting discounts, selling commissions and stock transfer taxes) relating
to Registrable Securities must be borne by the holders of the securities being
registered.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER DOCUMENTS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make any acquisition of us by a third party and the removal of our
incumbent officers and directors more difficult. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire control
of our company to first negotiate with it us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent of
an unfriendly or unsolicited acquisition proposal outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior, did own, 15% or
more of the corporation's voting stock. This provision may have the effect of
delaying, deferring or preventing a change in control of SiteSmith without
further action by the stockholders.
Our amended and restated certificate of incorporation and bylaws do not
provide for the right of stockholders to act by written consent without a
meeting or for cumulative voting in the election of directors. In addition, our
certificate of incorporation permits the Board of Directors to issue preferred
stock with voting or other rights without any stockholder action. Our
certificate of incorporation provides for the Board of Directors to be divided
into three classes, with each class staggered over three-year terms. As a
result, only one class of directors will be elected at each annual meeting of
stockholders. Each of the other two classes of directors will continue to serve
for the remainder of its respective three-year term. These provisions, which
require the vote of stockholders holding at least two-thirds of the outstanding
common stock to amend, may have the effect of deterring hostile takeovers or
delaying changes in our management.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is American Stock
Transfer & Trust Company. The Transfer Agent's address and telephone number is
40 Wall Street, New York New York 10005, (212) 936-5100.
NASDAQ NATIONAL STOCK MARKET LISTING
We have applied to list our common stock for quotation on The Nasdaq
National Market under the trading symbol "STSM".
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our Common Stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of the offering, we will have outstanding shares of common
stock. Of these shares, the shares sold in the offering (plus any shares issued
upon exercise of the underwriters' overallotment option) will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. In
general, affiliates includes officers, directors or 10% stockholders.
The remaining shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of these shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
Our officers and directors and our existing stockholders have generally
entered into lock-up agreements providing that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction that
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any such aforementioned transaction is to
be settled by delivery of our common stock or such other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation of a period of 180 days after the date of this
prospectus. For further details, see "Underwriting." As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by the
designated underwriters' representative. Taking into account the lock-up
agreements, and assuming Credit Suisse First Boston Corporation does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
o Beginning on the effective date of this prospectus, only the shares
sold in the offering will be immediately available for sale in the
public market.
o Beginning 180 days after the effective date, approximately
shares will be eligible for sale pursuant to Rule 701
and approximately additional shares will be eligible
for sale pursuant to Rule 144, of which all but shares
are held by affiliates.
o An additional shares will be eligible for sale pursuant
to Rule 144 by . Shares eligible to be sold by affiliates
pursuant to Rule 144 are subject to volume restrictions as
described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
o one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after the
offering; or
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of ours at any time during the three months preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract to resell these 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 these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options
exercised under the 1999 stock plan or any other benefit plan after the
effectiveness of such registration statement will also be freely tradable in the
public market, except that shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701. As of August
1, 2000, there were outstanding options for the purchase of 7,844,582 shares of
common stock.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
tax consequences of the ownership and disposition of our common stock to a
non-U.S. Holder. In this discussion, a non-U.S. Holder is any holder that for
U.S. federal income tax purposes is not a U.S. person. For purposes of this
discussion, the term U.S. person means:
o a citizen or resident of the United States,
o a corporation or other entity taxable as a corporation created or
organized in the United States or under the laws of the United States
or any political subdivision thereof,
o an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source, or
o a trust whose administration is subject to the primary supervision of
a U.S. court and one or more U.S. persons have the authority to
control all substantial decisions of the trust.
If a partnership holds common stock, the tax treatment of a partner will
generally depend on the status of the partner and upon the activities of the
partnership.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant in light of a non-U.S. Holder's special tax status
or special tax situations. U.S. expatriates, life insurance companies,
tax-exempt organizations, dealers in securities or currency, banks or other
financial institutions, investors whose functional currency is other than the
U.S. dollar, and investors that hold common stock as part of a hedge, straddle
or conversion transaction are among those categories of potential investors that
are subject to special rules not covered in this discussion. This discussion
does not address any tax consequences arising under the laws of any state, local
or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based
on current provisions of the Internal Revenue Code of 1986, as amended, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly with retroactive
effect. ACCORDINGLY, EACH NON-U.S. HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING
THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
DIVIDENDS
We have not paid any dividends on our common stock and we do not plan to
pay any dividends for the foreseeable future. However if we do pay dividends on
our common stock, those payments will constitute dividends for U.S. tax purposes
to the extent paid from our current and accumulated earnings and profits, as
determined under U.S. federal income tax principles. To the extent those
dividends exceed our current and accumulated earnings and profits, the dividends
will constitute a return of capital and will first reduce a holder's basis, but
not below zero, and then will be treated as gain from the sale of stock.
Any dividend paid to a non-U.S. Holder of common stock generally will be
subject to U.S. withholding tax either at a rate of 30% of the gross amount of
the dividend or such lower rate as may be specified by an applicable tax treaty.
In order to receive a reduced treaty rate, a non-U.S. Holder must provide us
with an IRS form W-8BEN certifying to your qualification for the reduced rate.
Dividends received by a non-U.S. Holder that are effectively connected with
a U.S. trade or business conducted by the non-U.S. Holder are exempt from such
withholding tax. In order to obtain this exemption, a non-U.S. Holder must
provide us with an IRS Form W-8ECI certifying to such exemption. Such
effectively connected dividends, although not subject to withholding tax, are
taxed at the same graduated rates applicable to U.S. persons, net of certain
deductions and credits.
In addition to the graduated tax described above, dividends received by a
corporate non-U. S. Holder that are effectively connected with a U.S. trade or
business of the corporate non-U.S. Holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.
A non-U.S. Holder of common stock that is eligible for a reduced rate of
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
Internal Revenue Service ("IRS").
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GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. Holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of our common stock
unless:
o the gain is effectively connected with a U.S. trade or business of the
non-U.S. Holder (which gain, in the case of a corporate non-U.S.
Holder, must also be taken into account for branch profits tax
purposes),
o the non-U.S. Holder is an individual who holds his or her common stock
as a capital asset (generally, an asset held for investment purposes)
and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the
sale or disposition occurs and certain other conditions are met, or
o we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the holder's holding
period for our common stock. We have determined that we are not and do
not believe that we will become a "U.S. real property holding
corporation" for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-U.S. Holder at an address within the United States
may be subject to backup withholding at a rate of 31% if the non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payer. Backup
withholding generally will not apply to dividends paid to non-U.S. Holders at an
address outside the United States on or prior to December 31, 2000 unless the
payer has knowledge that the payee is a U.S. person. Under recently finalized
Treasury Regulations regarding withholding and information reporting, payment of
dividends to non-U.S. Holders at an address outside the United States after
December 31, 2000 may be subject to backup withholding at a rate of 31% unless
such non-U.S. Holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a non-U.S. Holder of common stock outside the United States to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is a
U.S. person or has certain other connections to the United States, unless the
broker has documentary evidence in its files of the holder's non-U.S. status and
certain other conditions are met, or the holder otherwise establishes an
exemption. Neither backup withholding nor information reporting generally will
apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-U.S. Holders should consult their tax advisors
regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the U.S. income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained, provided that the required information is furnished to the IRS.
54
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation, Chase
Securities Inc. and FleetBoston Robertson Stephens Inc. are acting as
representatives, the following respective numbers of shares of common stock:
NUMBER
UNDERWRITER OF SHARES
----------- ------------
Credit Suisse First Boston Corporation................
Chase Securities Inc..................................
FleetBoston Robertson Stephens Inc....................
Total.................................................
============
The underwriting agreement provides that the underwriters are obligated
to purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares of common stock from us at the
initial public offering price less the underwriting discounts and commissions.
The option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of per share. The
underwriters and selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------------------------- ----------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
----------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions $ $ $ $
paid by us...........................
Expenses payable by us.................. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to or in connection with employee stock options or employee
stock purchase plans, in effect on the date of this prospectus and except in
connection with the conversion of all outstanding shares of preferred stock into
shares of common stock upon closing of the offering.
Our officers and directors and all of our existing stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction that would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or enter into any such
transaction,
55
<PAGE>
swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation of a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for merchants, custom
loyalty customers, companies with whom we are developing commercial
relationships, rewards suppliers, consultants and service providers and
employees of such entities who have expressed an interest in purchasing common
stock in the offering. The number of shares available for sale to the general
public in the offering 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 terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under
the Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "STSM".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors considered in determining
the initial public offering price will be:
o market conditions for initial public offerings,
o the history of and prospects for our business, our past and
present operations,
o our past and present earnings and current financial position,
o an assessment of our management,
o the market for securities of companies in businesses similar to
ours, and
o the general condition of the securities markets.
We cannot be sure that the initial public offering price will correspond
to the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will develop
and continue after this offering.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option. In
a naked short position, the number of shares involved is greater
than the number of shares in the over-allotment option. The
underwriters may close out any short position by either exercising
their over-allotment option and/or purchasing shares in the open
market.
o Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been completed
in order to cover syndicate short positions. In determining the
source of shares to close out the short position, the underwriters
will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which
they may purchase shares through the over-allotment option. If the
underwriters sell more shares than could be covered by the
over-allotment option--a naked short position--that position can
only be closed out by buying shares in the open market. A naked
short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
56
<PAGE>
o Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of the common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make Internet distributions on the same
basis as other allocations.
57
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under these securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
58
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Venture Law Group, A Professional Corporation, Menlo Park, California.
Jeffrey Y. Suto, a director of Venture Law Group, is our Secretary. The
underwriters were represented by Cravath, Swaine & Moore, New York, New York. As
of the date of this prospectus, attorneys of Venture Law Group and an investment
partnership controlled by Venture Law Group beneficially own a total of 80,000
shares of our common stock.
EXPERTS
The financial statements as of December 31 1999 and June 30, 2000 and for
the period from September 8, 1999 (inception) through December 31, 1999 and for
the six months ended June 30, 2000 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, or the
Commission, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered by this prospectus. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement. For further information
with respect to SiteSmith and the common stock offered by this prospectus,
reference is made to the registration statement and its exhibits, and the
financial statements and notes filed as a part of the registration statement.
With respect to each such document filed with the Commission as an exhibit to
the registration statement, reference is made to the exhibit for a more complete
description of the matter involved. The registration statement, including its
exhibits and the financial statements and notes filed as a part of the
registration statement, as well as such reports and other information filed with
the Commission, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
all or any part of the registration statement may be obtained from the
Commission upon payment of certain fees prescribed by the Commission. These
reports and other information may also be inspected without charge at a web site
maintained by the Commission at http://www.sec.gov.
59
<PAGE>
SITESMITH, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants.................................... F-2
Balance Sheets....................................................... F-3
Statements of Operations............................................. F-4
Statements of Stockholders' Deficit.................................. F-5
Statements of Cash Flows............................................. F-6
Notes to Financial Statements........................................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders' of
SiteSmith, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of SiteSmith, Inc. at
December 31, 1999 and June 30, 2000 and the results of its operations and its
cash flows for the period from September 8, 1999 (inception) through December
31, 1999 and for the six months ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 28, 2000
F-2
<PAGE>
SITESMITH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31 JUNE 30, JUNE 30,
1999 2000 2000
--------------- --------------- ---------------
ASSETS (UNAUDITED)
(SEE NOTE 8)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 1,416,341 $ 6,430,782
Restricted cash, current................................... -- 545,431
Accounts receivable, net................................... 97,999 6,435,965
Prepaid expenses and other................................. 238,895 1,206,090
--------------- ---------------
Total current assets..................................... 1,753,235 14,618,268
Property and equipment, net................................... 779,835 8,681,066
Restricted cash, non-current.................................. 71,000 490,566
Other assets.................................................. 189,353 606,142
--------------- ---------------
Total assets............................................. $ 2,793,423 $ 24,396,042
=============== ===============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable........................................... $ 523,675 $ 8,645,825
Accrued liabilities........................................ 89,373 3,396,632
Deferred revenue........................................... -- 386,000
Convertible notes payable.................................. -- 4,999,999
--------------- ---------------
Total current liabilities................................ 613,048 17,428,456
Commitments and contingencies (Note 7)........................
Mandatorily redeemable convertible preferred stock
(Note 4)................................................... 3,625,000 25,201,150 $ --
--------------- --------------- ---------------
Stockholders' (deficit) equity :
Common stock, $0.0001 par value; 30,000,000 shares
authorized; 8,536,000 and 13,180,389 shares issued and
outstanding at December 31, 1999 and June 30, 2000,
respectively; 28,991,250 shares issued and outstanding
pro forma (unaudited).................................... 854 1,318 2,899
Additional paid-in capital................................. 7,130,911 20,232,157 45,431,726
Unearned stock-based compensation.......................... (6,473,547) (15,021,879) (15,021,879)
Accumulated deficit........................................ (2,102,843) (23,445,160) (23,445,160)
--------------- --------------- ---------------
Total stockholders' (deficit) equity................... (1,444,625) (18,233,564) $ 6,967,586
--------------- --------------- ---------------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
(deficit) equity................................... $ 2,793,423 $ 24,396,042
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
SITESMITH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999 SIX MONTHS
(INCEPTION) THROUGH ENDED JUNE 30,
DECEMBER 31, 1999 2000
------------------ ----------------
<S> <C> <C>
Revenue:
Service revenue....................................................... $ 97,999 $ 3,842,441
Equipment revenue..................................................... -- 3,545,733
------------------ ----------------
97,999 7,388,174
Costs and expenses:
Cost of service revenue (excludes stock-based compensation of $251,741
and $1,952,109)....................................................... 484,458 7,866,583
Cost of equipment revenue................................................ -- 3,300,377
Research and development (excludes stock-based compensation of $92,594
and $355,355)......................................................... 66,843 344,810
Sales and marketing (excludes stock-based compensation of $131,658 and
$1,109,710)........................................................... 147,060 5,300,971
General and administrative (excludes stock-based compensation of
$186,925 and $1,411,835).............................................. 860,651 7,416,239
Stock-based compensation................................................. 662,918 4,829,009
------------------ ----------------
Total costs and expenses.......................................... 2,221,930 29,057,989
------------------ ----------------
Loss from operations..................................................... (2,123,931) (21,669,815)
Interest income, net..................................................... 21,088 327,498
------------------ ----------------
Net loss................................................................. (2,102,843) (21,342,317)
Accretion of redemption premium on mandatorily redeemable convertible
preferred stock..................................................... (60,000) (1,119,301)
------------------ ----------------
Net loss attributable to common stockholders.......................... $ (2,162,843) $ (22,461,618)
================== ================
Net loss per share attributable to common stockholders, basic and
diluted............................................................. $ (1.17) $ (6.68)
================== ================
Weighted average number of shares attributable to common
stockholders, basic and diluted..................................... 1,846,500 3,361,016
================== ================
Pro forma net loss per share attributable to common stockholders,
basic and diluted (unaudited)....................................... $ (0.30) $ (1.25)
================== ================
Pro forma weighted number of average shares attributable to common
stockholders, basic and diluted (unaudited)......................... 7,246,500 17,941,754
================== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
F-4
<PAGE>
SITESMITH, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED
------------------------- PAID-IN STOCK-BASED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------------ ----------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders in October 1999.... 8,500,000 $ 850 $ 7,650 $ -- $ -- $ 8,500
Issuance of common stock for
services provided........... 36,000 4 46,796 -- -- 46,800
Accretion of redemption premium
on Series A manadatorily
redeemable convertible
preferred stock............. -- -- (60,000) -- -- (60,000)
Unearned employee stock-based
compensation................ -- 7,136,465 (7,136,465) -- --
Amortization of unearned
employee stock-based
compensation................ -- -- -- 662,918 -- 662,918
Net loss....................... -- -- -- -- (2,102,843) (2,102,843)
------------ ----------- ------------- -------------- ------------- ------------
Balance at December 31, 1999... 8,536,000 854 7,130,911 (6,473,547) (2,102,843) (1,444,625)
Issuance of common stock for
services provided........... 102,000 10 175,430 -- -- 175,440
Issuance of common stock for
options exercised........... 4,551,765 455 672,463 -- -- 672,918
Repurchase of common stock..... (9,376) (1) (4,687) -- -- (4,688)
Accretion of redemption premium
on Series A and B mandatorily
redeemable convertible
preferred stock............. -- -- (1,119,301) -- -- (1,119,301)
Unearned employee stock-based
compensation................ -- -- 12,835,792 (12,835,792) -- --
Amortization of unearned
employee stock-based
compensation................ -- -- -- 4,752,071 -- 4,752,071
Unearned stock-based
compensation for services
provided.................... -- -- 541,549 (541,549) -- --
Amortization of stock-based
compensation for services
provided.................... -- -- -- 76,938 -- 76,938
Net loss....................... -- -- -- -- (21,342,317) (21,342,317)
------------ ----------- ------------- -------------- ------------- ------------
Balance at June 30, 2000....... 13,180,389 $ 1,318 $ 20,232,157 $ (15,021,879) $(23,445,160) $(18,233,564)
============ =========== ============= ============== ============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
SITESMITH, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
1999
(INCEPTION)
THROUGH SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
--------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................... $ (2,102,843) $ (21,342,317)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................................ 24,687 470,114
Allowance for doubtful accounts and returns.............................. -- 498,968
Issuance of common stock for services.................................... 46,800 175,440
Amortization of stock-based compensation................................. 662,918 4,829,009
Changes in assets and liabilities:
Accounts receivable.................................................... (97,999) (6,836,934)
Prepaid expenses and other assets...................................... (238,895) (967,195)
Other assets........................................................... (189,353) (416,789)
Accounts payable....................................................... 523,675 8,122,150
Accrued liabilities.................................................... 89,373 3,307,259
Deferred revenue....................................................... -- 386,000
--------------- -----------------
Net cash used in operating activities................................ (1,281,637) (11,774,295)
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................................... (804,522) (8,371,345)
Restricted cash............................................................ (71,000) (964,997)
--------------- -----------------
Net cash used in investing activities................................ (875,522) (9,336,342)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable.................................... -- 4,999,999
Proceeds from issuance of common stock..................................... 8,500 672,918
Repurchase of common stock................................................. -- (4,688)
Proceeds from issuance of preferred stock, net of issuance costs........... 3,565,000 20,456,849
--------------- -----------------
Net cash provided by financing activities ........................... 3,573,500 26,125,078
--------------- -----------------
Net increase in cash and cash equivalents..................................... 1,416,341 5,014,441
Cash and cash equivalents at beginning of period.............................. -- 1,416,341
--------------- -----------------
Cash and cash equivalents at end of period.................................... $ 1,416,341 $ 6,430,782
=============== =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
SiteSmith, Inc. ("SiteSmith" or the "Company") was incorporated as
SiteBrigade, Inc. in Delaware on September 8, 1999. On November 15, 1999, the
Board of Directors approved the change of the Company's name to SiteSmith, Inc.
SiteSmith provides outsourced Internet infrastructure management services
designed to maximize the performance, reliability, and security of large-scale,
complex Internet sites. SiteSmith offers its customers an outsourced Internet
infrastructure management solution. Our offerings consist of core services and
premium services. Our core services include establishing the infrastructure for
our customers' Internet operations. Our premium services includes automated
monitoring, security and network redundancy.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with
original maturities of 90 days or less. The carrying value of cash equivalents
approximates their estimated fair market value.
RESTRICTED CASH
At December 31, 1999 and the six months ended June 30, 2000, cash balances
of approximately $71,000 and $1,035,997, respectively, were restricted from
withdrawal and held by a bank in the form of certificates of deposit. These
certificates of deposit serve as a collateral supporting standby letters of
credit issued as a guarantee of payment to certain vendors and to the Company's
landlords as security deposits, which will not be available until the leases for
the Company's facilities expire.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash primarily in checking and
money market accounts. The Company's investment policy limits the amount of
credit exposure to any one issuer. The Company's customer base is primarily
composed of business throughout the United States. The Company performs ongoing
credit evaluations of its customers.
For the period from September 8, 1999 (inception) through December 31,
1999, five customers accounted for 31%, 21%, 13%, 12% and 10% of both the
Company's revenue and accounts receivable, respectively. For the six months
ended June 30, 2000, a different customer accounted for 10% of the Company's
accounts receivable and no customers accounted for 10% or more of revenues.
FAIR VALUE OF INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximate fair value due to the short-term maturity of these
instruments. Redeemable convertible preferred stocks are recorded at their
redemption amounts which is considered to approximate fair value.
F-7
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over estimated useful lives of
three to six years. Amortization of leasehold improvements is computed on a
straight-line basis over the shorter of the facility lease term or the estimated
useful lives of the improvements. Major additions and improvements are
capitalized, while replacements, maintenance and repairs that do not improve or
extend the life of the assets are charged to operations. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset are separately
identifiable and are less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998 and
provides guidance on accounting for the costs incurred for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs.
General and administrative costs include expenses incurred by the Company
to develop its internal software. The Company recognizes software development
costs in accordance with Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." As such, the
Company expenses all costs incurred that relate to the planning and post
implementation phases of development. Costs incurred in the development phase
are capitalized and recognized over the product's estimated useful life if the
product is expected to have a useful life beyond one year. Costs associated with
maintenance and training are included in general and administration expenses in
the accompanying statement of income.
REVENUE RECOGNITION
The Company's revenues consist of (i) monthly fees for providing internet
infrastructure management services, and (ii) revenues from sales of third-party
equipment to customers. Service revenues are generally recognized ratably over
the term of the contract, which is generally one year. Monthly fees are based on
a fixed contractual rate. If the services rendered in any given month exceed the
contract amount, then any incremental services are billed. Equipment revenues
are typically recognized when the equipment is delivered to the customer or the
internet data center. All fees billed represent a separate and distinct earnings
process and are recognized when the earnings process is complete. Advance
billings are classified as deferred revenue.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
STOCK-BASED COMPENSATION
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123
F-8
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
have been presented (see Note 6). Under APB No. 25, compensation expense is
based on the difference, if any, on the date of the grant, between the fair
value of the Company's stock and the exercise price of the option.
Stock, stock options and warrants for stock issued to non-employees have
been accounted for in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company identifies its operating
segments based on business activities and management responsibility. The Company
conducts its business within a single business segment providing Internet
infrastructure management services.
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. There was no difference between the Company's net loss and
its comprehensive loss for any of the periods presented in the accompanying
consolidated statements of operations.
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per common share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred stock, are included in the
diluted net loss per common share calculation to the extent these shares are
dilutive. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net loss per share attributable to common
stockholders' as follows:
<TABLE>
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, 1999 JUNE 30, 2000
------------------ --------------
Numerator
<S> <C> <C>
Net loss attributable to common stockholders'............................ $ (2,162,843) $ (22,461,618)
Denominator
Weighted average number of
shares................................................................. 8,509,000 10,528,965
Weighted average number of unvested
shares subject to repurchase........................................... (6,662,500) (7,167,949)
------------------ --------------
Denominator for basic and
diluted calculation.................................................... 1,846,500 3,361,016
------------------ --------------
Basic and diluted net loss
per share attributable to common stockholders'........................... $ (1.17) $ (6.68)
================== ==============
</TABLE>
F-9
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes common stock equivalents that are not
included in the denominator used in the diluted net loss per common share
calculation because to do so would be antidilutive for the periods indicated:
<TABLE>
PERIOD FROM
SEPTEMBER 8,
1999 (inception) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1999 2000
---------------- -----------------
Weighted average effect of common stock equivalents:
<S> <C> <C>
Series A mandatorily redeemable convertible
preferred stock.................................................. 5,400,000 7,200,000
Series B mandatorily redeemable convertible
preferred stock.................................................. -- 7,380,738
Options to purchase
common stock..................................................... 1,431,875 2,887,743
Common stock subject
to repurchase.................................................... 6,662,500 7,167,949
---------------- -----------------
13,494,375 24,636,430
================ =================
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any derivative instruments and does not engage in
hedging activities. The Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flow. The Company will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 did not have a material effect on
the financial position or results of operations of the Company.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretations is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of
certain of the conclusions of FIN 44 covering events occurring during the period
after December 15, 1998 or January 12, 2000 did not have a material impact on
the Company's financial position and results of operations. The Company does not
expect that the adoption of the remaining conclusions will have a material
effect on the financial statements.
F-10
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 - BALANCE SHEET COMPONENTS:
CASH AND CASH EQUIVALENTS
As of December 31, 1999 and June 30, 2000, cash and cash equivalents
included a cash reserve with a variable interest rate.
Restricted cash consisted of the following:
DECEMBER 31, JUNE 30,
1999 2000
--------------- ----------------
Due within one year....................... $ -- $ 545,431
Due after one year through six years...... 71,000 490,566
--------------- ----------------
71,000 1,035,997
Less: Current portion..................... -- (545,431)
--------------- ----------------
$ 71,000 $ 490,566
=============== ================
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, JUNE 30,
1999 2000
--------------- ----------------
Accounts receivable - trade................. $ 97,999 $ 6,934,933
Allowance for doubtful accounts............. -- (455,968)
Allowance for sales returns................. -- (43,000)
--------------- ----------------
$ 97,999 $ 6,435,965
=============== ================
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
DECEMBER 31, JUNE 30,
1999 2000
--------------- ----------------
CURRENT
Prepaid expenses....................... $ 124,169 $ 840,657
Deposits and other assets.............. 114,726 365,433
NONCURRENT
Prepaid expenses....................... 636 110,181
Deposits and other assets.............. 188,717 495,961
--------------- ----------------
$ 428,248 $ 1,812,232
=============== ================
F-11
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
USEFUL
LIVES DECEMBER 31, JUNE 30,
IN YEARS 1999 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Computer equipment............................... 3 $ 509,118 $ 5,330,863
Computer software................................ 3 14,959 1,160,430
Furniture and fixtures........................... 5 230,398 1,260,898
Leasehold improvements........................... 5 - 6 25,247 883,003
Construction in progress......................... -- 24,800 540,673
--------------- ---------------
804,522 9,175,867
Less: Accumulated depreciation and
amortization................................ (24,687) (494,801)
--------------- ---------------
Total............................................ $ 779,835 $ 8,681,066
=============== ===============
</TABLE>
Property and equipment depreciation and amortization expenses from
inception through December 31, 1999 and for the six months ended June 30, 2000
were $24,687 and $470,114, respectively.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
DECEMBER 31, JUNE 30,
1999 2000
------------- --------------
Accrued compensation................. $ 58,880 $ 1,739,532
Accrued professional fees............ 25,000 957,246
Accrued other........................ 5,493 699,854
------------- --------------
$ 89,373 $ 3,396,632
============= ==============
CONVERTIBLE NOTES PAYABLE
In June 2000, the Company issued approximately $5 million in convertible
promissory notes. The notes bear interest at a rate of 9.5% per annum and are
payable in full in September 2000. The notes are convertible into shares of the
Company's equity securities issued and sold at the close of the Company's next
equity financing. The notes shall be convertible into the number of shares of
equity securities based on the principle amount of the notes plus accrued and
unpaid interest divided by the price paid for the equity securities by third
parties. The Company closed an eligible equity financing on July 20, 2000 and as
a result the notes were converted into 884,956 shares of Series C mandatorily
redeemable convertible preferred stock (see Note 11).
NOTE 4 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company is authorized to issue 15,900,000 shares of preferred stock
of which 7,200,000 shares have been designated as Series A Preferred and
8,700,000 shares have been designated as Series B Preferred. In July 2000, the
Company increased the number of authorized shares of its preferred stock
to 20,539,110 shares (see Note 11).
F-12
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
On October 26, 1999, the Company issued a total of 7,200,000 shares of
its Series A mandatorily redeemable preferred stock ("Series A") for net
proceeds of $3,565,000 (net of $35,000 of issuance costs).
In January and February 2000, the Company issued a total of 8,610,861
shares of its Series B mandatorily redeemable preferred stock ("Series B") for
net proceeds of $20,456,849 (net of $37,000 of issuance costs).
From inception through June 30, 2000, the Company issued preferred stock
as follows:
<TABLE>
<CAPTION>
LIQUIDATION
ORIGINAL AND
ISSUE AMOUNT NET OF SHARES ISSUED AND PAR VALUE REDEMPTION
PRICE ISSUANCE COSTS AUTHORIZED OUTSTANDING AMOUNT AMOUNT
--------- --------------- -------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Series A.................. $ 0.50 $ 3,565,000 7,200,000 7,200,000 $ 0.0001 $ 3,840,000
Series B.................. $ 2.38 20,456,849 8,700,000 8,610,861 $ 0.0001 21,433,150
--------------- -------------- -------------- ---------------
Total..................... $ 24,021,849 15,900,000 15,810,861 -- $ 25,273,150
=============== ============== ============== ===============
</TABLE>
CONVERSION
Each issued share of Series A and Series B is convertible at the election
of the holder into one share of common stock subject to certain events,
including adjustment for changes in the Company's capital structure. All shares
of preferred stock shall automatically be converted into shares of common stock
upon the closing of an underwritten public offering having an aggregate offering
price of at least $25,000,000 and a per share offering price of at least $5.00.
DIVIDENDS
The holders of Series A and Series B are entitled to receive
noncumulative dividends at the per annum rate of $0.005 and $0.0238,
respectively, per share if and when declared by the Board of Directors. The
Company may not make a distribution to common stockholders until the preferred
stock dividends have been paid in full. The Company has no current intention of
declaring dividends.
VOTING RIGHTS
The holder of each share of preferred stock is entitled to vote based on
the number of shares of common stock into which it is convertible.
LIQUIDATION PREFERENCES
In the event of a liquidation, dissolution, winding up of the Company,
Series A and Series B stockholders are entitled to a per share distribution in
preference to common stockholders equal to the original issue price per share of
$0.50 and $2.38 per share, respectively, plus any declared but unpaid dividends.
After this distribution, the remaining assets will be distributed pro rata to
the holders of the common stock and Series A and Series B on an as if converted
basis. In the event funds are insufficient to make a complete distribution to
the holders of Series A and Series B, the holders shall share ratably in any
distribution.
REDEMPTION
Upon the request of the holder of the majority of the outstanding shares
of Series A and Series B at any time after January 13, 2005, but on a date
within thirty days after receipt by the corporation of a written request, the
shares are redeemable in two equal installments, beginning no earlier than
February 13, 2005, and continuing thereafter on the next anniversary date. The
shares may be redeemed at a price equal to the original issue price, subject to
adjustments for any stock dividends, combinations, reclassifications, splits,
and declared and unpaid dividends. The Company shall also pay 10% redemption
premium, based on the redemption price as outlined above, to the holders of
Series A or Series B for every full year a holder of Series A or Series B has
held such stock. This amount is being accreted ratably over the period from
issuance until the first redemption date.
F-13
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5 - COMMON STOCK:
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 30,000,000 shares of common stock. Each share of common stock
has the right to one vote. The holders of common stock are also entitled to
receive dividends whenever funds are legally available and when declared by the
Board of Directors, subject to the prior rights of the holders of preferred
stock at the time outstanding. In July 2000, the Company amended and restated
its Certificate of Incorporation to increase the authorized share capital to
50,000,000 shares of common stock (See Note 11).
The Company had reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1999 2000
------------ -------------
<S> <C> <C>
Conversion of Series A mandatorily redeemable
convertible preferred stock................................................... 7,200,000 7,200,000
Conversion of Series B mandatorily redeemable
convertible preferred stock................................................... -- 8,700,000
Exercise of options.............................................................. 9,500,000 15,500,000
------------ -------------
16,700,000 31,400,000
============ =============
</TABLE>
The Company had not declared or paid cash dividends as of June 30, 2000.
Upon the termination of employment, the Company repurchased 9,376 shares
of common stock previously issued upon the exercise of options.
FOUNDERS STOCK AGREEMENT
Certain common stock was issued to the founders of the Company and is
subject to repurchase in the event of voluntary termination or involuntary
termination with cause. Certain founder shares vest over a twelve month period,
50% of the shares vest at the end of six month period and the remaining 50% vest
at the end of the second six month period. Certain other shares vest over four
years. At December 31, 1999 and June 30, 2000, 6,662,500 and 5,281,250 shares,
respectively, of outstanding common stock were subject to repurchase by the
Company at the original purchase price of $.001.
NOTE 6 - STOCK OPTION PLAN:
The Company's 1999 Stock Option Plan (the "Option Plan"), authorizes the
Board of Directors to grant up to 9,500,000 incentive stock options and
nonstatutory stock options to employees, directors and consultants. In April
2000, the Board of Directors has authorized the Company to increase the
authorized number of shares of common stock in the option pool to 15,500,000
shares. The Option Plan provides that incentive stock options may be granted to
employees of the Company and nonstatutory stock options may be granted to
consultants and directors of the Company. Under the Option Plan, no incentive
stock options may be granted to a person who, at the time of grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company unless at the time such options are granted the option
price is at least 110% of the fair market value of the stock. Furthermore, such
options granted shall not be exercisable after ten years from the date of grant.
The Option Plan is administered by the Board of Directors or its designees
and provides generally that the option price shall not be less than the fair
market value of the shares on the date of grant and no portion may be exercised
beyond ten years from that date. Options granted generally vest 25% on the first
anniversary of the date of grant with the balance vesting in 36 equal monthly
increments.
F-14
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
--------------- -------------- ------------
<S> <C> <C> <C>
Shares authorized....................................... 9,500,000 -- --
Options granted......................................... (5,807,500) 5,807,500 $ 0.05
Options exercised....................................... -- -- $ --
Options canceled........................................ 80,000 (80,000) $ 0.05
--------------- --------------
Balances, December 31, 1999............................. 3,772,500 5,727,500 $ 0.05
Shares authorized....................................... 6,000,000 -- $ --
Options granted......................................... (5,725,028) 5,725,028 $ 0.76
Options exercised....................................... -- (4,551,765) $ 0.15
Options canceled........................................ 425,124 (425,124) $ 0.59
--------------- --------------
Balances, June 30, 2000................................. 4,472,596 6,475,639 $ 0.57
=============== ==============
</TABLE>
The following tables summarizes information with respect to stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE
NUMBER LIFE EXERCISE OPTIONS
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE
------------------ --------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
$ 0.05 5,727,500 9.92 $ 0.05 5,727,500
--------------- -------------
5,727,500 $ 0.05 5,727,500
=============== =============
</TABLE>
The following table summarizes information with respect to stock options
outstanding and exercisable at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE
EXERCISE NUMBER LIFE EXERCISE OPTIONS
PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE
----------- ---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
$ 0.05 3,203,450 9.02 $ 0.05 3,203,450
$ 0.50 1,521,674 9.67 $ 0.50 1,521,674
$ 1.00 239,100 9.83 $ 1.00 239,100
$ 1.50 376,787 9.83 $ 1.50 376,787
$ 1.75 1,134,628 9.92 $ 1.75 1,134,628
----------------- ------------
6,475,639 6,475,639
================= ============
</TABLE>
F-15
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE DISCLOSURES
The fair value of each option grant has been estimated on the date of
grant using the minimum value method with the following assumptions:
PERIOD FROM
SEPTEMBER 8,
1999 SIX
(INCEPTION) MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1999 2000
----------------- ----------
Weighted average fair values.................. $ 1.26 $ 2.56
Assumptions:
Risk-free interest rates................... 5.75% 6.43%
Expected lives............................. 5 years 3 years
Dividend yield............................. 0% 0%
Had compensation cost for the Company's stock option plan been determined
based on the fair market values of these stock options at the grant dates
consistent with the provisions of SFAS No. 123, the Company's net loss would
have changed to the pro forma amounts as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
1999
(INCEPTION)
THROUGH SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
---------------- ---------------
<S> <C> <C>
Net loss attributable to common stockholders--as reported..................... $ (2,162,843) $ (22,461,618)
Net loss attributable to common stockholders--pro forma....................... $ (2,170,291) $ (22,602,482)
Basic and diluted net loss per share attributable to
common stockholders--as reported........................................... $ (1.17) $ (6.68)
Basic and diluted net loss per share attributable to
common stockholders--pro forma............................................. $ (1.18) $ (6.72)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure may not
be indicative of future amounts. Additional awards in future years are
anticipated.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain employee stock option grants, the Company
recorded unearned stock-based compensation totaling $19,972,257 at June 30,
2000, which is being amortized over the vesting periods of the related options,
generally four years using the method set out in FASB Interpretation No. 28
("FIN 28"). Under the FIN 28 method, each vested tranche of options is accounted
for as a separate option grant awarded for past services. Accordingly, the
compensation expense is recognized over the period during which the services
have been provided. This method results in higher compensation expense in the
earlier vesting periods of the related options. Amortization of this stock-based
compensation recognized during the period from inception to December 31, 1999
and for the six months ended June 30, 2000 totaled approximately $663,000 and
$4,752,000, respectively.
In connection with certain consultant stock option grants, the Company
recorded unearned stock-based compensation totaling $541,544 at June 30, 2000,
which is being amortized over the vesting periods of the related options.
Amortization of this stock-based compensation recognized during the six months
ended June 30, 2000 totaled approximately $77,000. These option grants are
subject to variable accounting, which may result in
F-16
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
substantial increases in the compensation expense, as the fair value of the
Company's common stock may increase in future periods.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space in California, Illinois, New York, New
Jersey and Virginia under noncancelable operating leases with expiration dates
through the year 2010. In addition to office leases, the Company also leases
equipment under noncancelable leases with expiration dates through the year
2002. Rent expense for the year ended December 31, 1999 and for the six months
ended June 30, 2000 totaled $98,403 and $1,164,319, respectively.
YEARS ENDING DECEMBER 31, OPERATING LEASES
---------------------------- -----------------
2000......................................... $ 1,261,638
2001......................................... 2,242,869
2002......................................... 1,896,257
2003......................................... 1,729,049
2004......................................... 1,788,441
Thereafter................................... 4,560,353
-----------------
Total minimum lease payment $ 13,478,607
=================
EQUIPMENT LEASE LINE
In June 2000, the Company entered into a two year equipment financing
agreement which provided for borrowings of up to $2,000,000, secured by the
assets acquired, and restricted cash equal to six months of lease payments. At
June 30, 2000 the restricted cash balance was $374,431 and the amount
outstanding under the line of credit was $1,485,802. As of June 30, 2000, no
payments have been made.
CONTINGENT LIABILITIES
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures will
be made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain officers
and employees of the Company. The agreements generally provide for annual
bonuses and incentive stock options as determined by the Board of Directors as
well as covenants not-to-compete during the employment term and for a period
thereafter. The employment agreements also generally provide for severance and
accelerated vesting clauses in the event the individual is terminated without
cause, or a significant change in control occurs.
EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) plan available to substantially all
employees over the age of 21 years. Participants may contribute up to 20 percent
of their annual compensation to the plan, limited to a maximum amount set by the
Internal Revenue Service. The Company may make contributions to the 401(k) plan
at the discretion of the Board of Directors. No Company contributions have been
made to the plan since inception.
F-17
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY:
Upon the closing of the Company's initial public offering, all outstanding
mandatorily redeemable convertible preferred stock will be converted
automatically into common stock. The pro forma effect of this conversion has
been presented as a separate column in the Company's consolidated balance sheet,
assuming the conversion had occurred as of June 30, 2000.
Pro forma basic and diluted net loss per common share have been computed as
described in Note 2 and also give effect to common equivalent shares from
mandatorily redeemable convertible preferred stock that will automatically
convert upon the closing of the Company's initial public offering (using the
as-if-converted method) for the respective period.
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and fully diluted net loss per share attributable to common
stockholders' follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999 SIX MONTHS
(INCEPTION) THROUGH ENDED JUNE 30,
DECEMBER 31, 1999 2000
------------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net loss attributable to common stockholders'............................. $ (2,162,843) $ (22,461,618)
=================== ================
Shares used in computing basic and diluted net loss per share
attributable to common stockholders'................................... 1,846,500 3,361,016
Adjusted to reflect the effect of the assumed conversion of mandatorily
redeemable convertible preferred stock from the date of issuance.......
Series A mandatorily redeemable convertible preferred stock.......... 5,400,000 7,200,000
Series B mandatorily redeemable convertible preferred stock.......... -- 7,380,738
------------------- ----------------
Weighted average number of shares used in computing pro forma net loss per
share attributable to common stockholders, basic and diluted........... 7,246,500 17,941,754
=================== ================
Pro forma net loss per share attributable to common stockholders,
basic and diluted...................................................... $ (0.30) $ (1.25)
=================== ================
</TABLE>
NOTE 9 - INCOME TAXES:
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses since inception.
At December 31, 1999 and June 30, 2000, the Company had net operating loss
carryforwards available to offset future regular and alternative minimum taxable
income of approximately $1,379,000 and $17,594,000, respectively. These
carryforwards expire between 2007 through 2019, if not utilized before these
dates.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any year include, but are not limited to,
a cumulative ownership change of more than 50% as defined, over a three-year
period. SiteSmith has not yet determined the extent that its net operating loss
benefit will be limited.
F-18
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
1999 (INCEPTION)
THROUGH SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
---------------- --------------
<S> <C> <C>
Deferred tax assets (current):
Net operating loss carry forwards.......................................... $ 549,000 $ 7,008,000
Other accruals............................................................. 31,000 280,000
---------------- --------------
Deferred tax assets.................................................... 580,000 7,288,000
Deferred tax liabilities (non-current):
Depreciation............................................................... (14,000) (164,000)
---------------- --------------
Deferred tax liabilities............................................... (14,000) (164,000)
Net deferred tax assets.................................................... 566,000 7,124,000
Valuation allowance........................................................ (566,000) (7,124,000)
---------------- --------------
$ -- $ --
================ ==============
</TABLE>
Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against all of its net deferred tax assets. At such time as it is determined
that it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
1999
(INCEPTION)
THROUGH SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
----------------- --------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C>
Common stock issued for services provided.............................. $ 46,800 $ 175,440
Unearned stock-based compensation for services provided................ $ -- $ 541,549
Unearned stock-based compensation relating to employee stock option
grants............................................................... $ 7,136,465 $ 12,835,792
</TABLE>
NOTE 11 - SUBSEQUENT EVENT (UNAUDITED):
On July 1, 2000, Mark F. Spagnolo joined SiteSmith as chief executive
officer. His employment agreement provides for the grant of an option to
purchase 3,000,000 shares of common stock at the fair market value on the grant
date. The option shall vest as follows: 750,000 are fully vested on grant date
and 25% of the remaining 2,250,000 shall vest on the first anniversary of his
start date with the balance vesting in 36 equal monthly increments. The
agreement also provides for a loan to purchase common stock. The loan is full
recourse and will be secured by any shares of stock obtained by exercising the
options described above and other personal property. In July 2000, Mr. Spagnolo
exercised 1,409,525 of his options to purchase common stock by executing a
full-recourse promissory note for $2,466,528. The promissory note is payable on
the earlier of July 1, 2004 or 60 days after the employment with the Company
terminates for any reason and bears an interest of 6.51% of the unpaid principal
balance each year. The agreement further provides acceleration of options and
the payment of certain bonuses and severance in the event of a change in control
or involuntary termination.
In July 2000, David C. Winn joined SiteSmith as a managing director. His
employment agreement provides for the grant of an option to purchase 1,000,000
shares of common stock at the fair market value on the grant date.
F-19
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The option shall vest as follows: 25% shall vest on the first anniversary of his
start date with the balance vesting in 36 equal monthly increments. The
agreement also provides for a loan to purchase common stock. The loan is full
recourse and will be secured by any shares of stock obtained by exercising the
options described above and other personal property. In July 2000, Mr. Winn
exercised 1,000,000 of his options to purchase common stock by executing a
full-recourse promissory note for $1,749,900. The promissory note is payable on
the earlier of September 1, 2004 or 30 days after his employment with the
Company terminates for any reason and bears an interest of 6.51% of the unpaid
principal balance each year. The agreement further provides acceleration of
options, the payment of certain bonuses and severance in the event of a change
in control or in voluntary termination.
On July 19, 2000, in connection with an executive search agreement with
Heidrick & Struggles, Inc., the Company issued a warrant to purchase an
aggregate of 437,500 shares of common stock at an exercise price of $1.75 per
share. The warrants expire on (i) the earlier of one year after an initial
public offering (ii) upon a merger, or (iii) seven years after the date of
issuance. The Company valued the warrants using the Black-Scholes option pricing
model, applying an expected life of seven years, a weighted average risk free
interest rate of 6.43%, an expected dividend yield of zero percent, a volatility
of 70% and a deemed fair value of common stock of $5.09 per share. The fair
value of the warrants of approximately $1,911,000 will be expenses in full.
On August 1, 2000, in connection with an executive search agreement
Heidrick & Struggles, Inc., the Company issued a warrant to purchase an
aggregate of 83,333 shares common stock at an exercise price of $1.75 per share.
The warrants expire on (i) the earlier of one year after an initial public
offering (ii) upon a merger, or (iii) seven years after the date of issuance.
The Company valued the warrants using the Black-Scholes option pricing model,
applying an expected life of seven years, weighted average risk free interest
rate of 6.43%, an expected dividend yield of zero percent, a volatility of 70%
and a deemed fair value of common stock of $5.09 per share. The fair value of
the warrants of approximately $364,000 will be expensed in full.
In July 2000, the Company entered into an operating lease agreement for
its new facility in Santa Clara, California. The agreement is for a minimum of
ten years, with future minimum lease payments of $1,375,836; $2,806,704;
$2,918,970; $3,035,730; $3,157,164 and $19,742,472 for fiscal years 2000, 2001,
2002, 2003, 2004 and thereafter, respectively. Concurrent with the execution of
the lease, the Company posted a letter of credit in the amount of $2,850,000,
which expires on October 1, 2001. In connection with the lease agreement, the
Company granted the lessor warrants to purchase up to 10,000 shares of the
Company's preferred stock at an exercise price per share equal to the price paid
for the preferred stock in the Company's next private equity financing. The
Company completed a Series C preferred stock round of financing on July 23, 2000
at a price of $5.65 per share. The warrants expire on the earlier of (i) April
2007, (ii) the sale of all or substantially all the capital stock on
substantially all the assets of the Company in a merger, business combination or
other form of business transaction in which more than fifty percent (50%) of the
voting power of the Company is disposed of or, (iii) the closing of a firm
commitment underwritten public offering with an offering price not less than
$5.00 per share and aggregate proceeds of $25,000,000. The warrants were valued
at $40,680 using the Black-Scholes option pricing model and will be recorded as
additional rent expense over the life of the lease. The following assumptions
were used in determining the fair value of the warrants: deemed fair value per
share of $5.65, dividend yield of 0%, expected volatility of 70%, risk-free
interest rate of 6.43% and a contractual life of 7 years.
During the period from July 1, 2000 through July 31, 2000, the Company
granted options to purchase an aggregate of 4,255,975 shares of common stock
resulting in an additional deferred compensation of approximately $14,194,000.
In July 2000, the Company amended and restated its Certificate of
Incorporation to change the authorized share capital to 50,000,000 of common
stock and 20,539,110 of mandatorily redeemable convertible preferred stock, of
which 7,200,000 has been designated to Series A, 8,610,681 has been designated
to Series B and 4,728,429 has been designated as Series C.
The conversion and dividend rights, preferences and privileges of the
Series A mandatorily redeemable convertible and Series B mandatorily redeemable
convertible preferred stock were also amended as follows:
o Dividends are payable at a rate of $0.04 per share for Series A
mandatorily redeemable convertible preferred stock and at $0.19 per
share for Series B mandatorily redeemable convertible preferred
stock.
F-20
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
o All shares of mandatorily redeemable convertible preferred stock shall
automatically be converted into shares of common stock upon the
closing of an underwritten public offering having an aggregate
offering price of at least $35,000,000 and a per share offering price
of at least $11.30.
On July 20, 2000, the Company sold 3,827,818 shares of Series C mandatorily
redeemable convertible preferred stock for net proceeds of $21,627,000. Upon the
closing of this financing, the $4,999,999 convertible promissory notes and
accrued interest were automatically converted into 889,554 shares of Series C
mandatorily redeemable convertible preferred stock. The rights, preferences and
privileges of the Series C redeemable preferred stock are consistent with those
outlined for Series A and Series B in Note 4, except as follows:
o Dividends are payable at a rate of $0.45 per share.
o Holders have a liquidation preference at $5.65 per share plus all
declared but unpaid dividends.
Management believes that its current cash balances are sufficient to
continue its operations through June 30, 2001. In order to fund its planned
expansion and execute its business plan as currently contemplated, the Company
will require additional capital. In August 2000, the Company's board of
directors authorized management to file a registration statement with the
Securities and Exchange Commission to permit the Company to sell shares of its
common stock to the public.
In August 2000, the Board of Directors adopted the 2000 Directors' Stock
Plan under which 500,000 shares were reserved for issuance. The plan will become
effective on the effective date of the Registration Statement of the Company's
initial public offering. The plan provides that each person who becomes a
non-employee director after the effective date will be granted a non-statutory
stock option to purchase 25,000 shares of common stock which will vest over four
years. On the date of the Company's annual stockholder meeting each year, an
additional 5,000 shares of common stock which vest over one year will be granted
to non-employee directors who have served on the Board of Directors for at least
six months. Options granted will have an exercise price equal to the fair market
value of the common stock on the date of grant and will have a term of ten
years. This plan is subject to stockholder approval.
In August 2000, the 2000 Employee Stock Purchase Plan (the "Purchase
Plan"), was adopted by the Board of Directors. A total of 750,000 shares of
common stock has been reserved for issuance under the Purchase Plan, plus an
annual increase on the first day of each fiscal year beginning in 2001 and
ending in 2010 equal to the lesser of (i) 500,000 shares; (ii) 1% of the
outstanding stock on the last day of the immediately preceding fiscal year; or
(iii) a lesser number determined by the Board of Directors. This plan will
become effective on the effective date of the Registration Statement of the
Company's initial public offering. The Purchase Plan permits eligible employees
to purchase common stock through payroll deductions, which in any event may not
exceed 15% of an employee's eligible compensation, at a price equal to the lower
of 85% of the fair market value of the common stock at the beginning of the
offering period or at the end of an offering period. Employees may end their
participation in the Purchase Plan at any time during an offering period, and
participation ends automatically on termination of employment. Purchases of
common stock will occur on May 1 and November 1 of each year. The value of
shares purchased in any calendar year may not exceed $25,000. In addition, no
employee may purchase more than 1,000 shares of common stock under the Purchase
Plan in any one purchase period. This plan is subject to stockholder approval.
The Company's Board of Directors adopted the 2000 Executive Stock Incentive
Plan, (the "Executive Plan"), in July 2000. The Company has reserved a total of
4,000,000 shares of common stock for issuance under the Executive Plan. As of
August 1, 2000, 2,409,525 options have been exercised, options to purchase a
total of 1,590,475 shares at a weighted average exercise price of $1.75 per
share were outstanding and no shares remained available for future option or
stock purchase right grants. The Company does not intend to grant any additional
options or stock purchase rights under the Executive Plan after the date of the
Company's initial public offering. Unless terminated earlier, the Executive Plan
will terminate in 2010.
The terms of options and stock purchase rights under the Executive Plan are
generally the same as those that may be issued under the Option Plan, except
that the Executive Plan does not impose a limitation on the number of shares
subject to options and stock purchase rights that may be issued to any
individual employee. This plan is subject to stockholder approval.
F-21
<PAGE>
[SITESMITH LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee and the Nasdaq National Market listing
fee.
AMOUNT TO BE
PAID
------------
SEC registration fee.......................................... *
NASD filing fee............................................... *
Nasdaq National Market listing fee............................ *
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Blue Sky qualification fees and expenses...................... *
Transfer Agent and Registrar fees............................. *
Miscellaneous fees and expenses............................... *
------------
Total.................................................... *
============
* to be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article VII of
our certificate of incorporation, exhibit 3.2 hereto, and article VI of our
bylaws, exhibit 3.3, provide for indemnification of our directors, officers,
employees and other agents to the maximum extent permitted by Delaware Law. In
addition, we have entered into indemnification agreements, exhibit 10.3, with
our officers and directors. The underwriting agreement, exhibit 1.1, also
provides for cross-indemnification among SiteSmith and the underwriters with
respect to certain matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 8, 1999, our date of inception, we have sold and issued
the following securities:
1. In September 1999, we issued and sold an aggregate of 8,500,000
shares of our common stock at a price of $0.001 per share to Messrs. Tseu,
Rasmussen and Ryan.
2. In October 1999, we issued 7,200,000 shares of our Series A
preferred stock at a price of $0.50 per share to twenty-seven investors,
including 5 venture capital funds: Bedrock Capital Partners I, L.P., VBW
Employee Bedrock Fund, L.P., Credit Suisse First Boston Bedrock Fund, L.P.,
Communications Ventures III, L.P. and Communications Ventures III CEO &
Entrepreneur's Fund, L.P. Mr. McLean, a director of SiteSmith, is affiliated
with Bedrock Capital Partners I, L.P., VBW Employee Bedrock Fund, L.P. and
Credit Suisse First Boston Bedrock Fund, L.P.
3. In January and February 2000, we issued 8,610,861 shares of our
Series B preferred stock at a price of $2.38 per share to fifty investors,
including 8 venture capital funds: Bedrock Capital Partners I, L.P., VBW
Employee Bedrock Fund, L.P., Credit Suisse First Boston Bedrock Fund, L.P.,
Communications Ventures III, L.P., Communications Ventures III CEO &
Entrepreneur's Fund L.P., Weiss, Peck & Greer Associates V, L.L.C., Weiss, Peck
& Greer Venture Associates V-A, L.L.C. and Weiss, Peck & Greer Associates V
Cayman, L.P. Mr. McLean, a director of SiteSmith, is affiliated with Bedrock
Capital Partners I, L.P., VBW Employee Bedrock Fund, L.P., Credit Suisse First
Boston Bedrock Fund, L.P. Ms. Johnson, a director of SiteSmith, is affiliated
with Weiss, Peck & Greer
II-1
<PAGE>
Associates V, L.L.C., Weiss, Peck & Greer Venture Associates V-A, L.L.C. and
Weiss, Peck & Greer Associates V Cayman, L.P.
4. In July, 2000, we issued 4,717,372 shares of our Series C
preferred stock at a price of $5.65 per share to seventeen investors, including
14 venture capital funds: Dell Ventures, L.P., Bedrock Capital Partners I, L.P.,
VBW Employee Bedrock Fund, L.P., Credit Suisse First Boston Bedrock Fund, L.P.,
Communications Ventures III, L.P., Communications Ventures III CEO &
Entrepreneur's Fund L.P., ComVentures IV, L.P., ComVentures IV CEO Fund, L.P.,
ComVentures Entrepreneurs' Fund, L.P., Weiss, Peck & Greer Associates V, L.L.C.,
Weiss, Peck & Greer Venture Associates V-A, L.L.C. and Weiss, Peck & Greer
Associates V Cayman, L.P., WPG Information Sciences Entrepreneur Fund II,
L.L.C., and WPG Information Sciences Entrepreneur Fund II-A. L.L.C. Mr. McLean,
a director of SiteSmith, is affiliated with Bedrock Capital Partners I, L.P.,
VBW Employee Bedrock Fund, L.P. and Credit Suisse First Boston Bedrock
Fund, L.P.
5. In July 2000, we issued warrants to purchase 10,000 shares of
Series C Preferred Stock and 520,833 shares of common stock to a lessor of real
property and the placement agency used in connection with the hiring of Mr.
Spagnolo and Mr. Winn, respectively.
6. As of August 1, 2000, we have granted stock options to purchase
a total of 11,788,503 shares of our common stock at exercise prices ranging from
$0.05 to $1.75 per share to a total of 331 employees and directors pursuant to
our 1999 Stock Plan.
7. As of August 1, 2000, we have granted restricted stock purchase
rights to purchase a total of 138,000 shares of our common stock at an exercise
price of $0.50 per share to a total of 4 consultants pursuant to our 1999 Stock
Plan.
8. As of August 1, 2000, we have granted stock options to purchase a
total of 4,000,000 shares of our common stock at a price of $1.75 per share to
two of our officers pursuant to our 2000 Executive Stock Incentive Plan.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering
except that the issuance in Item 3 was deemed to be exempt under the Securities
Act in reliance on Rule 506 of Regulation D promulgated under the Securities
Act. In addition, certain issuances described in Item 6 and Item 7 were deemed
exempt from registration under the Securities Act in reliance upon Rule 701
promulgated under the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through their relationships with SiteSmith,
to information about us.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
---------- -------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of SiteSmith.
3.2 Amended and Restated Certificate of Incorporation of SiteSmith (proposed).
3.3 Amended and Restated Bylaws of SiteSmith.
3.4 Amended and Restated Bylaws of SiteSmith (proposed).
4.1* Specimen Stock Certificate.
4.2 Amended and Restated Investors' Rights Agreement dated July 20, 2000.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* Employment Agreement between Mark Spagnolo and SiteSmith.
10.2* Employment Agreement between David Winn and SiteSmith.
10.3 Form of Indemnification Agreement between SiteSmith and each of its officers and directors.
10.4 Change of Control Agreement between SiteBrigade, Inc. and Marvin Tseu.
10.5 Change of Control Agreement between SiteBrigade, Inc. and Robert Ryan.
10.6 Change of Control Agreement between SiteBrigade, Inc. and Dan Rasmussen.
10.7 1999 Stock Plan and form of stock option agreement and restricted stock purchase agreement.
10.8 2000 Employee Stock Purchase Plan and form of enrollment agreement.
10.9 2000 Directors' Stock Option Plan.
10.10 Industrial Lease dated September 15, 1999 between Spieker Properties, L.P., a California limited
partnership and SiteBrigade, Inc.
10.11 First Amendment to Lease dated January 7, 2000 between Spieker Properties, L.P., a California
limited partnership, and SiteSmith.
10.12 Consent to Sublease Agreement dated January 14, 2000 between Spieker Properties, L.P., a California
limited partnership, SiteSmith, and DPSS Lasers, Inc., a California corporation, and Sublease dated
January 14, 2000 between SiteSmith and DPSS Lasers, Inc., a California corporation.
10.13 2000 Executive Stock Incentive Plan.
10.14 Stock Option Agreement between David Winn and SiteSmith.
10.15 Stock Option Agreements between Mark Spagnolo and SiteSmith.
10.16 Employment letter for Richard Dym.
10.17 Employment letter for Lee Finck.
10.18 Employment letter for Michael Seifert.
10.19 Employment letter for Peter Hilliard.
10.20 Employment letter for David Bauer.
10.21 Employment letter for Frank Slattery.
10.22 Employment letter for Mary Cortani.
10.23 Warrant to purchase 437,500 shares of common stock dated July 19, 2000 issued to Heidrick &
Struggles, Inc.
10.24* Warrant to purchase 83,333 shares of common stock dated August 1, 2000 issued to Heidrick &
Struggles, Inc.
21.1 Subsidiaries of SiteSmith.
23.1 Consent of Independent Accountants.
23.2* Consent of Venture Law Group (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule for the six months ended June 30, 2000.
27.2 Financial Data Schedule for the period from September 8, 1999 (inception) to December 31, 1999.
--------------
</TABLE>
* To be supplied by amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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, 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 Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Santa
Clara, State of California on August 11, 2000.
SITESMITH, INC.
By: /s/ Mark F. Spagnolo
---------------------------------
Mark F. Spagnolo
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Mark F.
Spagnolo and Michael E. Seifert, and each of them, as his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this registration statement, including post-effective
amendments, and any and all registration statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this registration statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said registration statement.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Mark F. Spagnolo
----------------------------------------- Chief Executive Officer and Chairman of
Mark F. Spagnolo the Board of Directors August 11, 2000
/s/ Michael E. Seifert
----------------------------------------- Chief Financial Officer
Michael E. Seifert August 11, 2000
/s/ Carolyn V. Aver
----------------------------------------- Director
Carolyn V. Aver August 11, 2000
/s/ Amal M. Johnson
----------------------------------------- Director
Amal M. Johnson August 11, 2000
/s/ James L. McLean
----------------------------------------- Director
James L. McLean August 11, 2000
/s/ Robert John Ryan IV
----------------------------------------- Director
Robert John Ryan IV August 11, 2000
/s/ Edward J. Sanderson, Jr.
----------------------------------------- Director
Edward J. Sanderson, Jr. August 11, 2000
/s/ Marvin Tseu
----------------------------------------- Director
Marvin Tseu August 11, 2000
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
---------- -------------
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of SiteSmith.
3.2 Amended and Restated Certificate of Incorporation of
SiteSmith (proposed).
3.3 Amended and Restated Bylaws of SiteSmith.
3.4 Amended and Restated Bylaws of SiteSmith (proposed).
4.1* Specimen Stock Certificate.
4.2 Amended and Restated Investors' Rights Agreement dated July 20,
2000.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* Employment Agreement between Mark Spagnolo and SiteSmith.
10.2* Employment Agreement between David Winn and SiteSmith.
10.3 Form of Indemnification Agreement between SiteSmith and each of its
officers and directors.
10.4 Change of Control Agreement between SiteBrigade, Inc. and Marvin
Tseu.
10.5 Change of Control Agreement between SiteBrigade, Inc. and Robert
Ryan.
10.6 Change of Control Agreement between SiteBrigade, Inc. and Dan
Rasmussen.
10.7 1999 Stock Plan and form of stock option agreement and restricted
stock purchase agreement.
10.8 2000 Employee Stock Purchase Plan and form of enrollment agreement.
10.9 2000 Directors' Stock Option Plan.
10.10 Industrial Lease dated September 15, 1999 between Spieker
Properties, L.P., a California limited partnership and SiteBrigade,
Inc.
10.11 First Amendment to Lease dated January 7, 2000 between Spieker
Properties, L.P., a California limited partnership, and SiteSmith.
10.12 Consent to Sublease Agreement dated January 14, 2000 between Spieker
Properties, L.P., a California limited partnership, SiteSmith, and
DPSS Lasers, Inc., a California corporation, and Sublease dated
January 14, 2000 between SiteSmith and DPSS Lasers, Inc., a
California corporation.
10.13 2000 Executive Stock Incentive Plan.
10.14 Stock Option Agreement between David Winn and SiteSmith.
10.15 Stock Option Agreements between Mark Spagnolo and SiteSmith.
10.16 Employment letter for Richard Dym.
10.17 Employment letter for Lee Finck.
10.18 Employment letter for Michael Seifert.
10.19 Employment letter for Peter Hilliard.
10.20 Employment letter for David Bauer.
10.21 Employment letter for Frank Slattery.
10.22 Employment letter for Mary Cortani.
10.23 Warrant to purchase 437,500 shares of common stock dated July 19,
2000 issued to Heidrick & Struggles, Inc.
10.24* Warrant to purchase 83,333 shares of common stock dated August 1,
2000 issued to Heidrick & Struggles, Inc.
21.1 Subsidiaries of SiteSmith.
23.1 Consent of Independent Accountants.
23.2* Consent of Venture Law Group (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule for the six months ended June 30, 2000.
27.2 Financial Data Schedule for the period from September 8, 1999
(inception) to December 31, 1999.
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* To be supplied by amendment.