<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 2000
REGISTRATION STATEMENT NO. 333-30548
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SCREAMINGMEDIA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7389 13-4042678
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
601 WEST 26TH STREET, 13TH FLOOR
NEW YORK, NEW YORK 10001
(212) 691-7900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KEVIN C. CLARK
CHIEF EXECUTIVE OFFICER
601 WEST 26TH STREET, 13TH FLOOR
NEW YORK, NEW YORK 10001
(212) 691-7900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
DAVID J. GOLDSCHMIDT, ESQ. STEPHEN L. BURNS, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP CRAVATH, SWAINE & MOORE
FOUR TIMES SQUARE 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10036-6522 NEW YORK, NEW YORK 10019-7475
(212) 735-3000 (212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of 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(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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN 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.
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--------------------------------------------------------------------------------
<PAGE> 2
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 JULY 31, 2000
[SCREAMING MEDIA LOGO]
5,000,000 Shares
SCREAMINGMEDIA
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 $11.00 and $13.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "SCRM."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
4.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SCREAMINGMEDIA
------------- ------------- --------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total........................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
The date of this prospectus is , 2000.
<PAGE> 3
(Inside Front Cover)
Color photograph of a man screaming. In the middle of the photograph are the
words "DOES YOUR WEB SITE" which are next to the man's mouth. On the other side
of the mouth is a question mark. In the lower left side of the photograph is a
cylinder box with the text "Or does it just lie there and whimper with stale,
dull content? Attract visitors and keep them on your site with fresh content,
data, and features, custom-filtered for your Web site and updated continuously."
Underneath the text is the ScreamingMedia logo followed by the words SCREAMING
MEDIA. At the bottom of the cylinder are the words "www.screamingmedia.com."
Front Cover
Black and white photograph of a man screaming.
<PAGE> 4
[INSIDE GATEFOLD]
The gatefold is a diagrammatic representation of the ScreamingMedia content
network demonstrating the harvesting of content from a range of content
providers, represented by logos, to the Content Engine, and then the delivery of
content to customers, represented by screenshots of web pages.
Text explaining the diagram on the left is "Content is harvested from a variety
of sources via leased-line, satellite, FTP and other delivery methods" and on
the right is "Siteware[TM] integrates content into Web sites and databases in a
variety of formats".
<PAGE> 5
Text at the bottom reads "Aggregation-From hundreds of providers using a variety
of delivery methods and formats", "Custom Filtering-Allows customers to obtain
highly-targeted Content", "Editorial Control-Our Editor's Desk allows customers
to select and publish content with just a few clicks" and "Real-Time Delivery
and Integration-To hundreds of Web sites".
<PAGE> 6
[LEFT BLANK FOR INSIDE COVER]
<PAGE> 7
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 4
FORWARD-LOOKING STATEMENTS.......... 12
USE OF PROCEEDS..................... 12
DIVIDEND POLICY..................... 12
CAPITALIZATION...................... 13
DILUTION............................ 15
SELECTED FINANCIAL DATA............. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 18
BUSINESS............................ 27
MANAGEMENT.......................... 37
RELATED PARTY TRANSACTIONS.......... 50
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRINCIPAL STOCKHOLDERS.............. 52
DESCRIPTION OF CAPITAL STOCK........ 54
SHARES ELIGIBLE FOR FUTURE SALE..... 58
U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS.................. 60
UNDERWRITING........................ 63
NOTICE TO CANADIAN RESIDENTS........ 65
LEGAL MATTERS....................... 66
EXPERTS............................. 66
CHANGE IN ACCOUNTANTS............... 67
WHERE YOU CAN FIND MORE
INFORMATION....................... 67
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
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 DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 8
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. You should read the entire prospectus carefully.
SCREAMINGMEDIA
We have developed proprietary technologies for the aggregation and
distribution of digital content over the Internet. We aggregate content from a
wide range of content providers and then filter, deliver and efficiently
integrate this content into our customers' Web sites almost instantaneously. Our
technologies enable us to deliver content to customers who use any of the major
Web site server and database technologies, including those used to support
wireless access devices. While we presently deliver text and photograph-based
digital content, our technologies are designed to enable us to add new forms of
content, such as audio and streaming video, which we expect to offer in the
future. We believe that ScreamingMedia offers Web sites a cost-effective means
to meet the growing need for them to provide targeted, high-quality content to
their users, which is essential to building a loyal user base. We offer Web
sites a single-source solution for their timely and relevant content needs and
offer content providers a means of syndicating their content to third parties.
We have assembled a growing network of customers and content providers,
which we refer to as our "digital content network." As of June 30, 2000 our
digital content network consisted of over 1,000 Web site and four wireless
customers and over 410 content providers supplying content from over 580
publications. We generate revenue principally from recurring monthly fees under
contracts that we enter into with customers, typically for an initial period of
one year. We also generate revenue from one-time set-up fees that we charge new
customers. In addition, we have a growing international presence, with 113 of
our customers and 93 of our content providers based outside of the United
States, primarily in Latin America, the United Kingdom and Canada.
We believe that high-quality content is vital to Web sites in order to
drive traffic, develop user loyalty and increase the length of time that users
spend on a site. Web sites have limited options to obtain timely and relevant
content. Traditionally, Web sites either had to produce their own content or
enter into multiple relationships with a variety of content providers. These
options can involve considerable expense, limit the range and quality of the
content available and create integration difficulties.
We offer Web sites the following key benefits:
- the ability to obtain highly-targeted, continuously updated content from
a wide range of sources;
- a cost-effective, single-source alternative to independently producing or
aggregating content;
- seamless integration of content into the look and feel of the Web site,
giving customers control over their users' online experience and
enhancing their brand identity; and
- a flexible and scalable service that meets the needs of a wide range of
customers and is easily adaptable to their changing needs.
Our objective is to establish our technology as the global standard for the
exchange of digital content and related services. To achieve this, we intend to:
- rapidly expand our digital content network;
- maintain and extend our product and technology leadership;
- establish ScreamingMedia as a leading brand;
- continue to pursue strategic relationships; and
- expand our international presence.
Our principal executive offices are located at 601 West 26th Street, 13th
Floor, New York, New York 10001, and our telephone number is (212) 691-7900. The
address of our Web site is www.screamingmedia.com. The information on our Web
site is not part of this prospectus.
1
<PAGE> 9
Content Engine(R) is a registered service mark of ScreamingMedia.
ScreamingMedia(SM) and Digital Content Network(SM) are service marks of
ScreamingMedia. SiteWare(TM) is a trademark of ScreamingMedia. This prospectus
also contains trademarks of other companies.
We have a history of operating losses and expect to incur losses for the
foreseeable future. As of June 30, 2000, we had an accumulated deficit of $35.8
million. We incurred net losses of $13.2 million and $21.6 million for the year
ended December 31, 1999 and the six months ended June 30, 2000, respectively. We
have a limited operating history on which to evaluate our business and
prospects. We began our current line of business at the end of 1997 and began
focusing exclusively on this business in the latter part of 1998. We also
operate in a highly competitive market.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............................... 5,000,000 shares
Common stock to be outstanding after this
offering......................................... 37,425,117 shares
Use of proceeds.................................... For general corporate purposes, including
increasing our sales and marketing activities,
expanding our international operations, product
development and working capital.
Nasdaq National Market Symbol...................... SCRM
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on our shares outstanding as of July 17, 2000. This information
excludes:
- 5,585,149 shares of common stock issuable on the exercise of stock
options outstanding as of July 17, 2000 issued under our 1999 stock
option plan at a weighted average exercise price of $2.43;
- 528,714 shares of common stock issuable on the exercise of stock options
issued on July 10, 2000 with an exercise price equal to the initial
public offering price of our common stock;
- 452,200 shares of common stock issuable on the exercise of warrants
outstanding as of July 17, 2000 at a weighted average exercise price of
$5.50; and
- 3,174,603 shares of common stock available for issuance under our 2000
equity incentive plan.
------------------------
Except as otherwise indicated, the information in this prospectus assumes
no exercise of the underwriters' overallotment option and gives effect to the
following:
- a 1.7-for-1 common stock split that we effected on April 11, 2000;
- a 1-for-1.26 reverse stock split that we effected on July 17, 2000;
- the sale in a private placement on July 17, 2000 of 8,254,227 shares of
Series C convertible preferred stock; and
- the automatic conversion of all our outstanding preferred stock,
including the Series C preferred stock, into 19,602,801 shares of common
stock upon the completion of this offering.
2
<PAGE> 10
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue.......... $ 525 $ 782 $ 574 $ 567 $ 2,985 $ 661 $ 7,424
Total operating
expenses............. 419 772 669 1,163 16,479 1,995 29,342
Operating income
(loss)............... 106 10 (95) (596) (13,494) (1,334) (21,918)
Net income (loss)...... $ 106 $ 10 $ (95) $ (610) $(13,166) $(1,303) $(21,557)
====== ====== ====== ====== ======== ======= ========
Basic net income (loss)
per share............ $ 0.07 $ 0.01 $(0.06) $(0.35) $ (1.07) $ (0.11) $ (1.61)
====== ====== ====== ====== ======== ======= ========
Weighted average number
of shares of common
stock outstanding.... 1,484 1,484 1,585 1,731 12,298 12,120 13,425
====== ====== ====== ====== ======== ======= ========
Pro forma basic net
loss per share....... $ (0.77) $ (0.87)
======== ========
Pro forma weighted
average number of
shares of common
stock outstanding.... 17,038 24,774
======== ========
</TABLE>
Pro forma basic net loss per share has been calculated assuming the
conversion of all previously outstanding preferred stock into common stock, as
if the shares had converted immediately upon their issuance. See note 2 to the
financial statements for an explanation of the determination of the number of
shares used in computing basic net loss per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 9,691 $55,874 $109,174
Working capital.......................................... 3,500 49,683 102,983
Total assets............................................. 29,972 76,155 129,455
Capital lease obligations, less current portion.......... 3,578 3,578 3,578
Redeemable convertible preferred stock................... 27,742 -- --
Total stockholders' equity (deficiency).................. (12,058) 61,864 115,164
</TABLE>
The pro forma balance sheet data gives effect to (1) our receipt of net
proceeds of approximately $46.2 million from the sale of 8,254,227 shares of
Series C convertible preferred stock on July 17, 2000 and (2) the automatic
conversion of all our outstanding preferred stock into a total of 19,602,801
shares of common stock upon the completion of this offering. The pro forma as
adjusted data gives further effect to our receipt of the net proceeds from the
sale of 5,000,000 shares of common stock offered by us at an assumed initial
public offering price of $12.00 and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.
3
<PAGE> 11
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below before deciding to invest in
shares of our common stock. The trading price of our common stock could decline
due to any of these risks, in which case you could lose all or part of your
investment. In assessing these risks, you should also refer to the other
information in this prospectus, including our financial statements and the
related notes.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT WILL BE DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS.
It is difficult to value our business and evaluate our prospects because of
our limited operating history. We began our current line of business at the end
of 1997 and began focusing exclusively on this business in the latter part of
1998. Accordingly, we have limited financial and operating data that is relevant
to our current business. Our business model is unproven, which creates a risk
that our performance will not meet the expectations of investors and that the
value of our common stock will decline.
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
We expect to incur operating losses and experience negative cash flow for
the foreseeable future. We have incurred significant losses since we began our
current line of business in 1997. As of June 30, 2000, we had an accumulated
deficit of $35.8 million. We incurred net losses of $13.2 million and $21.6
million for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively. We anticipate our losses will also increase significantly
from current levels as we incur additional costs and expenses related to:
- sales and marketing activities;
- employing additional personnel;
- funding our international operations;
- software and product development;
- establishing strategic relationships; and
- increasing the number of content providers.
We cannot predict when we will operate profitably, if ever. Our ability to
achieve profitability will depend on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. We
cannot be certain that if we were to achieve profitability, we would be able to
sustain or increase profitability.
OUR QUARTERLY FINANCIAL RESULTS MAY BE VOLATILE AND COULD CAUSE OUR STOCK PRICE
TO FLUCTUATE.
Our revenues and operating results may vary significantly from quarter to
quarter. Because of these fluctuations, our results in any quarter may not be
indicative of future performance and it may be difficult for investors to
properly evaluate our results. It is possible that in some future periods our
revenues or earnings may fall below the expectations of investors and result in
the market price of our common stock declining. The factors that may cause our
financial results to vary from quarter to quarter include:
- the demand for our services;
- the value, timing and renewal of contracts with customers and content
providers;
- the amount and timing of operating costs and capital expenditures; and
- the performance of our technology.
These factors, which are largely beyond our control, together with our
limited operating history and unproven business model, make it difficult to
forecast our future revenues or results of operations accurately. We also have
limited meaningful historical financial data upon which to base planned
operating expenses. A substantial portion of our operating expenses is related
to personnel costs, marketing programs and overhead,
4
<PAGE> 12
which cannot be adjusted quickly. Our operating expense levels reflect, in part,
our expectations of future revenues. If actual revenues on a quarterly basis are
below management's expectations, or if our expenses precede increased revenues,
both gross margins and results of operations would be materially adversely
affected.
LOSING MAJOR CONTENT PROVIDERS MAY LEAVE US WITH INSUFFICIENT BREADTH OF CONTENT
TO RETAIN AND ATTRACT CUSTOMERS.
We do not generate original content and are therefore highly dependent upon
third-party content providers. As of June 30, 2000, one of our content
providers, Comtex, provided 40, or 7%, of our total publications. While no other
content provider supplied more than 5% of our publications as of that date, if
we were to lose one of our major content providers and were not able to obtain
similar content from another source, our services would be less attractive to
customers. In addition, we cannot be certain that we will be able to license
content from our current or new providers on favorable terms in the future, if
at all. If we are unable to add content providers to our network, we may not be
able to attract new customers in sufficient numbers to expand our business.
FAILURE TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD ADVERSELY AFFECT
OUR BUSINESS AND OPERATING RESULTS.
We have grown quickly in the last year and we anticipate continuing to
expand. Any failure to manage our growth effectively will result in our
operations being less than optimally efficient, which will adversely affect our
operating and financial results.
Our number of full-time employees increased from eight on December 31, 1998
to 236 on June 30, 2000. We expect to add at least 75 employees in the remainder
of 2000, although the exact figure will depend on a number of factors including
our domestic and international growth and our ability to increase the
productivity of our employees. This expected growth will place strains on our
resources, management and operating systems. To effectively manage our growth,
we must, among other things:
- accurately estimate the number of employees we will require and the areas
in which they will be required;
- upgrade and expand our office infrastructure so that it is appropriate
for our level of activity;
- manage expansion into additional geographic areas; and
- improve and refine our operating and financial systems.
We expect to devote considerable resources and management time to improving
our operating and financial systems to manage our growth.
OUR MANAGEMENT TEAM HAS LIMITED EXPERIENCE WORKING TOGETHER AND IF THEY FAIL TO
FUNCTION EFFECTIVELY AS A UNIT, OUR OPERATING PERFORMANCE MAY BE ADVERSELY
EFFECTED.
Our chief executive officer has only been employed by us since November
1999 and our chief financial officer joined us in March 2000. Our chief
operating officer joined us in February 2000 as president, international and
assumed the role of chief operating officer in June 2000. Additionally, several
of our other senior managers joined us in the last six months. Therefore, there
has been little or no opportunity to evaluate the effectiveness of our senior
management team as a unit. The failure of our senior management to function
effectively as a team may have an adverse effect on our ability to maintain a
cohesive culture and compete effectively.
IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PROFESSIONAL STAFF, OUR GROWTH
WILL BE LIMITED.
Our ability to grow, increase our market share and develop our products
depends in large part on our ability to hire, retain and manage highly skilled
employees, including technical, sales, marketing and business development
personnel. Companies in our industry and similar industries compete intensely to
hire and retain qualified personnel, and we cannot assure you that we will be
able to attract the employees we need, or that we will be able to retain the
services of those we have hired. We cannot assure you that we will be able to
prevent the unauthorized use or disclosure of our proprietary knowledge,
practices and procedures if our employees leave us.
5
<PAGE> 13
IF WE LOSE ANY OF OUR SENIOR MANAGERS OR OTHER KEY PERSONNEL, OUR BUSINESS MAY
BE OPERATED LESS EFFECTIVELY.
We depend on the continued services and performance of our senior
management and other key personnel including technical and sales personnel. If
we lose the services of our senior managers or any of our other executive
officers or key employees, we may not be able to operate our business as
effectively as we anticipate, and our operating results may suffer.
IF WE DO NOT CONTINUE TO DEVELOP OUR TECHNOLOGY, OUR SERVICES MAY QUICKLY BECOME
OBSOLETE.
The market for Internet products and services is characterized by rapidly
changing technology, evolving industry standards and customer demands and
frequent new product introductions and enhancements. To be successful, we will
have to continually improve the performance, features and reliability of our
products and services. We cannot assure you that our technological development
will advance at the pace necessary to sustain our growth. For example, we
believe that to compete effectively in the future, we will need to expand our
customized content product to include additional types of content, such as audio
and video. Additionally, new Internet or telecommunications technologies may
require us to alter our technology and products to avoid them becoming obsolete.
Improving our current products and developing and introducing new products will
require significant research and development.
OUR LIMITED EXPERIENCE SELLING AND MARKETING OUR SERVICES MAY IMPEDE EXPANSION
OF OUR BUSINESS.
We have had relatively little experience marketing our services and may not
be able to successfully implement our sales and marketing initiatives. Marketing
our services in order to expand our customer base is crucial to the success of
our business. On December 31, 1998, we had only three sales people. The majority
of our sales people were hired since the beginning of 1999. We may be unable to
hire, retain, integrate and motivate sales and marketing personnel. New sales
and marketing personnel may also require a substantial period of time to become
effective. Moreover, although our average sales cycle from the time a potential
customer is first contacted to the time a contract is signed currently ranges
from three to six weeks, there can be no assurance that we will not experience
longer sales cycles in the future. Such a lengthening in sales cycles could make
our operating results more unpredictable. Unsuccessful sales or marketing
efforts or a material lengthening of our sales cycle could have material adverse
effects on our revenues.
IF EQUIPMENT FAILURES INTERRUPT THE DISTRIBUTION OF CONTENT TO OUR CUSTOMERS, WE
MAY LOSE CUSTOMERS AND OUR REPUTATION MAY BE ADVERSELY AFFECTED.
Our services will only be attractive to current and prospective customers
if we are able to process and distribute content quickly and reliably. Any
failure of the computer equipment we use or the third-party telecommunications
networks on which we rely for distribution could interrupt or delay our service.
This could lead to customers cancelling contracts and could damage our
reputation, which could limit our ability to attract additional customers and
lead to a drop in the value of our common stock.
Substantially all of our own computer and communications hardware is
located in our headquarters and on the premises of our server hosting providers,
GlobalCenter and Network Plus, located in New York City. We also depend on the
Internet to distribute our content. All of these systems are vulnerable to
damage or interruption from fire, flood, power loss, earthquake, malicious
damage, including hacking and computer viruses, telecommunications failure and
similar events.
WE MAY BE UNABLE TO EXPAND OUR COMPUTER SYSTEMS QUICKLY ENOUGH TO SUPPORT DEMAND
FOR OUR SERVICES.
Our future success will depend in part on our ability to expand our
computer systems rapidly in order to accommodate significant increases in
content processing volume. We may be unable to expand the capacity of our
existing systems or develop new systems to enable us to process a larger amount
of content, or to provide our services to a larger number of customers. If we
are unable to expand our systems, we may suffer service interruptions that could
make our services less attractive to customers.
Most of our software systems are internally developed, and we rely on our
employees and third-party contractors to develop and maintain these systems. If
any of our software developers or these contractors
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<PAGE> 14
become unavailable to us, we may experience difficulty in improving and
maintaining our systems. Although we are continually enhancing and expanding our
infrastructure, we have experienced periodic systems interruptions, which we
believe may continue to occur. Failure to maintain high-capacity data
transmission would adversely affect our reputation and business.
WE FACE INTENSE COMPETITION THAT COULD IMPAIR OUR ABILITY TO GROW AND ACHIEVE
PROFITABILITY.
We face significant competition in the market for digital content. We may
experience greater competition in the future as we address a wider range of
market segments, additional entrants join the market and existing competitors
offer new or upgraded products. Barriers to new entrants are relatively low. If
we fail to compete successfully, we could lose market share, or be forced to
lower our prices or spend more on marketing, which would reduce our margins.
We compete with companies that are focused on aggregating third-party
content and distributing it to online customers. We also compete with
traditional wire services that have adapted their own content for use by Web
sites. We also compete with a wide range of providers of different types of
content that can be used on Web sites, such as directories, maps, photographs,
stock tickers and video clips. We do not believe that any of these competitors
is currently dominant.
Some of our competitors offer products with different pricing models,
delivery systems and types of content, and these differences could prove
attractive to potential customers. In the future, these competitors or others
might offer products with the features we currently provide, or other features
desired by potential customers.
Many of our current and potential competitors have longer operating
histories, larger customer or user bases, and significantly greater financial,
marketing and other resources than we do. These competitors can devote
substantially more resources than we can to business development and may adopt
aggressive pricing policies. In addition, larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with our
competitors as the use of the Internet and other online services increases.
Increased competition from these or other competitors could adversely affect our
business.
IF THE CONTENT WE DISTRIBUTE IS UNLAWFUL OR CAUSES INJURY, WE MAY HAVE TO PAY
FINES OR DAMAGES.
The publication or dissemination of content that we have distributed may
give rise to liability for defamation, negligence, breach of copyright, patent,
trade secret or trademark infringement or other claims or charges based on the
nature of the content. As a distributor of this content, we may be directly or
indirectly liable to claims or charges of this nature.
In addition, we could be exposed to liability arising from the activities
of our customers or their users with respect to the unauthorized duplication of,
or insertion of inappropriate material into, the content we supply. Although we
carry general liability insurance, our insurance may not cover claims of these
types or may be inadequate to indemnify us for all liability that may be imposed
on us.
IF WE DISTRIBUTE CONTENT TO UNAUTHORIZED RECIPIENTS, WE MAY HAVE TO PAY DAMAGES
TO OUR CONTENT PROVIDERS.
Our proprietary software technologies enable us to deliver content we
receive from participating content providers only to customers who have been
authorized to access that content. We might inadvertently distribute content to
a customer who is not authorized to receive it, which could subject us to a
claim for damages from the information provider or harm our reputation in the
marketplace.
IF WE ARE UNABLE TO MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION, WE
MAY HAVE DIFFICULTY ATTRACTING NEW BUSINESS AND RETAINING CURRENT CUSTOMERS AND
EMPLOYEES, AND OUR BUSINESS MAY SUFFER.
We believe that establishing and maintaining a good reputation and name
recognition are critical for attracting and retaining customers and employees.
We also believe that the importance of reputation and name recognition is
increasing and will continue to increase due to the growing number of providers
of Internet services. If our reputation is damaged or if potential customers are
not familiar with us or the services we provide, we may be unable to attract
new, or retain existing, customers and employees. Promotion and enhancement of
our name will depend largely on our success in continuing to provide effective
services. If
7
<PAGE> 15
customers do not perceive our services to be effective or of high quality, our
brand name and reputation will suffer.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED AND EFFORTS TO PROTECT OUR
INTELLECTUAL PROPERTY MAY BE INADEQUATE, TIME-CONSUMING AND EXPENSIVE.
We regard our trademarks, service marks, copyrights, trade secrets and
similar intellectual property as critical to our success. The unauthorized
reproduction or other misappropriation of our trademarks or other intellectual
property could diminish the value of our proprietary rights or reputation. If
this were to occur, our business could be materially and adversely affected.
We rely upon a combination of trademark and copyright law, patent law,
trade secret protection and confidentiality and license agreements with our
employees, customers and others to protect our proprietary rights. We have
received and have filed a number of trademarks and service marks, and have filed
several patent applications with the United States Patent and Trademark Office.
However, registrations and patents may only be granted in selected cases, and
there can be no assurance that we will be able to secure these or additional
registrations or patents. Furthermore, policing and enforcement against the
unauthorized use of our intellectual property rights could entail significant
expenses and could prove difficult or impossible.
THIRD PARTIES MAY CLAIM THAT WE HAVE BREACHED THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD DIVERT MANAGEMENT'S ATTENTION AND RESULT IN EXPENSE TO
DEFEND OR SETTLE CLAIMS.
Third parties may bring claims of copyright or trademark infringement,
patent violation or misappropriation of creative ideas or formats against us
with respect to content that we distribute or our technology or marketing
techniques and terminology. These claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management attention,
require us to enter into costly royalty or licensing arrangements or limit our
ability to distribute content or prevent us from utilizing important
technologies, ideas or formats.
WE COULD FACE ADDITIONAL RISKS AND CHALLENGES AS WE EXPAND INTERNATIONALLY AND
MAY FACE UNEXPECTED COSTS IN DEVELOPING INTERNATIONAL REVENUES.
We have recently begun to invest financial and managerial resources to
expand our operations in international markets. We recently opened offices in
London and in Miami in order to service the European and Latin American markets,
respectively. If our revenues from international operations, and particularly
from our operations in Europe and Latin America, do not exceed the expense of
establishing and maintaining these operations, our business, financial condition
and operating results will suffer. We have only limited experience in
international operations, and we may not be able to capitalize on our investment
in these markets.
POTENTIAL ACQUISITIONS AND STRATEGIC INVESTMENTS MAY RESULT IN INCREASED
EXPENSES, DIFFICULTIES IN INTEGRATING TARGET COMPANIES AND DIVERSION OF
MANAGEMENT'S ATTENTION.
Although we are not currently in discussions with any party, we anticipate
undertaking one or more acquisitions or strategic investments in the near future
to expand our range of technology and products and to gain access to new
markets. Growth through acquisitions entails many risks, including the
following:
- our management's attention may be diverted during the acquisition and
integration process;
- we may face costs, delays and difficulties of integrating the acquired
company's operations, technologies and personnel into our existing
operations, organization and culture;
- the adverse impact on earnings of amortizing the acquired company's
intangible assets may be significant, particularly in light of the high
valuations of many Internet and other information technology services
companies;
- we may issue new equity securities to pay for acquisitions, which would
dilute the holdings of existing stockholders;
- the timing of the acquisition or our failure to meet operating
expectations for acquired businesses may impact adversely on our
financial condition; and
8
<PAGE> 16
- we may be adversely affected by expenses of any undisclosed or potential
legal liabilities of the acquired company, including intellectual
property, employment and warranty and product liability-related problems.
If realized, any of these risks could have a material adverse effect on our
business, financial condition and operating results.
RISKS OF DOING BUSINESS OVER THE INTERNET
IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR COMMERCE, WE WILL NOT
SUCCEED.
Because most of our present and anticipated customers are operators of
commercial Web sites, demand for our services will depend in large part on
continued growth in use of the Internet. There are critical issues concerning
the commercial use of the Internet that remain unresolved. If the Internet
develops more slowly than we expect as a commercial or business medium, demand
for our services will be lower than we expect.
LEGAL UNCERTAINTIES AND GOVERNMENT REGULATION OF THE INTERNET COULD INHIBIT
GROWTH OF THE INTERNET AND E-COMMERCE.
Many legal questions relating to the Internet remain unclear and these
areas of uncertainty may be resolved in ways that damage our business. It may
take years to determine whether and how existing laws governing matters such as
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, new laws and regulations that apply directly to Internet
communications, commerce and advertising are becoming more prevalent. For
example, the U.S. Congress has recently passed Internet-related legislation
concerning copyrights, taxation, and the online privacy of children. As the use
of the Internet and the prevalence of e-commerce grow, there may be calls for
further regulation, such as more stringent consumer protection laws. Finally,
our distribution arrangements and customer contracts could subject us to the
laws of foreign jurisdictions in unpredictable ways.
These possibilities could affect us adversely in a number of ways. New
regulation could make the Internet less attractive to users, resulting in slower
growth in its use and acceptance than we expect. Complying with new regulations
could result in additional cost to us, which could reduce our margins, or it
could leave us at risk of potentially costly legal action. We may be affected
indirectly by legislation that fundamentally alters the practicality or
cost-effectiveness of utilizing the Internet, including the cost of transmitting
over various forms of network architecture, such as telephone networks or cable
systems, or the imposition of various forms of taxation on Internet-related
activities. Regulators continue to evaluate the best telecommunications policy
regarding the transmission of Internet traffic.
RISKS RELATING TO THIS OFFERING
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION IN THE BOOK VALUE PER
SHARE.
The initial public offering price of our common stock is substantially
higher than the net tangible book value per share of our outstanding common
stock will be immediately after this offering. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares outstanding. If you purchase our common stock in this
offering, you will incur immediate dilution of approximately $8.93 in the net
tangible book value per share of common stock from the price you pay for our
common stock in this offering, based on an assumed initial public offering price
of $12.00 per share.
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.
The initial public offering price of our common stock will be determined by
negotiations between representatives of the underwriters and us and may not be
representative of the trading price of our common stock after this offering,
which is likely to fluctuate considerably. The stock market in general, and in
particular the market for Internet-related stocks, has recently experienced
extreme price fluctuations. At times, Internet-related stocks have traded at
prices and multiples that are substantially above the historical levels of the
stock market in general. Since estimates of the value of Internet-related
companies have little historical basis and often vary widely, fluctuations in
our stock price may not be correlated in a predictable way to our performance or
operating results. Our stock price may also fluctuate as a result of factors
that are beyond our
9
<PAGE> 17
control or unrelated to our operating results. We expect our stock price to
fluctuate as a result of factors such as:
- variations in our actual or anticipated quarterly operating results or
those of our competitors;
- announcements by us or our competitors of technological innovations;
- introduction of new products or services by us or our competitors;
- conditions or trends in the Internet industry;
- changes in the market valuations of other Internet companies;
- announcements by us or our competitors of significant acquisitions; and
- our entry into strategic partnerships or joint ventures.
THE NET PROCEEDS FROM THIS OFFERING MAY BE ALLOCATED IN WAYS WITH WHICH YOU MAY
NOT AGREE.
Our business plan is subject to change based upon changing conditions and
opportunities and our management has significant flexibility in applying the net
proceeds we receive from this offering. Because the net proceeds are not
required to be allocated to any specific investment or transaction, you cannot
determine at this time the value or propriety of our application of the proceeds
and you and other stockholders may not agree with our decisions. See "Use of
Proceeds" for a more detailed description of how management intends to apply the
proceeds of this offering.
AN AGGREGATE OF APPROXIMATELY 23.5 MILLION SHARES WILL BECOME ELIGIBLE FOR
RESALE IN THE PUBLIC MARKET 180 DAYS AFTER THIS OFFERING, AND FUTURE SALES OF
THIS STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that these sales could occur,
could adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through offerings of our common
stock. An aggregate of 37,425,117 shares of common stock will be outstanding
after this offering. Of these, the 5,000,000 shares offered by this prospectus
will be freely tradable without restriction or further registration.
In connection with this offering, we and our officers, directors and
substantially all of our existing stockholders and warrant holders have agreed
not to sell or transfer any shares of our common stock for 180 days after
completion of this offering without the underwriters' consent. After that
period, 23,378,429 shares of common stock will become available for sale by
their holders pursuant to an exemption from the registration requirements of the
Securities Act. While the underwriters may release these shares from the
restrictions at any time, this will be done, if at all, only on a case-by-case
basis. The underwriters do not currently have any intention of consenting to a
waiver of these restrictions. We cannot predict what effect, if any, market
sales of shares held by any stockholder or the availability of these shares for
future sale will have on the market price of our common stock. See "Shares
Eligible for Future Sale" for a more detailed description of the restrictions on
selling shares of our common stock after this offering.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
WE WILL CONTINUE TO BE EFFECTIVELY CONTROLLED BY OUR EXECUTIVE OFFICERS AND
DIRECTORS AFTER THIS OFFERING, AND THE INTERESTS OF THESE STOCKHOLDERS COULD
CONFLICT WITH YOUR INTERESTS.
Immediately upon completion of this offering, our executive officers and
directors, in the aggregate, will beneficially own approximately 50.3% of our
outstanding common stock on a fully-diluted basis. As a result, these
stockholders, if acting together, would be able to exert considerable influence
on any matters requiring approval by our stockholders, including the election of
directors, amendments to our charter and by-laws and the approval of mergers or
other business combination transactions. The ownership position of these
10
<PAGE> 18
stockholders could delay, deter or prevent a change in control of ScreamingMedia
and could adversely affect the price that investors might be willing to pay in
the future for shares of our common stock.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could have the effect of delaying, deferring, or
preventing a change in control of ScreamingMedia that stockholders may consider
favorable or beneficial. These provisions could discourage proxy contests and
make it more difficult for you and other stockholders to elect directors and
take other corporate actions. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:
- a staggered board of directors, so that it would take three successive
annual meetings to replace all directors;
- prohibition of stockholder action by written consent; and
- advance notice requirements for the submission by stockholders of
nominations for election to the board of directors and for proposing
matters that can be acted upon by stockholders at a meeting.
In addition, we have entered into a stockholder rights agreement that makes it
more difficult for a third party to acquire us without the support of our board
of directors and principal stockholders.
11
<PAGE> 19
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things:
<TABLE>
<S> <C>
- development of services;
- expansion strategy;
- use of proceeds;
- projected capital expenditures;
- liquidity;
- development and expansion of marketing
relationships;
- market acceptance of Internet
commerce; and
- technological advancement and ability
to develop "brand" awareness.
</TABLE>
These statements may be found in the sections of this prospectus entitled
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and in this prospectus generally. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including all the risks discussed in "Risk Factors"
and elsewhere in this prospectus.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and are subject to risks and uncertainties.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the
5,000,000 shares of common stock in this offering of $53.3 million, assuming an
initial public offering price of $12.00 per share, the mid-point of the filing
range, and after deducting estimated underwriting discounts and commissions and
estimated offering expenses. If the underwriters exercise their over-allotment
option in full, we estimate that our net proceeds will be $61.7 million. The
principal purposes of this offering are to obtain additional capital, to create
a public market for our common stock and to facilitate future access to public
equity markets.
We expect to use approximately $20 million of the net proceeds of this
offering on domestic sales and marketing activities, approximately $9 million to
expand our international operations, approximately $12 million for product
development and the balance for general corporate purposes, including working
capital.
The preceding allocations are only estimates and the amounts that we
actually spend on these activities will depend on several factors, including our
available cash, the success of our marketing and promotional activities and the
availability of new business opportunities. In addition, we may use a portion of
the net proceeds to fund acquisitions. However, we currently have no commitments
and are not involved in any negotiations with respect to any particular
transaction. Pending application of the proceeds as described above, we intend
to invest the net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain any future earnings for the development
and operation of our business. Accordingly, we do not anticipate declaring or
paying any cash dividends in the foreseeable future.
12
<PAGE> 20
CAPITALIZATION
The following table shows our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to give effect to (1) our receipt of net proceeds of
approximately $46.2 million from the sale of 8,254,227 shares of Series C
convertible preferred stock on July 17, 2000, (2) the automatic
conversion of all of our outstanding preferred stock, including the
Series C preferred stock, into a total of 19,602,801 shares of common
stock upon the completion of this offering and (3) a $50.2 million deemed
dividend comprising (a) $4.0 million representing the issuance costs of
the Series B and Series C preferred stock that remain unaccreted as of
the conversion date and (b) $46.2 million representing the unamortized
portion of the amount by which the value of the common stock issued on
conversion of the Series C preferred stock exceeds the proceeds we
received on its issuance; and
- on a pro forma as adjusted basis to reflect the issue and sale of
5,000,000 shares of common stock by us in this offering at an assumed
initial public offering price of $12.00 per share less underwriting
discounts and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 9,691 $ 55,874 $109,174
======== ======== ========
Capital lease obligations, less current portion........... $ 3,578 $ 3,578 $ 3,578
-------- -------- --------
Redeemable convertible preferred stock:
Series B, $0.01 par value; 2,678,572 shares authorized,
issued and outstanding actual; no shares authorized,
issued and outstanding pro forma and pro forma as
adjusted............................................. 27,742 -- --
Series C, $0.01 par value; no shares authorized, issued
and outstanding actual; no shares authorized, issued
and outstanding pro forma and pro forma as
adjusted............................................. -- -- --
-------- -------- --------
Stockholders' equity (deficiency):
Series A Convertible Preferred Stock, $0.01 par value;
1,527,085 shares authorized, issued and outstanding
actual; no shares authorized, issued and outstanding
pro forma and pro forma as adjusted.................. 15 -- --
Common Stock, $0.01 par value; 100,000,000 shares
authorized, 14,454,879 shares issued and 12,822,332
shares outstanding actual; 100,000,000 shares
authorized, 34,057,664 shares issued and 32,425,117
shares outstanding pro forma; 100,000,000 shares
authorized, 39,057,664 shares issued and 37,425,117
shares outstanding pro forma as adjusted............. 144 340 390
Additional paid-in capital.............................. 42,158 166,117 219,367
Warrants................................................ 787 787 787
Deferred compensation................................... (18,364) (18,364) (18,364)
Treasury stock.......................................... (1,019) (1,019) (1,019)
Accumulated deficit..................................... (35,779) (85,997) (85,997)
-------- -------- --------
Total stockholders' equity (deficiency)............ (12,058) 61,864 115,164
-------- -------- --------
Total capitalization............................ $ 19,262 $ 65,442 $118,742
======== ======== ========
</TABLE>
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<PAGE> 21
The outstanding share information is based on our shares outstanding as of
June 30, 2000. This information excludes:
- 5,585,149 shares of common stock issuable on the exercise of stock
options outstanding as of July 17, 2000 issued under our 1999 stock
option plan at a weighted average exercise price of $2.43;
- 528,714 shares of common stock issuable on the exercise of stock options
issued on July 10, 2000 with an exercise price equal to the initial
public offering price of our common stock;
- 452,200 shares of common stock issuable on the exercise of warrants
outstanding as of July 17, 2000 at a weighted average exercise price of
$5.50; and
- 3,174,603 shares of common stock available for issuance under our 2000
equity incentive plan.
14
<PAGE> 22
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of our common
stock after this offering. Our pro forma net tangible book value as of June 30,
2000 was $61.5 million, or $1.90 per share. Pro forma net tangible book value
per share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving pro
forma effect to (1) our receipt of net proceeds of approximately $46.2 million
from the sale of 8,254,227 shares of Series C convertible preferred stock on
July 17, 2000 and (2) the automatic conversion of all of our outstanding
preferred stock into a total of 19,602,801 shares of common stock upon the
completion of this offering. Dilution in pro forma net tangible book value per
share represents the difference between the amount per share paid by new
investors purchasing shares in this offering and the pro forma net tangible book
value per share immediately after this offering. After giving effect to the sale
by us of 5,000,000 shares of common stock in this offering at an assumed initial
public offering price of $12.00 per share, less estimated underwriting discounts
and commissions and offering expenses payable by us, our pro forma net tangible
book value as of June 30, 2000 would have been $114.8 million, or $3.07 per
share. This represents an immediate increase in pro forma net tangible book
value of $1.17 per share to our existing stockholders and an immediate dilution
in pro forma net tangible book value of $8.93 per share to new investors
purchasing shares in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $1.90
Increase in the pro forma net tangible book value per
share attributable to this offering.................... 1.17
Pro forma as adjusted net tangible book value per share
after this offering....................................... 3.07
------
Dilution per share to new investors......................... $ 8.93
======
</TABLE>
The following table illustrates this dilution on a per share basis assuming
the underwriters exercise their overallotment option in full:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $1.90
Increase in the pro forma net tangible book value per
share attributable to this offering.................... 1.33
Pro forma as adjusted net tangible book value per share
after this offering....................................... 3.23
------
Dilution per share to new investors......................... $ 8.77
======
</TABLE>
The following table summarizes, on a pro forma basis, as of July 17, 2000,
the number of shares of stock purchased from us, the total consideration paid to
us and the average price per share paid by existing stockholders and by new
investors purchasing shares in this offering. The calculation below is based
upon an assumed initial public offering price of $12.00 per share, before
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 32,425,117 86.6% $ 82,578,832 57.9% $ 2.55
New investors in this offering..... 5,000,000 13.4 60,000,000 42.1 12.00
---------- ----- ------------ -----
Total............................ 37,425,117 100.0% $142,578,832 100.0%
========== ===== ============ =====
</TABLE>
15
<PAGE> 23
The following table summarizes the same information as of July 17, 2000,
assuming the underwriters exercise their overallotment option in full:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 32,425,117 84.9% $ 82,578,832 54.5% $ 2.55
New investors in this offering..... 5,750,000 15.1 69,000,000 45.5 12.00
---------- ----- ------------ -----
Total............................ 38,175,117 100.0% $151,578,832 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants to purchase common stock outstanding. As of July 17, 2000, there
were:
- 5,585,149 shares of common stock issuable upon the exercise of stock
options outstanding at a weighted average exercise price of $2.43 per
share;
- 528,714 shares of common stock issuable on the exercise of options issued
July 10, 2000 with an exercise price equal to the initial public offering
price of our common stock; and
- 452,200 shares of common stock issuable upon the exercise of warrants
outstanding at a weighted average exercise price of $5.50 per share.
To the extent these options or warrants are exercised, there may be further
dilution to the new investors.
16
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data should be read in connection with,
and are qualified by reference to, the financial statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The statements of operations
data for the years ended December 31, 1998 and 1999, and the balance sheet data
at December 31, 1998 and 1999 are derived from our financial statements, which
have been audited by Deloitte & Touche LLP, independent auditors. The statement
of operations data for the year ended December 31, 1997, and the balance sheet
data as of December 31, 1997 are derived from our financial statements, which
have been audited by David Tarlow & Co., C.P.A., P.C., independent auditors. The
financial statements for each of the two years in the period ended December 31,
1996 and for the six months ended June 30, 1999 and 2000 have been derived from
our unaudited financial statements. These unaudited financial statements have
been prepared on substantially the same bases as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary of a fair presentation of the financial
position and results of operations for these periods. The results of operations
for the six months ended June 30, 2000 are not necessarily indicative of results
to be expected for any future period.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Services.................................................. $ -- $ -- $ 246 $ 309 $ 2,480 $ 558 $ 6,260
Set-up fee................................................ -- -- 41 68 492 95 1,079
Other..................................................... 525 782 287 190 13 8 85
------ ------ ------ ------ -------- -------- --------
Total revenue........................................... 525 782 574 567 2,985 661 7,424
------ ------ ------ ------ -------- -------- --------
Operating expenses:
Cost of services (excluding depreciation of $119 in 1999
and $2 and $249 in the six months ended June 30, 1999
and 2000, respectively, shown below).................... 115 242 70 130 974 156 2,310
Research and development (excluding stock-based
compensation of $64 in 1999 and $0 and $1,150 in the six
months ended June 30, 1999 and 2000, respectively, shown
below).................................................. -- 3 107 97 894 318 1,954
Sales and marketing (excluding stock-based compensation of
$1,821 in 1999 and $0 and $2,536 in the six months ended
June 30, 1999 and 2000, respectively, shown below)...... 35 129 87 105 3,768 520 7,225
General and administrative (excluding stock-based
compensation of $25, $350 and $4,177 in 1997, 1998 and
1999, respectively, and $134 and $6,165 in the six
months ended June 30, 1999 and 2000, respectively, shown
below).................................................. 235 360 347 455 4,330 820 6,721
Depreciation and amortization............................. 34 38 33 26 451 47 1,281
Stock-based compensation.................................. -- -- 25 350 6,062 134 9,851
------ ------ ------ ------ -------- -------- --------
Total operating expenses................................ 419 772 669 1,163 16,479 1,995 29,342
------ ------ ------ ------ -------- -------- --------
Operating income (loss)..................................... 106 10 (95) (596) (13,494) (1,334) (21,918)
------ ------ ------ ------ -------- -------- --------
Other income (expense), net................................. -- -- -- (14) 328 31 362
------ ------ ------ ------ -------- -------- --------
Net income (loss)........................................... $ 106 $ 10 $ (95) $ (610) $(13,166) $ (1,303) (21,556)
====== ====== ====== ====== ======== ======== ========
Basic net income (loss) per share attributable to common
stockholders.............................................. $ 0.07 $ 0.01 $(0.06) $(0.35) $ (1.07) $ (0.11) $ (1.61)
====== ====== ====== ====== ======== ======== ========
Weighted average number of shares of common stock
outstanding............................................... 1,484 1,484 1,585 1,731 12,298 12,120 13,425
====== ====== ====== ====== ======== ======== ========
Pro forma basic net loss per share.......................... $ (0.77) $ (0.87)
======== ========
Pro forma weighted average number of shares of common stock
outstanding............................................... 17,038 24,774
======== ========
</TABLE>
Pro forma basic net loss per share has been calculated assuming the
conversion of all previously outstanding preferred stock into common stock, as
if the shares had converted immediately upon their issuance. See note 2 to the
financial statements for an explanation of the determination of the number of
shares used in computing basic net loss per share.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 30 $ 13 $ -- $ 120 $22,122 $ 9,691
Working capital............................................. 122 102 41 24 21,930 3,500
Total assets................................................ 220 240 166 274 32,370 29,972
Capital lease obligations, less current portion............. -- -- -- -- 647 3,578
Redeemable convertible preferred stock...................... -- -- -- -- 27,434 27,742
Total stockholders' equity (deficiency)..................... 54 143 64 (190) (549) (12,058)
</TABLE>
17
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of a variety of factors as discussed in "Risk Factors."
OVERVIEW
ScreamingMedia is a leading aggregator and distributor of custom-filtered
digital content over the Internet. We aggregate digital content from a wide
range of content providers and filter, deliver and efficiently integrate this
content into our customers' Web sites almost instantaneously.
We were incorporated in August 1993 as The Interactive Connection, Inc.
Until 1997, our primary business focus was Web site design, development and
consulting. By the end of 1997 we had designed, developed and tested our
proprietary software. In late 1998 we shifted our business focus entirely to the
business of aggregating and distributing digital content over the Internet.
Revenue
Our revenue is composed of services revenue, set-up fees and other revenue.
We derive our services revenue primarily from distributing content directly to
our customers' Web sites. Our contracts typically have an initial term of one
year. We charge our customers a minimum monthly fee based on a contractually
specified volume of content. We charge our customers additional monthly fees for
content delivered in excess of the contracted volume of content. We recognize
revenue for the contracted minimum monthly fee in equal amounts each month over
the life of the contract. We recognize revenue from content used in excess of
the contracted volume as the services are delivered. We report our revenue net
of allowances and rebates.
We generally charge our customers a one time set-up fee. Set-up fees are
charged for building custom filters and enabling the customer to receive
customized content. The amount of the set-up fee varies according to the number
of custom filters created and other factors. We recognize set-up fee revenue in
equal amounts over the initial term of the contract, commencing with the service
start date specified in the contract.
In 1999, our other revenue consisted of an immaterial amount of revenue
from server hosting and maintenance. Prior to 1999, our other revenue also
included revenue from Web hosting and Web design and consulting. We do not
expect to actively pursue these lines of business in the future.
Cost of Services
Cost of services consists of the content royalty fees we pay to content
providers for the usage of their content by our customers and the server hosting
and connectivity costs associated with the aggregation and distribution of that
content. Monthly royalty fees are calculated based on the volume of a provider's
content used by our customers. Under our existing contracts with content
providers, we only pay royalties on content that is used by our customers.
Research and Development Expenses
Our research and development expenses consist primarily of personnel costs
and outside consulting services for research, design and development of the
internal use software applications supporting our business. Research and
development costs are expensed as incurred.
Sales and Marketing Expenses
Our sales and marketing expenses consist mainly of advertising costs,
personnel costs and sales commissions, as well as related trade show,
promotional and public relations expenses. Our success in increasing revenues
depends on our ability to increase our customer base as well as our range of
content providers. Accordingly, we intend to pursue sales and marketing
campaigns aggressively after this offering.
18
<PAGE> 26
General and Administrative Expenses
General and administrative expenses consist primarily of management and
administrative personnel costs, fees for professional services and facilities
costs.
Stock-Based Compensation
We recorded a charge for the amortization of deferred stock-based
compensation of approximately $6.1 million in 1999 and approximately $9.9
million in the six months ended June 30, 2000. Stock-based compensation is a
result of the issuance of stock options to employees, directors and affiliated
parties with exercise prices per share subsequently determined for financial
reporting purposes to be below the fair market value per share of our common
stock at the date of the applicable grant. This difference is recorded as a
reduction of stockholders' equity and amortized as non-cash compensation expense
on an accelerated basis over the vesting period of the related options. In
connection with the grant of stock options to employees, we recorded deferred
stock compensation of $16.4 million in 1999 and $17.8 million during the six
months ended June 30, 2000. Deferred stock-based compensation that will be
subsequently amortized as expense for each of the next five fiscal years,
including options granted through June 30, 2000, is estimated to be as follows:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ --------------
(IN THOUSANDS)
<S> <C>
Year ending December 31, 2000............................... $17,977
Year ending December 31, 2001............................... 7,405
Year ending December 31, 2002............................... 2,393
Year ending December 31, 2003............................... 328
Year ending December 31, 2004............................... 11
-------
Total....................................................... $28,114
=======
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
revenue for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ----------------
1997 1998 1999 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Services....................................... 43% 54% 83% 84% 84%
Set-up fee..................................... 7 12 17 14 15
Other.......................................... 50 34 -- 2 1
---- ----- ----- ----- -----
Total revenue............................... 100% 100% 100% 100% 100%
==== ===== ===== ===== =====
Operating expenses:
Cost of services (excluding depreciation of 4%
in 1999 and 0% and 3% in the six months
ended June 30, 1999 and 2000, respectively,
shown below)................................ 12% 23% 33% 24% 31%
Research and development (excluding stock-based
compensation of 2% in 1999 and 0% and 15% in
the six months ended June 30, 1999 and 2000,
respectively, shown below).................. 19 17 30 48 26
Sales and marketing (excluding stock-based
compensation of 61% in 1999 and 0% and 34%
in the six months ended June 30, 1999 and
2000, respectively, shown below)............ 15 18 126 79 97
</TABLE>
19
<PAGE> 27
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ----------------
1997 1998 1999 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
General and administrative (excluding
stock-based compensation of 4%, 62% and 140%
in 1997, 1998 and 1999, respectively, and
20% and 83% in the six months ended June 30,
1999 and 2000, respectively, shown below)... 60 80 145 123 91
Depreciation and amortization.................. 6 5 15 7 17
Stock-based compensation....................... 4 62 203 20 133
---- ----- ----- ----- -----
Total operating expenses.................... 116 205 552 301 395
---- ----- ----- ----- -----
Operating income (loss).......................... (16) (105) (452) (201) (295)
Other income (expense), net...................... -- (2) 11 5 5
---- ----- ----- ----- -----
Net income (loss)........................... (16)% (107)% (441)% (196)% (290)%
==== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenue. Total revenue increased to $7.4 million for the six months ended
June 30, 2000 from $661,000 for the six months ended June 30, 1999. This was due
to an increase in our customer base to over 1,000 at June 30, 2000 from 104 at
June 30, 1999. For the six months ended June 30, 2000, no customer accounted for
more than 10% of our total revenues.
Cost of Services. Cost of services increased to $2.3 million for the six
months ended June 30, 2000 from $156,000 for the six months ended June 30, 1999.
As a percentage of revenue, cost of services increased from 24% to 31%, due to
higher royalty fee arrangements with some of our content providers.
Research and Development. Research and development expenses increased to
$2.0 million for the six months ended June 30, 2000 from $318,000 for the six
months ended June 30, 1999. Approximately $982,000 of this increase was due to
costs associated with increasing our research and development personnel to 46 at
June 30, 2000 from 10 at June 30, 1999. Approximately $679,000 of the increase
was due to expenditures related to the refinement of our core products and the
development of our internal database systems.
Sales and Marketing. Sales and marketing expenses increased to $7.2
million for the six months ended June 30, 2000 from $520,000 for the six months
ended June 30, 1999. Approximately $2.0 million of the increase was the result
of the increase in staff employed in our sales and customer service departments
to 117 at June 30, 2000 from 22 at June 30, 1999. Approximately $836,000 of the
increase was due to the formation of our global content acquisition group, which
consisted of 22 employees as at June 30, 2000. Approximately $2.6 million of the
increase was due to increased expenditures related to traditional marketing and
brand-building activities.
General and Administrative. General and administrative expenses increased
to $6.7 million for the six months ended June 30, 2000 from $820,000 for the six
months ended June 30, 1999. Approximately $1.6 million of the increase was a
result of increasing our general and administrative staff to 51 at June 30, 2000
from 8 at June 30, 1999. A further $712,000 of the increase was due to the
increased cost of rent, utilities and telecommunications to support our growth.
Approximately $754,000 of the increase was due to increased use of professional
services such as legal and recruitment services and approximately $1.0 million
was due to an allowance for doubtful accounts.
Stock-Based Compensation. In connection with the grant of stock options to
employees during the six months ended June 30, 2000, we recorded deferred stock
compensation of $17.8 million. We amortized approximately $6.6 million of this
deferred stock compensation during the six months ended June 30, 2000. In
addition, we amortized approximately $3.3 million of deferred stock compensation
during the six
20
<PAGE> 28
months ended June 30, 2000 relating to options granted during 1999. In the six
months ended June 30, 1999, we recorded and amortized $134,000 in stock-based
compensation.
YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenue. Total revenue increased to $3.0 million for the year ended
December 31, 1999, from $567,000 in the previous year. This increase was mostly
due to an increase in our customers to 453 at December 31, 1999 from 30 at
December 31, 1998. Also contributing to this increase was a 28% increase in the
average monthly services revenue per customer as a result of higher average
usage of content. In 1999, About.com accounted for approximately 12% of revenue.
We do not anticipate that any one customer will account for more than 10% of
revenue in the year ending December 31, 2000.
Cost of Services. Cost of services increased to $974,000 for the year
ended December 31, 1999, from $130,000 in the year ended December 31, 1998. As a
percentage of revenue, cost of services increased to approximately 33% for the
year ended December 31, 1999 from approximately 23% for the year ended December
31, 1998. The dollar increase was primarily due to increases in services revenue
resulting in content royalty fees paid to content providers growing by
approximately $757,000. The percentage increase was primarily a function of
higher royalty fee arrangements with some of our content providers. We
anticipate that the cost of services will continue to grow in absolute dollars
as we expand our business.
Research and Development. Research and development expenses increased to
$894,000 for the year ended December 31, 1999, from $97,000 for the year ended
December 31, 1998. As a percentage of revenue, research and development expenses
increased to approximately 30% for the year ended December 31, 1999 from
approximately 17% for the year ended December 31, 1998. This increase was due to
direct personnel and consulting costs incurred in further development of our
content filtering, aggregation and distribution software and the development of
new products. During this period, we increased the number of our research and
development staff to 13 from two. We believe that significant investments in
research and development expenses will be required to enhance and expand our
products and services. Accordingly, we expect that our research and development
expenses will continue to increase in absolute dollars for the forseeable
future.
Sales and Marketing. Sales and marketing expenses increased to $3.8
million for the year ended December 31, 1999, from $105,000 for the year ended
December 31, 1998. As a percentage of revenue, sales and marketing expenses
increased to approximately 126% for the year ended December 31, 1999 from
approximately 18% for the year ended December 31, 1998. The increase in sales
and marketing expense was due to a $2.5 million increase in compensation expense
associated with the growth of our sales, content acquisition, customer support
and marketing departments. The remainder of the increase was attributable to the
launch of a marketing campaign in the third quarter of 1999 that totaled
approximately $1.0 million. We intend to expand our sales and marketing
activities and staff substantially, both domestically and internationally, in
order to increase market awareness and to promote and sell our services.
Accordingly, we expect our sales and marketing expenses to continue to increase
in absolute dollars.
General and Administrative. General and administrative expenses increased
to $4.3 million for the year ended December 31, 1999, from $455,000 for the year
ended December 31, 1998. As a percentage of revenue, general and administrative
expenses increased to approximately 145% for the year ended December 31, 1999
from approximately 80% for the year ended December 31, 1998. This increase
resulted from an increase in personnel costs of approximately $1.3 million
associated with a significant increase in the number of administrative
personnel, as well as increased facilities expenses and accounting, legal and
consulting fees which in aggregate totaled approximately $1.5 million. The
remainder of the increase was mostly attributable to employee and office related
costs of approximately $700,000.
Stock-Based Compensation. In connection with the grant of stock options to
employees during 1999, we recorded deferred stock compensation of $16.4 million.
We amortized $6.1 million of this deferred stock compensation in 1999. In 1998,
we incurred a charge of $350,000 for stock-based compensation.
21
<PAGE> 29
YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenue. Total revenue decreased to $567,000 for the year ended December
31, 1998, from $574,000 for the year ended December 31, 1997. In 1998, we
completed our transition from a Web design, hosting and consulting enterprise to
our present content delivery business. As a result, we did not actively seek to
renew Web design, hosting and consulting agreements when they expired.
Cost of Services. Cost of services increased to $130,000 for the year
ended December 31, 1998, from $70,000 for the year ended December 31, 1997. As a
percentage of revenue, cost of services increased to approximately 23% for the
year ended December 31, 1998 from approximately 12% for the year ended December
31, 1997. The increase was due to royalty fees that we began paying to content
providers as our content aggregation and distribution business became
operational and to the content delivery costs associated with this business.
Research and Development. Research and development expenses decreased to
$97,000 for the year ended December 31, 1998, from $107,000 for the year ended
December 31, 1997. Our research and development expenses remained essentially
flat as we redirected our internal resources from the business of Web site
design and development to the development of our business of aggregating and
distributing digital content.
Sales and Marketing. Sales and marketing expenses increased to $105,000
for the year ended December 31, 1998, from $87,000 for the year ended December
31, 1997. Sales and marketing costs remained relatively flat as a percentage of
revenue.
General and Administrative. General and administrative expenses increased
to $455,000 for the year ended December 31, 1998, from $347,000 for the year
ended December 31, 1997. As a percentage of revenue, general and administrative
expenses increased to approximately 80% for the year ended December 31, 1998
from approximately 60% for the year ended December 31, 1997. This increase was
due to increases in overhead costs associated with legal and accounting
services, additional facilities expenses and general office expenses.
22
<PAGE> 30
QUARTERLY OPERATING RESULTS
The following table sets forth our unaudited quarterly operating results
for the year ended December 31, 1999 and the three months ended March 31 and
June 30, 2000. This information has been derived from our unaudited interim
financial statements. In our opinion, this unaudited information has been
prepared on a basis consistent with our audited financial statements contained
elsewhere in this prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented. Historical results for any quarter are
not necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Services..................... $ 234 $ 324 $ 681 $ 1,241 $ 2,231 $4,030
Set-up fee................... 25 69 135 263 412 667
Other........................ 8 -- 2 3 76 8
----- ------- ------- ------- -------- --------
Total revenue........ 267 393 818 1,507 2,719 4,705
Operating expenses:
Cost of services (excluding
depreciation of $0, $2,
$31, $86, $123 and $126 in
the first quarter of 1999
through the second quarter
of 2000, respectively, as
shown below).............. 60 96 283 535 929 1,381
Research and development
(excluding stock-based
compensation of $0, $0,
$0, $64, $493 and $657 in
the first quarter of 1999
through the second quarter
of 2000, respectively, as
shown below).............. 137 182 196 379 916 1,039
Sales and marketing (excludes
stock-based compensation
of $0, $12, $700, $1,110,
$1,162 and $1,374 in the
first quarter of 1999
through the second quarter
of 2000, respectively, as
shown below).............. 75 445 1,389 1,859 3,502 3,724
General and administrative
(excludes stock-based
compensation of $0, $122,
$987, $3,067, $2,946 and
$3,219 in the first
quarter of 1999 through
the second quarter of
2000, respectively, as
shown below).............. 270 549 1,036 2,475 3,380 3,341
Depreciation and
amortization.............. 12 35 125 279 549 732
Stock-based compensation..... -- 134 1,687 4,241 4,601 5,249
----- ------- ------- ------- -------- --------
Total operating
expenses........... 554 1,441 4,716 9,768 13,877 15,466
----- ------- ------- ------- -------- --------
</TABLE>
23
<PAGE> 31
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating loss................. (287) (1,048) (3,898) (8,261) (11,158) (10,761)
----- ------- ------- ------- -------- --------
Other income (expenses), net... -- 31 24 273 250 113
----- ------- ------- ------- -------- --------
Net loss............. $(287) $(1,017) $(3,874) $(7,988) $(10,908) $(10,648)
===== ======= ======= ======= ======== ========
</TABLE>
ANALYSIS OF 1999 QUARTERLY RESULTS
Revenue from services and set-up fees increased from $259,000 in the first
quarter to $1.5 million in the fourth quarter due to an increase in our customer
base from 61 to 453. Cost of services increased from $60,000 in the first
quarter to $535,000 in the fourth quarter as we increased the number of
customers receiving content. Research and development expenses increased from
$196,000 in the third quarter to $379,000 in the fourth quarter. This increase
was primarily due to the planning and preliminary development of our back office
systems and the refinement of our core products. Sales and marketing expenses
increased from $75,000 in the first quarter to $1.9 million in the fourth
quarter. The increase was a result of the rapid increase in our direct sales
force, the establishment of our customer service department, the formation of
our global content acquisition group and a marketing campaign in the third
quarter to build our brand name. General and administrative expenses increased
from $270,000 in the first quarter to $2.5 million in the fourth quarter. This
was a result of adding personnel to manage the growth process and infrastructure
to support the growth. Stock-based compensation expense increased due to
issuances of stock options to attract and retain senior management and outside
directors and advisors and to allow equity participation to all employees. The
increase in other income was attributable to overnight investment of excess cash
in low-risk, high-liquidity securities.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of equity and debt securities, which totaled approximately $34.3 million
in aggregate net proceeds through June 30, 2000. As of June 30, 2000, we had
cash and cash equivalents of $9.7 million.
As of June 30, 2000, our principal commitments consisted of obligations
outstanding under a series of capital leases of computer and networking
equipment and our facilities leases. During the year ended December 31, 1999 and
the six months ended June 30, 2000, we entered into capital lease arrangements
for (1) computer, network and telephony equipment with Data General, (2)
computer equipment with Dell Financial Services, (3) network equipment with
Avnet, (4) computer equipment with Jacom Inc. and (5) hardware, software and
professional services to design and implement our new financial systems with
Working Capital Technologies of America. Working Capital Technologies is the
beneficiary of a standby letter of credit with Chase Manhattan Bank securing our
lease arrangement with them. In aggregate, the gross asset value of the
equipment subject to these leases is approximately $6.0 million. At the end of
each lease term, we have the option to purchase the equipment, typically at the
lesser of fair market value or 10% of gross asset value. We presently intend to
exercise the purchase option for the majority of the leases.
We operate from leased premises in New York, San Francisco, Miami and
London. Our current aggregate annual rental obligations under these leases are
approximately $1.5 million for 2000 and $2.1 million for 2001. During the year
ended December 31, 1999 and the six months ended June 30, 2000, our capital
expenditures were $3.4 million and $3.3 million, respectively, consisting
principally of computers, networking equipment and the build-out of our
headquarters.
For the six months ended June 30, 2000 and the years ended December 31,
1999 and 1998, net cash used in operating activities was $7.8 million, $7.8
million and $110,000, respectively. The net cash used in operating activities
for the six months ended June 30, 2000 resulted primarily from net losses of
$21.6 million and an increase in trade accounts receivable of $1.3 million. This
was offset by $11.1 million in non-cash charges, of which stock-based
compensation accounted for $9.9 million, an increase of $3.6 million in accounts
payable and accrued expenses, a $1.4 million increase in deferred revenue and a
$1.0 million increase in prepaid expenses and other current assets. The net cash
used in operating activities in 1999
24
<PAGE> 32
resulted primarily from net losses of $13.2 million, an increase in prepaid
advertising of $2.9 million and an increase in trade accounts receivable of $1.3
million, offset by a $6.1 million non-cash charge for stock-based compensation
and a $3.1 million increase in accounts payable and accrued expenses.
For the six months ended June 30, 2000 and the years ended December 31,
1999 and 1998, net cash used in investing activities was $3.5 million, $3.8
million and $7,000, respectively. The net cash used in investing activities for
the six months ended June 30, 2000 was principally for the purchase of
equipment, leasehold improvements and the initial phase of the rollout of our
new financial system. The net cash used in investing activities in 1999 was
principally for the purchase of equipment and leasehold improvements.
For the six months ended June 30, 2000, net cash used in financing
activities was $1.1 million. Net cash used in financing activities in the six
months ended June 30, 2000 was primarily the result of repayments of our capital
lease obligations of $531,000 and payment for the repurchase of treasury stock
for $1.0 million, offset by proceeds from the exercise of a warrant and stock
options of $405,000. For the years ended December 31, 1999 and 1998, net cash
provided by financing activities amounted to $33.5 million and $237,000,
respectively. Net cash provided by financing activities in 1999 was provided
substantially by net proceeds generated from our offerings of capital stock,
which together totaled $33.5 million. On March 30, 1999 and on April 7 and 9,
1999, we received a total of $5.5 million in gross proceeds from the sale of our
Series A preferred stock in a private offering under Regulation D to accredited
investors. On October 6, 1999, we received approximately $28.0 million in net
proceeds from the sale of our Series B preferred stock in a private offering to
a group of institutional accredited investors and a limited number of individual
investors.
During May 2000, one of our former employees exercised options to acquire
269,841 shares of common stock for $360,000. In June 2000, we repurchased 67,460
shares of our common stock from Tomar Studios Inc. for $1.0 million in
accordance with the terms of a warrant agreement. On July 17, 2000, we received
approximately $46.2 million in net proceeds from the sale of 8,254,227 shares of
our Series C preferred stock in a private offering to a group of institutional
investors.
On July 17, 2000, we recorded a deemed dividend of $46.2 million related to
the issuance of our Series C preferred stock at below its then current fair
value. Additionally, since the Series B and Series C preferred stock will
automatically convert into common stock upon the completion of this offering,
$4.2 million relating to the unaccreted issuance costs of both the Series B and
Series C preferred stock will also be recognized as a deemed dividend upon their
conversion into common stock.
We believe that the net proceeds from this offering, together with the net
proceeds from the Series C preferred stock offering and 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 next eighteen months.
Without the proceeds of this offering, we believe that our cash and cash
equivalents would be sufficient to meet our working capital needs for at least
the next twelve months. In addition, if we undertake significant acquisitions or
make large strategic investments, we may need to raise additional funds within
that time. We may also need to raise additional funds if competitive pressures
force us to make unforseen 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.
MARKET RISK
In 1999, all of our revenues and expenses were denominated in U.S. dollars.
We anticipate that in the future the proportion of operating expenses paid in
foreign currencies will increase and that the number of
25
<PAGE> 33
foreign currencies in which our revenue is denominated will also increase.
Accordingly, we may be subject to exposure from adverse movements in foreign
currency exchange rates in relation to these revenues and expenses. We do not
currently use derivative financial instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the way business enterprises
report information about operating segments, as well as enterprise-wide
disclosures about products and services, geographic areas and major customers.
We operate in one segment. Our customers are located in twenty-six countries
around the world with the majority being in the United States. All of our
transactions have been conducted in United States dollars. As of June 30, 2000,
we did not have any material revenues or assets outside the United States.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. Generally, it requires that an entity recognizes all derivatives as
either an asset or liability and measures those instruments at fair value, as
well as identifies the conditions for which a derivative may be specifically
designated as a hedge. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. We do not currently engage in or plan to engage in any
derivative or hedging activities.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, or SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This statement
requires companies to capitalize qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. We adopted requirements of SOP 98-1 as of
January 1, 1999.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Staff
Accounting Bulletin No. 101 summarizes certain areas of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We believe that our current revenue recognition principles
comply with Staff Accounting Bulletin No. 101.
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BUSINESS
OVERVIEW
We have developed proprietary technologies that enable Web sites to
cost-effectively meet the growing need to provide targeted, high-quality content
to their users. We aggregate digital content from a wide range of content
providers and filter, deliver and efficiently integrate this content into our
customers' Web sites almost instantaneously. Our technologies enable us to
deliver content to customers who use any of the major Web site server and
database technologies, including those used to support wireless access devices.
While we presently deliver text and photograph-based digital content, our
technologies are designed to enable us to add new forms of content, such as
audio and streaming video, which we expect to offer in the future. Participation
in our rapidly growing network of content providers and customers offers Web
sites access to timely and relevant content and offers our content providers an
efficient means of syndicating their content to third parties.
As of June 30, 2000, we had over 1,000 Web site and four wireless customers
and obtained content from over 580 publications, supplied by over 410 content
providers. We refer to this network of customers and content providers as our
"digital content network." We have a growing international presence, with 113 of
our customers and 93 of our content providers based outside the United States,
primarily in Latin America, the United Kingdom and Canada.
Our technology consists of two principal elements of software, the Content
Engine(R) and Siteware(TM). Content from a range of sources is delivered in a
variety of formats to our servers where the Content Engine(R) processes and
filters it, then sends to our customers any items that match their requirements.
Siteware(TM), which resides on our customers' servers, receives the content over
the Internet and integrates it seamlessly into the customer's Web site.
We enter into contracts with our customers, typically for an initial period
of one year, that provide for a recurring monthly services fee for the delivery
of content. Our customers are predominantly operators of vertical Web sites,
spanning a broad range of Internet categories, with representative customers
including AltaVista Shopping.com, The Black World Today, CareerBuzz, Commerce
One, Entertaindom.com, InteliHealth, MSN MoneyCentral, OmniSky, Sun
Microsystems, Inc. and Yupi Internet. Our content providers range from
traditional news services to new media sources and include Astrology.com, AP
Online, Deutsche Presse-Agentur, EFE, Knight-Ridder Tribune, Knoxville
New-Sentinel, The New York Times Syndicate, Red Herring.com and
RollingStone.com.
INDUSTRY BACKGROUND
Rapid Growth of the Internet
The Internet has emerged as a global medium for communications and
commerce. International Data Corporation, or IDC, estimates that the number of
Web users worldwide will increase from approximately 196 million in 1999 to
approximately 502 million by the end of 2003. IDC also estimates that the number
of Web users in the United States alone will increase from approximately 81
million in 1999 to approximately 177 million by the end of 2003.
Proliferation of Vertical Web Sites
As the number of Web sites has grown, another trend that has emerged is the
proliferation of vertical Web sites, or Web sites targeted to specific interest
groups. Vertical sites represent one of the fastest-growing segments of the
Internet and are projected to attract a greater portion of advertising dollars
than portal sites. According to Forrester Research, the share of Internet
advertising revenue generated by vertical and niche Web sites will grow from 35%
in 1999 to 57% in 2004.
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Growing Importance of High-Quality Content
The ability of Web sites to attract users is based in large part on their
ability to provide users with value-added content. We believe that high-quality
content is the primary reason users return to their favorite Web sites. In order
to drive traffic to their sites and maximize stickiness, or the amount of time a
user spends on a Web site, Web sites need to obtain high-quality content to
differentiate themselves and to attract the attention of loyal users on the
increasingly crowded Internet.
Web Sites Face Challenges Obtaining and Managing High-Quality Content
Web sites have traditionally faced two costly and time consuming
alternatives in attempting to obtain and integrate compelling content -- either
to produce the content themselves or to outsource content from multiple
third-party sources. Web sites that choose to create their own content face the
high cost of maintaining an editorial staff as well as limitations on the volume
and breadth of the content they can produce. Web sites that choose to aggregate
third party content themselves must spend the time and effort to establish
relationships with multiple content providers, often at a high cost, in order to
obtain a sufficient array of content. They must then sift through a large volume
of incoming content, in multiple formats, in order to find relevant content for
their site.
THE SCREAMINGMEDIA SOLUTION
We provide Web sites with a single source for high-quality, targeted
content. Our technologies allow our customers to obtain custom-filtered digital
content that is delivered in real time and fully integrated into the look and
feel of their Web sites. Participation in our rapidly growing digital content
network provides the following benefits to our customers and our content
providers.
BENEFITS TO OUR CUSTOMERS
Custom-Filtered, Real-Time Content. We offer Web sites continuously
updated customized content drawn from our broad selection of content providers.
We create one or more custom filters for our Web site customers, producing a
highly targeted content service. Our technologies enable us to process and
deliver relevant content to customers' Web sites within seconds of our receiving
the material from our content providers.
Compelling Cost Proposition. We provide our Web site customers with a
single-source solution for their content needs. Our services are both easy to
implement -- our software is compatible with the software that is used to
support most Web sites -- and easy to use, with very little ongoing effort
required. Customers can opt to maintain full editorial control in selecting the
content they receive from us or they can opt to operate "hands-free," with
content integrated directly into their Web site without any further editorial
effort. By using ScreamingMedia, our customers can avoid the time and expense
associated with maintaining an editorial staff or dealing with multiple content
providers, enabling them to focus their resources on other critical aspects of
their business.
Seamless Integration into a Customer's Web Site. Our services deliver and
integrate content directly into our customers' Web sites in a manner consistent
with the look and feel of the site, enabling our customers to maintain and
enhance their brand identity. The content we supply is fully integrated so that
users remain on our customers' sites, which is an advantage over other services
that require users to transfer to the content provider's site. This enhances
user loyalty, allows Web sites to control the user's online experience and
expands our customers' revenue opportunities.
Flexible Solutions for a Broad Range of Customers. Our services are
scalable and adaptable to meet customers' changing needs. Our services are
equally suitable for customers requiring a high volume of content across many
categories and those requiring a narrow stream of highly targeted content.
Additionally, our services may be used to supplement a Web site's original
content. We can supply local, national and international content in different
languages from a broad range of sources to Web sites worldwide. In addition,
with our new packaged news product, News!Stand, we offer customers a lower-cost,
pre-edited news
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service. We can deliver content in any commonly used format, including current
standard Internet formats such as the format known as HTML and evolving
standards such as the format known as XML. We can also format content for
insertion into a customer's database. Our software is compatible with all major
Web site operating systems.
Enhanced Stickiness and Value. By providing our customers with
continuously updated, targeted and relevant content, we believe that we help
them differentiate their Web sites, build a loyal user base and increase the
time each user spends on the site, as well as the frequency of user visits. This
enhanced traffic and stickiness increases revenue opportunities for our
customers.
BENEFITS TO OUR CONTENT PROVIDERS
We offer our content providers the opportunity to expand the distribution
of their content and extend their reach at little or no cost. Participation in
our digital content network also allows content providers to increase their
brand exposure while generating additional revenue opportunities. For content
providers that already syndicate their content, the benefit lies in accessing
additional distribution outlets without having to negotiate specific
arrangements, which translates into increased distribution and revenue potential
at little or no incremental cost. For other publishers, particularly small or
niche content providers, we offer an attractive opportunity to syndicate their
material and reach audiences that they could not otherwise access.
STRATEGY
Our objective is to establish our technology as the global standard for the
exchange of digital content and related services. The key elements of our
strategy are as follows:
Rapidly Expand Our Digital Content Network. We plan to aggressively expand
the number of customers and content providers that make up our digital content
network. The growth of our digital content network benefits both customers and
content providers. As more Web sites use our services, this helps attract
content providers by offering greater exposure and the opportunity to earn more
revenue. Similarly, as more content providers join the network, the more
valuable our services become to our customers as they gain access to an even
greater array of content. We intend to rapidly grow our customer base through
expanded domestic and international sales and marketing efforts and the
continued expansion and enhancement of our products and services. We believe
that the expansion of our digital content network will create significant
barriers to entry and help our solution become the global standard for digital
content aggregation and distribution.
Maintain and Extend Product and Technology Leadership. We believe that we
are currently the technology leader in aggregating and distributing digital
content to Web sites. We intend to maintain and extend our technology and
product leadership through continued research and development investments. We
plan to continue developing products and services that respond to changing
customer needs and evolving technologies and standards. Our development efforts
are focused on offering new types of content such as photos, audio and video and
adding complementary services such as context-based e-commerce applications. In
addition, we are currently extending our platform to provide our Web site
customers with enhanced wireless content delivery capabilities.
Establish ScreamingMedia as a Leading Brand. We believe that strong brand
recognition is critical to our continued success. We intend to establish
ScreamingMedia as the leading global brand for digital content aggregation and
distribution. In September 1999, we launched our first brand-building campaign
through print advertising in major business publications. We intend to
aggressively extend our global brand-building campaign in 2000, which will
include offline and online advertising, appearing at industry trade shows,
sponsoring and appearing at industry conferences and other activities. We
anticipate that we will more than double our expenditures on marketing and
advertising in 2000.
Continue to Expand Our Alliance Program. We intend to continue developing
relationships with other Internet-related companies to increase the number of
customers and content providers in our digital content network. To date, through
a program that we call our "Alliance Program," we have entered into contractual
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relationships with a variety of companies including Agency.com, Broadvision,
Plumtree Software, Concentric Networks, Interwoven, Proxicom and Red Hat. These
companies help us generate sales leads by recommending our products and
services, where appropriate, as part of their overall service package, and in
some instances by bundling our SiteWare(TM) software with their technology
offerings. We intend to continue to enter into additional contractual
relationships with other Internet-related companies that further enhance our
business. In addition, where appropriate, we intend to pursue strategic
acquisitions that offer complementary products, services or technologies.
Expand Our International Presence. There are significant opportunities to
continue to expand our digital content network outside the United States. In
particular, Latin America, Europe and Asia are expected to experience dramatic
growth in Internet use over the next several years. We intend to capitalize on
these opportunities. By moving into these markets early, just as the need for
Web content becomes critical, we believe we will be able to obtain a significant
advantage over our competitors. Our content processing technology allows us to
aggregate and manipulate any form of content in any language and consequently we
face few technological barriers to international expansion. Currently, we
aggregate and distribute content in different languages for customers both
within the United States and internationally. To further extend our
international presence, we opened a London office in January 2000 to service the
European market and a Miami office in June 2000 to service the Latin American
market. We will also pursue strategic relationships with international partners
when appropriate opportunities arise.
OUR SERVICES
Our customized content service employs two principal software applications:
- the Content Engine(R), which resides on our servers, processes, filters
and distributes incoming content to our customers; and
- SiteWare(TM), which is installed on our customers' servers, receives the
content and integrates it into customers' Web sites.
Content is delivered from our content providers to our servers via the
Internet, leased lines, and satellite and FM signals. We deliver content to our
customers over the Internet.
The key features of our service are:
- customization -- we work with our customers to create a series of custom
filters. Each filter is a file containing search parameters that is built
into the Content Engine(R) and causes it to extract exactly the type of
content the customer desires;
- real-time delivery -- as soon as we receive content, our Content
Engine(R) processes, filters and dispatches it almost instantaneously to
our customers' Web sites;
- control -- customers can use the Editor's Desk feature of SiteWare(TM) to
review the content we deliver and choose which items to display on their
sites. Alternatively, customers can choose to have ScreamingMedia publish
content directly to their Web sites without an intervening step; and
- integration -- once a customer has chosen the desired content,
SiteWare(TM) automatically integrates it into the customer's Web site.
Customers can choose to receive content in most commonly-used formats,
including XML, HTML, and database-ready formats. Our system enables
content to appear on the customer's site in a manner consistent with the
look and feel of the site.
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CUSTOMERS
As of June 30, 2000, we had entered into contracts with over 1,000 Web site
and four wireless customers. Our customers are predominantly operators of Web
sites, spanning a broad spectrum of Internet categories. The following is a
representative list of our customers:
BUSINESS-TO-BUSINESS
ChemConnect
Commerce One
eSteel
Power Marketers Association
Seafood.com
TECHNOLOGY
EarthWeb
Sun Microsystems, Inc.
BUSINESS AND FINANCE
Accounting.com
H&R Block
Insurance Information Institute
MSN MoneyCentral
E-COMMERCE/ADVERTISING/PORTALS
About.com
AltaVista Shopping.com
DoubleClick
Network Commerce
ENTERTAINMENT
DVDfile
Entertaindom.com
iCAST
Trans-World Entertainment Company
HEALTH
eNutrition.com
InteliHealth
National Multiple Sclerosis Society
Shared Medical Systems
INTERNATIONAL/FOREIGN LANGUAGE
LatPro.com
Telemundo
Yupi Internet
RECRUITING
CareerBuzz
Career Zone
E-cruiter.com
Monster.com
SPECIAL INTERESTS
The Black World Today
EVOTE.COM
The Gay Financial Network
Womens' Health Interactive
WIRELESS ENABLED
MobileID
OmniSky
Oracle Corp.
With most of our customers, we initially enter into year-long contracts
that typically permit the customer to use a specified volume of content per
month. Customers pay a fixed monthly fee for any volume of content they actually
use up to this specified volume. Any content that the customer uses in excess of
this volume is billed additionally.
CASE STUDIES
The following case studies illustrate the way in which a range of customers
across a variety of Internet categories have been able to use our services.
The Black World Today -- Using ScreamingMedia to Help Increase Ad
Revenue. The Black World Today, or TBWT, wanted to create additional revenue
from advertising and sponsorships in order to expand, but had insufficient
page-views to attract the volume of advertising they desired. By using
ScreamingMedia, TBWT has been able to publish relevant, high-quality content,
thereby adding additional pages of targeted news content to their site. TBWT
believes that the use of ScreamingMedia's service has helped them to increase
their page-views and attract new advertisers.
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Sun Microsystems, Inc. -- Using ScreamingMedia for Specialized
Content. Sun wanted to offer their large community of Java(TM) developers
real-time news from multiple sources, but did not want the inconvenience and
expense of creating and managing multiple content licensing deals.
ScreamingMedia provided Sun with a single source for custom-filtered articles
related to Java technology from multiple sources in real time and allowed them
to integrate these articles directly into Sun's Web site. By outsourcing the
provision of news for its Web site to ScreamingMedia, Sun was able to obtain a
range of highly specific articles and integrate these articles into its Web site
at low cost, with very little effort.
EVOTE.COM -- Using ScreamingMedia to Lower Editorial Costs. EVOTE needed
to provide high-quality, up-to-the-minute election news for the 2000
Presidential election, but it was not cost-effective to hire the additional
editorial staff it required. ScreamingMedia created a custom filter for EVOTE,
enabling EVOTE's editors to select election-related content from a wide variety
of sources with minimal effort. With custom content from ScreamingMedia, EVOTE
can now provide high-quality, real-time election news in a cost-effective and
efficient manner with no additional editorial staff.
InteliHealth -- Using ScreamingMedia to Maximize Editorial
Control. InteliHealth was looking for real-time, health-related news to
supplement its already extensive database of high-quality content. InteliHealth
chose ScreamingMedia because our Editor's Desk feature provided a mechanism for
their news editors to effectively review, classify and hand-pick the articles
they wanted. Additionally, our SiteWare(TM) software allowed them to publish
content to their site, in a manner consistent with InteliHealth's own look and
feel, with the click of a mouse. ScreamingMedia offered InteliHealth a large
quantity of filtered content and full editorial control over the content they
choose to publish on their Web site.
None of the customers discussed in the case studies above presently
accounts for 5% or more of our revenues.
CONTENT PROVIDERS
We employ a specialized content acquisition team to build our network of
content providers. As of June 30, 2000, this team was composed of 22 employees.
Members of this department typically specialize in a particular type of source,
such as newspapers, newswires, magazines or Web sites, or on major geographic or
vertical markets. We intend to hire additional content acquisition staff as we
expand.
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As of June 30, 2000, we obtained content from over 580 publications
supplied by 410 content providers, ranging from traditional news syndication
services to specialized media sources and including both domestic and
international publications. A representative list is provided below:
GENERAL NEWS SYNDICATION
ABCNews.com
AP Online
The Christian Science Monitor
Comtex
Knight-Ridder Tribune
The New York Times Syndicate
Scripps Howard News Service
INTERNATIONAL/FOREIGN LANGUAGE
Agence-France Presse
Deutsche Presse - Agentur
EFE
Europa Press
Guardian Unlimited
Latin Trade
LIFESTYLES/ENTERTAINMENT/SPORTS
AP Mega Sports
Astrology.com
The Atlantic Monthly
Cigar Afficionado
Launch Media
RollingStone.com
Theatre.com
Wine Spectator
BUSINESS AND INDUSTRY
American Banker
Bridge News
Business 2.0
Businessweek Online
Crain's New York Business
Red Herring.com
LOCAL/REGIONAL
Albuquerque Journal
Arizona Republic
Atlanta Journal - Constitution
Knoxville News - Sentinel
Las Vegas Review Journal
MaineToday.com
New York Post.com
St. Petersburg Times
As of June 30, 2000, one of our content providers, Comtex, provided 40, or
7%, of our total publications. No other content provider supplied more than 5%
of our total publications as of that date. As we expand our network of content
providers, we expect that the percentage of our total publications supplied by
any single content provider will decline.
In March 2000, we launched a new packaged news product called News!Stand.
This product offers customers a lower-cost, easy-to-install, pre-edited news
solution available for purchase from our Web site. Customers are able to choose
one or more of 13 topical content packages, which are composed of items selected
daily by our editors. This content is sent to customers over the Internet and
automatically integrated into the look and feel of the customer's Web site.
TECHNOLOGY
ScreamingMedia's proprietary software platform is designed for flexibility,
scalability and reliability. The primary elements consist of SiteWare(TM)
software that is installed on each customer's Internet server computer and the
Content Engine(R) that resides on our own server computers. Key features of the
technology include:
- Object-Oriented Multi-Tiered Architecture. Our software is based on the
distributed object model, which means that it recognizes groups of data
as compiled packages known as objects. Because it does this, it does not
have to identify the types of content it processes. This allows it to
process and transfer virtually any digital data, including text, photo,
video and audio content. The modularity resulting from our multi-tiered
architecture enhances our ability to modify and upgrade our software and
hardware without interruption to our services. Both of these features
contribute to the scalability of our services.
- Robust Processing and Filtering Technology. The algorithms employed in
our proprietary processing technology allow real-time processing and
filtering of all incoming content. Our proprietary processing algorithms
normalize and index all incoming content prior to the filtering stage.
Our filtering
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technology, which incorporates software we license from Verity Inc., recognizes
patterns of words as well as identifying keywords, which allows a high degree of
customization and control.
- Platform Independent Java Application. Our SiteWare(TM) software is
written entirely in Java. Using Java allows the software to function on
all major operating systems.
- Compatibility With Evolving Technologies. Our technology enables us to
both deliver content to and aggregate content from a variety of Web
platforms and in a variety of standard and legacy data formats.
SiteWare(TM) can deliver content to Web sites in most commonly-used
formats, including XML, HTML, and database-ready formats. Our content
aggregation system can access content through a variety of delivery
channels, including satellite, leased lines and the Internet.
Content Engine(R)
The Content Engine(R) is composed of a number of elements of proprietary
software that interact with filtering technology based on software we license
from Verity and categorizing technology based on software we license from
Autonomy. Our proprietary software parses, normalizes and indexes incoming
content. The filtering software, which incorporates the over 5,000 custom
filters we have built for our customers, matches content to client filters. When
content has been filtered, proprietary programs copy the content to customer-
specific files, prepare it for delivery in the form the customer requires, and
dispatch it over the Internet by means of a proprietary communication protocol
that communicates between the Content Engine(R) and SiteWare(TM).
SiteWare(TM)
We provide our customers with our proprietary SiteWare(TM) software.
SiteWare(TM) allows the customer access to our services and enables
communication between the customer's server and the Content Engine(R).
SiteWare(TM) houses each customer's unique integration configuration and, upon
receiving data from the Content Engine(R), can immediately integrate that
information into the customer's Web site in the manner desired.
SiteWare(TM) includes a feature called the Editor's Desk that allows a
customer to exercise complete control over the content they select and publish
to their Web site. From the Editor's Desk, a customer can review articles and
publish selected stories to pre-determined locations on their Web site with a
single click of their mouse. Web sites that prefer to have "hands-free" content
delivery can choose to have us publish content directly to their Web site
without any further editorial involvement.
Scalable Network Infrastructure
The infrastructure we use to provide our services consists of multiple UNIX
servers that communicate internally and externally using the Internet Protocol.
These servers and the applications that run on them have a multi-tiered
configuration, which means that the functions they perform are distributed
across multiple machines. If one of these machines or applications stops
functioning, either through failure or for maintenance or upgrading, we will
still be able to provide our services. Our servers are hosted by GlobalCenter
and Network Plus, which, in addition to housing our servers, provide power,
security and connectivity.
SALES AND MARKETING
Sales
We sell our services through a direct sales force. As of June 30, 2000, our
sales force was composed of 64 employees. Our sales staff is currently located
in New York, San Francisco, Miami and London. Our sales force is divided into
teams focused on international markets and vertical categories, such as health,
technology, finance and entertainment. We intend to hire additional sales people
as we expand.
Marketing
Our marketing strategy is to build brand awareness and increase customer
familiarity with ScreamingMedia and our services through online and traditional
media advertising, public relations efforts and a presence at trade shows and
other industry events. In addition, we use online and offline promotions
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and strategic marketing partnerships to help generate sales leads. Our Web site
is also used as a marketing and sales tool, providing current and potential
customers the ability to research and sample our services and to contact our
sales staff.
Alliance Program
To accelerate the growth of our digital content network, we have developed
our "Alliance Program". Under this program we have entered into contractual
relationships with a wide range of Internet-related businesses that offer
opportunities to market our products or to distribute our software, such as
Agency.com, Concentric Networks, Broadvision, Plumtree Software and Proxicom.
These companies recommend our products and services, where appropriate, as part
of their overall service package. Under some of these arrangements, we share
revenues from relevant product lines. In other cases we enter into contractual
arrangements under which other companies bundle our SiteWare(TM) software with
their technology offerings. Bundling our software with complementary products
increases awareness of our services among likely customers, who can then access
our services without further installation of software. During 1999,
approximately 10% of our total revenue was derived from customers introduced to
us as a result of these contractual relationships. We anticipate that these
contractual relationships will continue to generate a significant percentage of
the leads through which we are introduced to potential customers in the future.
CUSTOMER SUPPORT
We believe that a high level of customer support is critical to our
success. We provide our customers and content providers with 24 hours a day,
seven days a week support. As of June 30, 2000, our customer support staff was
composed of 38 employees. We provide full life-cycle support, beginning with
assistance in configuring and installing the software we provide and building
the customized content filters requested by our clients, and extending to
ongoing technical support and account management. We also provide Web-based
customer support. We intend to hire additional customer support personnel as our
business expands.
COMPETITION
The market for digital content aggregation and distribution on the Internet
is new and rapidly evolving. We expect competition to increase significantly in
the future as current competitors improve their offerings and as new
participants enter the market.
Our current competitors include:
- other Internet-focused aggregators and distributors of content;
- traditional newswires that have begun offering products for Web sites;
and
- providers of alternative forms of content for Web sites, such as
directories, maps, photographs, stock tickers and video clips.
We believe that the principal competitive factors in our market are
cost-effectiveness, ease of use, brand recognition, ease of integration,
scalability, and breadth, depth and timeliness of content.
We believe that we presently compete favorably with respect to most of
these factors, particularly breadth and depth of content, ease of integration
and cost-effectiveness. However, some of our competitors offer products with:
- different pricing models, such as flat fees for unlimited access to the
vendor's content, or fees per item;
- different delivery systems, such as systems that provide access to the
content by transferring the user to the content provider's Web site; and
- different types of content, such as maps and directories.
These differences could prove attractive to our existing and potential
customers.
Barriers to entry in our market are relatively low, and we expect to face
new competitors. Competition may come from traditional content providers that
are not currently focused on the Internet and from online providers of other
types of content, as well as from new entrants. We expect our existing
competitors to offer
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new services and new features on their existing products, any of which could
make their services more attractive to potential customers.
INTELLECTUAL PROPERTY
Our success will depend in part on our ability to protect our intellectual
property and other proprietary rights in our software and other technology. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright, and trade secret laws, confidentiality and license agreements with
our employees, customers, partners, and others, and security features we have
built into our technology.
We have four pending U.S. patent applications, but presently do not have
any issued patents. Unless and until patents are issued, no patent rights can be
enforced. We have applied for registration in the United States for some of our
trademarks and service marks, including ScreamingMedia(SM), SiteWare(TM),
Content Engine(R) and others, and we intend to pursue registration of some of
our marks internationally.
Despite these protections, others still might be able to use our
intellectual property without our authorization. In addition, the laws of some
foreign countries do not protect proprietary rights to the same extent as do
U.S. laws. Moreover, potential competitors might be able to develop technologies
or services similar to ours without infringing our patents. In addition, if our
agreements with employees, consultants and others who participate in product and
service development activities are breached, we may not have adequate remedies,
and our trade secrets may become known or independently developed by
competitors. If we are unable to protect our intellectual property adequately,
it could materially affect our financial performance.
There can also be no assurance that other parties will not assert claims
that our products or names infringe on their proprietary rights. A third-party
infringement claim could be time-consuming to defend, result in costly
litigation, divert management's attention and resources, cause product and
service delays or require us to enter into royalty or licensing agreements.
EMPLOYEES
As of June 30, 2000, we had 236 full-time employees. Of these, 72 were
employed in sales and business development, 38 in customer support, seven in
marketing, 22 in content acquisition, 46 in research and development and 51 in
general and administrative positions. None of our employees is represented by a
union. We believe that our relations with our employees are good.
FACILITIES
We are headquartered in New York City, where we lease approximately 47,350
square feet of space. We have agreed to lease an additional 15,000 square feet
of space, which we will occupy by September 1, 2000. The lease for 44,850 square
feet of this space expires in March 2009, while the lease for the remaining
17,500 square feet expires in January 2009. We also lease offices in London,
Miami and San Francisco.
LEGAL PROCEEDINGS
We are not presently a party to any material legal proceedings.
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<PAGE> 44
MANAGEMENT
Our executive officers, key employees and directors, and their ages and
positions as of July 17, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jay Chiat................................. 68 Chairman of the Board of Directors
Kevin C. Clark............................ 40 Chief Executive Officer and Director
Alan S. Ellman............................ 37 President
David M. Obstler.......................... 40 Chief Financial Officer
J. Terrence Waters........................ 41 Chief Operating Officer
Joseph F. Choti........................... 40 Chief Technical Officer
Marianne Howatson......................... 51 Executive Vice President, Global Content
Management and Development
Sean P. Morgan............................ 36 Senior Vice President of Emerging Markets
David P. Tamburri......................... 29 Senior Vice President of U.S. Sales
Steven Spencer............................ 41 Senior Vice President of Wireless
Robert B. Peck............................ 36 Controller
William P. Kelly.......................... 33 General Counsel, Secretary and Director
James D. Robinson III..................... 64 Director
Wm. Brian Little.......................... 58 Director
Kenneth B. Lerer.......................... 47 Director
Patrick J. McNeela........................ 51 Director
David C. Hodgson.......................... 43 Director
</TABLE>
Jay Chiat has served as chairman of our board of directors since November
1999 and as a director since April 1997. Between November 1998 and November
1999, he also served as interim chief executive officer. Since 1995, Mr. Chiat
has served as an advisor to several new media start-up businesses. Mr. Chiat is
the founder of Chiat/Day Advertising, Inc., an international advertising agency
for which he served as chairman from July 1968 to January 1995. Mr. Chiat is a
director of Cybergold, Inc., the Hereditary Disease Foundation, Department 56,
Inc. and SoftCom, Inc. Mr. Chiat has received numerous awards in the advertising
industry and was elected to the AAF Advertising Hall of Fame in 1999.
Kevin C. Clark has served as our chief executive officer since November
1999 and he has been a director since November 1998. From August 1998 until
November 1999, Mr. Clark pursued Internet investment activities as chairman and
chief executive officer of KMC Holdings LLC. Mr. Clark served as vice chairman
of Modem Media.Poppe Tyson from May 1998 to August 1998. From May 1997 to May
1998, Mr. Clark served as chairman and chief executive officer of Poppe Tyson, a
global digital marketing business. From March 1996 to May 1997, he served as a
director of and advisor to Poppe Tyson. Mr. Clark founded Cross Country Staffing
in 1986, and was chairman and chief executive officer from 1986 through 1994 and
chairman from June 1994 through March 1996. Mr. Clark serves as a director of
Healthmarket.com and Primary Knowledge, Inc. and as an advisor to the board of
Ecommerce Solutions, LLC.
Alan S. Ellman founded the company and has served as a director since 1993.
Mr. Ellman has served as president since 1995 and served as chief operating
officer between February and June 2000. From 1990 to 1993, Mr. Ellman was the
director of finance at ABC Radio Networks in New York, where his
responsibilities included managing domestic and international financial and
accounting operations.
David M. Obstler joined ScreamingMedia in March 2000 as our chief financial
officer. From September 1996 to July 1999, Mr. Obstler served as a vice
president in the investment banking department at J.P. Morgan where he was
responsible for advising companies in the telecommunications sector. From June
1993
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<PAGE> 45
to September 1996, Mr. Obstler was an executive director in the equity capital
markets department at Lehman Brothers. From September 1986 to June 1993, Mr.
Obstler worked in the investment banking department at Goldman Sachs, most
recently as a vice president.
J. Terrence Waters was appointed chief operating officer in June 2000. From
February to May 2000, he served as our president, international. From July 1999
to February 2000, Mr. Waters pursued Internet investment and consulting
activities as an independent consultant. From September 1985 to June 1999, Mr.
Waters was employed by Gartner Group, Inc., most recently serving as senior vice
president and managing director of executive programs. Prior to this, Mr. Waters
was vice president, worldwide marketing from October 1990 to December 1993 and
vice president, eastern region sales from March 1987 to October 1990. Mr. Waters
was employed by the Xerox Corporation from September 1981 to August 1985.
Joseph F. Choti has served as chief technology officer since October 1999.
From September 1998 to October 1999, Mr. Choti was chief technical officer of
Real Time Data Inc. From May 1996 to September 1998, Mr. Choti was chief
technical officer and director of product development at Applied Information
Services, Inc. From 1994 to 1996 Mr. Choti worked in the enterprise systems
research and development group of Bloomberg Financial Markets, LP.
Marianne Howatson has served as our executive vice president of global
content management since June 1999. From June 1998 through April 1999, Ms.
Howatson served as an advisor to Emap plc, the British publisher of Elle, New
Woman and Q magazines, on the acquisition by Emap plc of the Peterson Publishing
Company. From April 1997 through March 1998, Ms. Howatson was executive vice
president of Playboy Enterprises, Inc. and president of the Publishing Group of
Playboy. In this position Ms. Howatson oversaw Playboy's domestic and overseas
publishing businesses, including the U.S. edition of Playboy Magazine, its 15
foreign editions and new media business. From 1995 to April 1997, Ms. Howatson
was an equity partner and general manager of Cardinal Business Media. Prior to
that Ms. Howatson was group publisher at Gruner + Jahr USA Publishing and
publisher of Conde Nast Publications' Self magazine and American Express' Travel
and Leisure magazine.
Sean P. Morgan has served as our senior vice president of emerging markets
since June 2000. From February 1997 to May 2000, he served as our senior vice
president of sales. Prior to joining us, Mr. Morgan founded Gravity Sports, a
firm that created sports-based, cross-promotional events for companies, for
which he served as president from 1991 to 1997. Prior to that, Mr. Morgan
directed the Manhattan marketing operations for Community Quote Graphics Inc., a
provider of data services for the commodities and futures markets.
David P. Tamburri was appointed our senior vice president of U.S. sales in
June 2000. From May 1999 to May 2000, Mr. Tamburri served as our vice president
of business development. Between January 1998 and May 1999, Mr. Tamburri
attended Harvard Business School, graduating with an M.B.A. Mr. Tamburri was
employed by B. Braun-McCaw Medical Inc. as a territory manager and sales trainer
from May 1995 to December 1997.
Steven Spencer has served as our senior vice president of wireless since
April 2000. From January 1998 to March 2000, Mr. Spencer was the senior managing
director of business management for the wireless Internet applications division
of Lucent Technologies. In this position, Mr. Spencer was responsible for
developing and managing a portfolio of wireless Internet enabling technologies
for Lucent's global business. Prior to this, Mr. Spencer held a number of
positions at Lucent Technologies, including project director for Internet
appliances, director, business development for Internet Technologies, project
director for broadband interactive television and director, business management
for optical carrier systems. Mr. Spencer began his career with Bell Laboratories
in 1980 as a design engineer in the digital carrier loop laboratory.
Robert B. Peck has served as controller since June 2000. Mr. Peck served as
group controller for CSC Healthcare Inc., a wholly owned subsidiary of Computer
Sciences Corporation, from June 1996 to May 2000. From May 1993 through May
1996, Mr. Peck served as the assistant controller of American Practice
Management, Inc., a privately owned healthcare management-consulting firm
acquired by CSC in July 1996. From December 1992 through May 1993, Mr. Peck
served on the professional accounting staff of Odyssey
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<PAGE> 46
Partners, L.P., a multi-billion dollar hedge fund based in New York. From
September 1987 through December 1992, Mr. Peck served as a member of the audit
staff for Goldstein Golub Kessler & Company, P.C.
William P. Kelly has served as general counsel, director and secretary
since April 1997. From 1991 until February 2000, Mr. Kelly was engaged in the
practice of law in the area of complex civil litigation. From 1995 to 1996, he
was associated with the law firm of Condon & Forsyth. Mr. Kelly was a founder in
1996 of the law firm of McCarthy & Kelly LLP. Since February 2000, he has been
employed full time as our general counsel.
James D. Robinson III has served as a director of since April 1997. He is
co-founder and General Partner of RRE Ventures II, LLC, a private information
technology venture investment firm and its affiliates, and since 1996, he has
been chairman of Violy, Byorum & Partners Holdings. Mr. Robinson served as
chairman and chief executive officer of American Express Company from 1977 to
1993. Mr. Robinson is a director of The Coca-Cola Company, Bristol-Myers Squibb
Company, First Data Corporation, Cambridge Technology Partners, Sunbeam
Corporation and Concur Technologies, Inc. He is a limited partner and advisor to
International Equity Partners and serves on the boards of Achex, Inc.,
eCoverage, Inc., NetVendor, Inc., Returns Online, Inc., Ibero-American Media
Partners and Qpass Inc., all private companies. Mr. Robinson is a member of the
Business Council and the Council on Foreign Relations.
Wm. Brian Little has served as a director since June 1999. Since January
1995, Mr. Little has been a private investor. During 1994, Mr. Little was a
special limited partner of Forstmann Little & Co. From 1978 through 1993, Mr.
Little served as a founding general partner of Forstmann Little & Co. Mr. Little
serves on the boards of directors of The Topps Company, Inc., Department 56 Inc.
and Aldila, Inc.
Kenneth B. Lerer has served as a director since November 1998. Mr. Lerer
has served since May 1996 as the president and chief operating officer of
Robinson, Lerer and Montgomery, a financial consulting firm providing services
to Fortune 500 companies. In addition, Mr. Lerer has served as a senior vice
president of America Online since October 1999. From 1980 to 1996, Mr. Lerer was
vice president of corporate affairs at Warner Amex Cable. Mr. Lerer is chairman
of the board of the Public Theater/New York Shakespeare Festival and is a
director of Oxygen Media, Inc., an Internet and cable company.
Patrick J. McNeela has served as a director since December 1999. Since
December 1997, Mr. McNeela has served as vice president of General Electric
Investment Company, Private Equity Group. From January 1995 to December 1997, he
was senior vice president and manager of GE Capital Corporation, Equity Capital
Group.
David C. Hodgson has served as a director since July 2000. Mr. Hodgson is a
managing member of General Atlantic Partners, LLC, a private equity investment
firm. He has been with General Atlantic, LLC or its predecessors since 1982. Mr.
Hodgson is also a director of S1 Corporation, a provider of Internet-based
software and infrastructure for financial institutions, Proxicom Inc., a
provider of Internet and intranet design and implementation services, Atlantic
Data Services, Inc., a provider of computer services to the banking industry,
Baan Company N.V., a business management software company, ProBusiness, Inc., a
provider of outsourced employee administrative services, and several private
information technology companies.
CLASSES OF DIRECTORS
Our certificate of incorporation divides our board of directors into three
classes, denominated as Class I, Class II and Class III. Members of each class
hold office for staggered three-year terms. At each annual meeting of our
stockholders beginning in 2001, the successors to the directors whose term
expires at that meeting will be elected to serve until the third annual meeting
after their election or until their successor has been elected and qualified.
Messrs. Kelly, Lerer and Robinson will serve as Class I directors whose terms
expire at the 2001 annual meeting of stockholders. Messrs. Little, McNeela and
Ellman will serve as Class II directors whose terms expire at the 2002 annual
meeting of stockholders. Messrs. Chiat, Clark and Hodgson will serve as Class
III directors whose terms expire at the 2003 annual meeting of stockholders.
With respect to each class, each director's term will be subject to the election
and qualification of his or her successor, or
39
<PAGE> 47
his or her earlier death, resignation or removal. These provisions, when taken
in conjunction with other provisions of our certificate of incorporation
authorizing the board of directors to fill vacant directorships, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees.
BOARD COMMITTEES
We have established an audit committee, a compensation committee and a
nominating committee. The audit committee reviews our internal accounting
procedures and considers and reports to the board of directors with respect to
other auditing and accounting matters, including the selection of our
independent auditors, the scope of annual audits, fees to be paid to our
independent auditors and the performance of our independent auditors. The audit
committee consists of Messrs. Little, McNeela and Robinson. The compensation
committee reviews and recommends to the board of directors the salaries,
benefits and stock option grants for all employees, consultants, directors and
other individuals compensated by us. The compensation committee also administers
our stock option and other employee benefit plans. The compensation committee
currently consists of Messrs. Chiat, Little and Robinson. In 1999, the
compensation committee consisted of Messrs. Chiat, Robinson and Ellman. During
1999, Alan S. Ellman served as our president, and from January through November
1999, Jay Chiat served as our interim chief executive officer. The nominating
committee considers candidates for nomination to the board of directors and
makes recommendations to the board based on that consideration. The nominating
committee currently consists of Messrs. Little, McNeela and Hodgson.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
Between October 1998 and March 1999, several of our officers, directors and
related persons lent us an aggregate of $550,000, including $250,000 from Mr.
Chiat and $50,000 each from Mr. Robinson and his spouse. The promissory notes
evidencing these loans were converted into an aggregate of 443,298 shares of our
common stock in March 1999. In 1996, we received a non-interest bearing loan of
$19,350 from Mr. Ellman, which we repaid during 1999. In April 1999, we executed
an agreement employing the firm of Robinson, Lerer & Montgomery, for corporate
communications services for a monthly fee of $20,000. Linda Robinson, the spouse
of Mr. Robinson, is a principal of Robinson, Lerer & Montgomery. The services
provided under this contract are general public relations advice and consultancy
services. In May 1999, we invested $150,000 to purchase 384,615 shares of Series
A convertible preferred stock of SoftCom, Inc. We also hold a warrant that
expires May 14, 2004 for purchase of up to 19,231 additional shares of Series A
preferred stock of SoftCom at an exercise price of $0.39 per share. Mr. Chiat
became a director of SoftCom at the closing of this investment.
COMPENSATION OF DIRECTORS
We do not currently pay cash fees to our directors for attending board or
committee meetings, but we reimburse directors for their reasonable expenses
incurred in connection with attending these meetings. Directors are eligible for
grants of awards under our stock equity plans, as described below under "Stock
Plans."
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<PAGE> 48
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
compensation earned in 1999 by both of the individuals who served as
ScreamingMedia's chief executive officer during 1999 and the remaining four most
highly compensated executive officers as of December 31, 1999 whose salary and
bonus earned in 1999 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION ($) ($) ($) (#) ($)
------------------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Jay Chiat................................ $ -- $ -- $20,870(5) -- $ --
Chairman of the Board(1)
Kevin C. Clark(2)........................ 46,140 -- -- 1,214,286 --
Chief Executive Officer
Alan S. Ellman........................... 95,870 100,000 -- -- --
President
Gregoire Sentilhes(3).................... 59,222 -- -- 269,841(6) 80,000(7)
Former President, International
Marianne Howatson(4)..................... 103,930 70,000 -- 809,524 --
Executive Vice President, Global
Content Management and Development
Sean P. Morgan........................... 85,890 100,250 -- -- --
Senior Vice President of Emerging
Markets
</TABLE>
---------------
(1) Mr. Chiat was our interim chief executive officer until November 1999 but
resigned from that position when Mr. Clark joined ScreamingMedia as our
chief executive officer. Mr. Chiat was not paid any cash compensation for
his services as chief executive officer.
(2) Mr. Clark joined ScreamingMedia on November 8, 1999 at an annual salary of
$300,000.
(3) Mr. Sentilhes joined ScreamingMedia on September 1, 1999 at an annual salary
of $175,000. Mr. Sentilhes left ScreamingMedia on February 8, 2000.
(4) Ms. Howatson joined ScreamingMedia on June 7, 1999 at an annual salary of
$180,000.
(5) We maintain an apartment in New York City for business purposes. This amount
represents the cost in 1999 of allowing Mr. Chiat to use the apartment for
his personal use.
(6) This number excludes 607,143 shares subject to unvested options that expired
when Mr. Sentilhes left ScreamingMedia on February 8, 2000.
(7) This amount represents consulting fees paid to Mr. Sentilhes in 1999 for
work he did for us as a consultant before he became one of our officers.
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<PAGE> 49
OPTION GRANTS IN 1999
The following table sets forth information concerning individual grants of
stock options made during 1999 to each of the executive officers named in the
Summary Compensation Table. Potential realizable value is presented net of the
option exercise price, but before any federal or state income taxes associated
with exercise, and is calculated assuming that the fair market value on the date
of the grant appreciates at the indicated annual rates, compounded annually, for
the term of the option. Potential realizable value has been calculated using the
assumed initial public offering price of $12.00, although we estimate that, in
each case, the fair market value of our stock at the time the option was granted
was substantially less. The 0%, 5% and 10% assumed rates of appreciation are
mandated by the rules of the SEC and do not represent our estimate or projection
of future increases in the price of our common stock. Actual gains will be
dependent on the future performance of our common stock and the option holder's
continued employment throughout the vesting period. Accordingly, the amounts
reflected in the following table may not actually be achieved.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK PRICE APPRECIATION
SHARES GRANTED TO EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 0% 5% 10%
---- ------------------ ------------- --------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jay Chiat............ -- -- -- -- -- -- --
Kevin C. Clark....... 1,214,286(1) 24.7% 2.41 11/08/04 $11,645,000 $15,670,817 $20,541,003
Alan S. Ellman....... -- -- -- -- -- -- --
Gregoire Sentilhes... 876,984(2)(3) 17.9 1.34 09/01/04 9,348,651 12,256,181 15,773,522
Marianne Howatson.... 809,524(4) 16.5 1.34 06/07/04 8,629,524 11,313,402 14,560,192
Sean P. Morgan....... -- -- -- -- -- -- --
</TABLE>
---------------
(1) We estimate that the fair value of our common stock at the time the stock
options were granted was $7.41 per share. This estimate is based on the
amount received from the issuance of convertible preferred stock prior to
the grant date of these stock options, giving effect to the increase in the
value of our company from the time the proceeds were received from the
preferred stock offering to the date on which these stock options were
issued. Had this price been used in calculating the potential realizable
values at assumed annual rates of stock price appreciation for the option
term of 0%, 5% and 10%, the potential realizable values would have been
$6,073,571, $8,560,105 and $11,568,161, respectively.
(2) We estimate that the fair value of our common stock at the time the stock
options were granted was $3.73 per share, which is based on the value given
to our common stock in a convertible preferred stock offering around the
time of the grants of these stock options. Had this price been used in
calculating the potential realizible values at assumed annual rates of stock
price appreciation for the option term of 0%, 5% and 10%, the potential
realizable values would have been $2,095,641, $2,999,303 and $4,092,497,
respectively.
(3) This number includes 607,143 shares subject to unvested options that expired
when Mr. Sentilhes left ScreamingMedia on February 8, 2000.
(4) We estimate that the fair value of our common stock at the time the stock
options were granted was $3.73 per share, which is based on the value given
to our common stock in a convertible preferred stock offering around the
time of the grants of these stock options. Had this price been used in
calculating the potential realizable values at assumed annual rates of stock
price appreciation for the option term of 0%, 5% and 10%, the potential
realizable values would have been $1,934,438, $2,768,567 and $3,777,690,
respectively.
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<PAGE> 50
1999 OPTION EXERCISES AND OPTION VALUES
The following table sets forth information concerning unexercised stock
options held of December 31, 1999 by the executive officers named in the Summary
Compensation Table. None of these persons exercised any options during 1999. The
value of "in-the-money" options represents the difference between the exercise
price of an option and the fair market value of our common stock as of December
31, 1999, which, solely for purposes of this calculation, we estimate to be the
assumed initial public offering price of $12.00.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jay Chiat....................................... -- -- -- --
Kevin C. Clark.................................. 303,571 910,715 $2,911,244 $8,733,756
Alan S. Ellman.................................. -- -- --
Gregoire Sentilhes.............................. 269,841 607,143(1) 2,876,505 6,472,146
Marianne Howatson............................... 134,921 674,603 1,438,257 7,191,267
Sean P. Morgan.................................. -- -- -- --
</TABLE>
---------------
(1) These 607,143 shares were subject to unvested options that expired when Mr.
Sentilhes left ScreamingMedia on February 8, 2000.
EMPLOYMENT AGREEMENTS
Kevin C. Clark. We are a party to a three-year employment agreement with
Kevin C. Clark, dated November 8, 1999. Pursuant to this agreement, he serves as
our chief executive officer. Mr. Clark receives an annual salary of $300,000 per
year, is eligible to participate in any bonus plans we have for our senior
executives, and participates at the highest level in all of our benefit plans
and fringe benefit arrangements. On his first day of employment, Mr. Clark
received stock options to purchase 1,214,285 shares of our common stock at an
exercise price of $2.41 per share. Of these options, 303,571 vested on December
1, 1999 and the remainder will vest quarterly in equal installments over a two
and one-half year period beginning November 8, 1999. Under the employment
agreement, we are obligated to pay Mr. Clark an additional payment to reimburse
him for any excise tax imposed under Section 4999 of the Internal Revenue Code
on any payment, including any gross-up payments, made to Mr. Clark, whether
under his employment agreement or otherwise. If Mr. Clark is terminated without
cause or he quits for good reason, he will receive his base salary, medical and
other insurance benefits for six months following termination. In addition, all
options held by Mr. Clark that would have vested within one year after
termination, had he been employed for that period, will automatically vest on
the date of his termination. Mr. Clark is subject to six-month post-termination
noncompetition and nonsolicitation covenants.
Marianne Howatson. We are party to an employment agreement with Marianne
Howatson, dated June 7, 1999. Pursuant to this agreement, she was paid a signing
bonus of $70,000 and receives an annual salary of $180,000. In addition, Ms.
Howatson was granted options to purchase 809,524 shares of our common stock at
an exercise price of $1.34 per share. These options vest in 36 substantially
equal monthly installments, as long as Ms. Howatson remains employed with us.
Ms. Howatson participates in our standard benefit plans.
David M. Obstler. We are party to a three year employment agreement with
David M. Obstler, dated March 8, 2000. Pursuant to this agreement, Mr. Obstler
serves as our chief financial officer. Mr. Obstler receives an annual salary of
$225,000 per year and a minimum annual bonus of $50,000. Furthermore, Mr.
Obstler is eligible to participate in any bonus plans we have for our senior
executives on a level and on terms no less favorable than our other senior
executives, and participates at the highest level in all of our benefit plans
and fringe benefit arrangements. Under the agreement, Mr. Obstler was granted
stock options to purchase 371,032 shares of our common stock at an exercise
price of $2.59 per share. Under the employment agreement, we are obligated to
pay Mr. Obstler an additional payment to reimburse him for any excise tax
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<PAGE> 51
imposed by Section 4999 of the Internal Revenue Code (or any similar excise tax)
on any payment, including any gross up payments, made to Mr. Obstler, whether
under this agreement or otherwise. If Mr. Obstler's employment is terminated
without cause, or he terminates his employment for good reason, he will receive
salary and continued insurance coverage for six months, a prorated merit bonus
for the year in which termination occurs and all equity awards that we have
granted to him (under the agreement or otherwise) will become vested to the
extent that they would otherwise have vested within the year after termination.
Mr. Obstler is subject to six-month post-termination non-competition and
non-solicitation covenants.
J. Terrence Waters. We are party to a three year employment agreement with
J. Terrence Waters, dated May 26, 2000. Pursuant to this agreement, Mr. Waters
serves as our chief operating officer. Mr. Waters receives an annual salary of
$200,000 per year and a minimum merit bonus of $100,000. Furthermore, Mr. Waters
is eligible to receive equity awards under our equity plans that are
commensurate with his position at such times as awards are made to the other
executive officers generally as a group (excluding Mr. Clark), and with similar
terms as awards granted to such executives. Under the agreement, Mr. Waters was
granted stock options to purchase 303,571 shares of our common stock at an
exercise price of $2.59 per share and 63,492 shares of our common stock at an
exercise price of $5.78 per share. During the term of his employment, Mr. Waters
is entitled to a modification of his employment agreement to the extent that our
highest level executive officers (excluding Mr. Clark) have their participation
in our fringe benefit programs (including golden parachute and severance
arrangements) altered in a way that is monetarily more advantageous to them than
Mr. Waters' arrangements. If Mr. Waters' employment is terminated without cause,
or he terminates his employment for good reason, he will receive salary and
continued insurance coverage for six months, a prorated merit bonus for the year
in which termination occurs and fifty percent of his option awards will become
immediately vested. Mr. Waters is subject to a six-month post-termination
non-competition and non-solicitation covenants.
STOCK PLANS
1999 Stock Option Plan
General. We have reserved for issuance 6,746,032 shares of common stock
under our 1999 stock option plan, subject to adjustment in the event of a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split or other similar corporate event. If an option expires, terminates or
becomes unexercisable for any reason without having been exercised in full, the
unpurchased shares will again be available for future option grants under the
plan.
Options granted under the plan may be incentive stock options within the
meaning of Section 422 of the Internal Revenue Code or non-qualified stock
options.
Administration. The plan is administered by our compensation committee.
The committee has the authority to adopt, amend and rescind rules and
regulations as it determines advisable for administration of the plan. The
committee also has the sole authority to determine who will be granted options
and to determine the terms of the options, including the number of shares and
the exercise price of the option.
Eligibility. Options may be granted under the plan to our officers,
employees, directors, consultants, advisors and representatives, but incentive
stock options may be granted only to our employees.
Terms and Conditions of Options. The number of shares of common stock to
be subject to an option and the option's exercise price are determined by the
committee. Incentive stock options may not be granted at an exercise price less
than 100% of the fair market value of the common stock on the date of grant.
Non-qualified options may not be granted under the plan at an exercise price
less than 85% of the fair market value of the common stock on the date of grant.
Options granted under the plan become exercisable at the times and upon the
conditions that the committee may determine, as reflected in the applicable
option agreement. The committee determines the term of the option, which
generally may not exceed ten years from the date of grant.
If there is a sale of substantially all of our property and assets or if a
change in control occurs, the purchaser of our assets or common stock may, in
its discretion, deliver to the optionees the same kind of consideration that is
delivered to our stockholders as a result of the sale or change in control that
has a value
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<PAGE> 52
equal to the option had it been exercised in full and no shares had been sold
prior to the sale or change in control. The committee also has the authority,
but not the obligation, to accelerate the exercisability of any options granted
under the plan upon a merger, consolidation, sale of substantially all of our
property and assets or upon a change in control. If there is a hostile change in
control, each option outstanding under the plan will automatically accelerate in
full and unvested shares will vest in full immediately. If we are dissolved or
liquidated, all options outstanding under the plan will terminate, but each
optionee, if then employed by us or any of our subsidiaries, will have the right
to exercise his or her options immediately before the dissolution or
liquidation.
The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:
- in cash;
- by delivery of a promissory note, provided that a note may be used only
under the circumstances and according to the terms established by the
committee; or
- by delivery of previously acquired shares of common stock.
Termination of Employment or Service. If an optionee's employment or
service terminates because of disability or death, the optionee's options will
terminate on the last day of the twelfth month from the date of cessation of
employment or service. If an optionee's employment or service terminates within
six months of the date on which there occurs a hostile change of control, any
options held by the optionee will immediately accelerate, and any shares which
are not vested at the time of termination will automatically vest in full and
may be exercised during the three-month period after the date of cessation of
employment or service. The committee also has the authority to permit
post-termination exercise of an option under other circumstances. In any event,
no option may be exercised after the original exercise period has expired.
Amendment, Termination of Plan. Unless earlier terminated by the board of
directors, the plan will terminate ten years from the date of its adoption. The
board of directors may terminate, modify or amend the plan at any time, except
that an amendment will be subject to stockholder approval if the amendment would
increase the maximum number of shares reserved for the plan or change the class
of persons eligible to receive options, or make any other change that requires
stockholder approval under applicable law or regulations. The committee
generally may terminate, amend or modify any outstanding option without the
optionee's consent, except that the committee cannot change the number of shares
subject to the option, its exercise price or its term without the optionee's
consent.
Since the amount of benefits to be received by any plan participant is
determined by the committee, the amount of future benefits allocated to any
employee or group of employees in any particular year is not determinable.
2000 Equity Incentive Plan
General. We have reserved for issuance a maximum of 3,174,603 shares of
common stock under our 2000 equity incentive plan. No more than 793,651 shares
of common stock may be made subject to options granted to any of our executive
officers within a twelve month period. If an award granted under the plan
expires or is terminated, the shares of common stock underlying the award will
again be available under the plan.
Types of Awards. The following awards may be granted under the plan:
- stock options, including incentive stock options and non-qualified stock
options;
- restricted stock;
- phantom stock;
- stock bonuses; and/or
- other stock-based awards.
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Administration. The plan will initially be administered by the
compensation committee, although it may be administered by either our full board
of directors or any other committee designated by the board.
The committee may, subject to the provisions of the plan, determine the
persons to whom awards will be granted, determine the type of award to be
granted, the number of shares to be made subject to awards, the exercise price
and other terms and conditions of the awards, and to interpret the plan and
prescribe, amend and rescind rules and regulations relating to the plan. The
committee may delegate to any of our senior management the authority to make
grants of awards to our employees who are not our executive officers or
directors.
Eligibility. Awards may be granted under the plan to employees, directors
and consultants, as selected by the committee.
Terms and Conditions of Options. Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue
Code, or non-qualified stock options. The exercise price of a stock option
granted under the plan is determined by the committee at the time the option is
granted, but the exercise price of an incentive stock option may not be less
than the market value per share of common stock on the date of grant. Stock
options are exercisable at the times and upon the conditions that the committee
may determine, as reflected in the applicable option agreement. The committee
will determine the term of the option, which may not exceed ten years from the
date of grant.
The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:
- in cash or cash equivalents;
- the surrender of previously acquired shares of common stock that have
been held by the participant for at least six months prior to the date of
surrender;
- if so determined by the committee as of the grant date, authorization for
us to withhold a number of shares otherwise payable pursuant to the
exercise of an option; or
- through a "broker cashless exercise" procedure approved by us.
The committee may, in its sole discretion, authorize ScreamingMedia to make
or guarantee loans to a participant to assist the participant in exercising
options.
At the time of grant of an option, the committee may provide that the
participant may elect to exercise all or any part of the option before it
becomes vested and exercisable. If the participant elects to exercise all or
part of a non-vested option, the participant will be issued shares of restricted
stock which will vest in accordance with the vesting schedule set forth in the
original option agreement. The restricted shares will be subject to our right to
repurchase the shares following termination of the participant's employment or
service with us.
Restricted Stock. The plan provides for awards of common stock that are
subject to restrictions on transferability and others imposed by the committee.
Except as provided for under the award agreement relating to the restricted
stock, a participant granted restricted stock will have all of the rights of a
stockholder.
Phantom Stock. The plan provides for awards of phantom stock which, upon
vesting, entitle the participant to receive an amount in cash or common stock
equal to the fair market value of the number of shares. Vesting of all or a
portion of a phantom stock award may be subject to various conditions
established by the committee.
Stock Bonuses; Other Awards. The plan provides that the committee, in its
discretion, may award shares of common stock to employees. In addition, the
committee may grant other awards valued in whole or in part, by reference to, or
otherwise based on, common stock.
Termination of Employment or Service. Generally, unless otherwise
determined by the committee, the termination of a participant's employment or
service will immediately cancel any unvested portion of awards granted under the
plan. However, if a participant's employment or service terminates other than
because of
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death, disability or retirement, all options that are exercisable at the time of
termination may be exercised by the participant for up to 90 days after the date
of termination. If a participant's employment or service terminates for cause,
all options held by the participant will immediately terminate. If a
participant's employment or service terminates as a result of death, all options
that are exercisable at the time of death may be exercised by the participant's
heirs or distributees for one year. If a participant's employment or service
terminates because of disability or retirement, all options that are exercisable
at the time of termination may be exercised for a period of one year. In no case
may an option be exercised after it expires in accordance with its terms.
Change in Control. In the event of a change in control, awards granted
under the plan may be assumed by a successor. If not assumed, awards become
immediately vested and/or exercisable. If a participant is terminated or
constructively terminated within two years following a change in control, awards
granted to the participant become immediately vested and/or exercisable.
Amendment, Termination of Plan. The board of directors may modify or
terminate the plan or any portion of the plan at any time, except that an
amendment that requires stockholder approval in order for the plan to continue
to comply with any law, regulation or stock exchange requirement will not be
effective unless approved by the requisite vote of our stockholders. No options
may be granted under the plan after the day prior to the tenth anniversary of
its adoption date.
Since the amount of benefits to be received by any employee plan
participant is determined by the committee, the amount of future benefits
allocated to any employee or group of employees in any particular year is not
determinable.
Employee Stock Purchase Plan
General. The employee stock purchase plan is designed to encourage the
purchase by our employees of shares of our common stock and to comply with the
requirements of Section 423 of the Internal Revenue Code so as to assure the
participants of favorable tax treatment with respect to shares purchased under
the plan. The employee stock purchase plan will be administered by a committee
established by the board of directors. The committee may make such rules and
regulations and establish such procedures for the administration of the employee
stock purchase plan as it deems appropriate.
Shares Available. The committee has authorized for issuance under the plan
a total of 357,143 shares of common stock, subject to adjustment by the
committee in the event of a recapitalization, stock split, stock dividend or
similar corporate transaction, plus an annual increase in the number of shares
to be added on the first day of our fiscal year beginning in 2001 equal to the
lessor of:
- 158,730 shares;
- 0.5% of the outstanding shares on such date; or
- a lesser amount determined by the committee.
Eligibility. Subject to certain procedural requirements, all of our
employees who have at least six months of service and work more than 20 hours
per week will be eligible to participate in the employee stock purchase plan,
except that employees who own five percent or more of our common stock or the
common stock of any of our subsidiaries will not be eligible to participate. All
our full-time employees will be eligible to participate in the first offering
period under the plan.
Stock Purchases. Under the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of our common stock through
regular payroll deductions and/or cash payments in an amount equal to 1% to 15%
of the employee's compensation for each payroll period. The fair market value of
the shares of common stock which may be purchased by any employee under this or
any of our other plans that is intended to comply with Section 423 of the
Internal Revenue Code during any calendar year may not exceed $25,000.
The employee stock purchase plan provides for a series of consecutive,
overlapping offering periods that generally will be 24 months long. Successive
six-month purchase periods will run during each offering
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period. Offering periods generally will commence on January 1 and July 1 of each
year during the term of the plan, and purchase periods will run from January 1
to June 30 and from July 1 to December 31. The first offering period will
commence on the first day of regular trading and end on the last trading day on
or before June 30, 2002.
During each offering period, participating employees will be able to
purchase shares of common stock with payroll deductions at a purchase price
equal to 85% of the fair market value of the common stock at either the
beginning of each offering period or the end of each purchase period within the
offering period, whichever price is lower.
To the extent permitted by applicable laws, regulations, or stock exchange
rules, if the fair market value of the shares at the end of any purchase period
is lower than the fair market value of the shares on the date the related
offering period began, then all participants in that offering period will be
automatically withdrawn from the offering period immediately after the exercise
of their option on the date the purchase period ends. The participants will
automatically be re-enrolled in the immediately following offering period when
that offering period begins.
The options granted to a participant under the employee stock purchase plan
are not transferable otherwise than by will or the laws of descent and
distribution, and are exercisable, during the participant's lifetime, only by
the participant.
Amendment or Termination of Plan. The board of directors may from time to
time amend or terminate the employee stock purchase plan, but no amendment or
termination may adversely affect the rights of any participant without the
consent of that participant and, to the extent required by Section 423 of the
Internal Revenue Code or any other law, regulation or stock exchange rule, no
amendment will be effective without the approval of stockholders entitled to
vote thereon. Additionally, the committee may make amendments that it deems
necessary to comply with applicable laws, rules and regulations.
Since the amount of benefits to be received by each participant in the
employee stock purchase plan is determined by his or her elections, the amount
of future benefits to be allocated to any individual or group of individuals
under the plan in any particular year is not determinable.
Management Incentive Plan
Prior to the completion of this offering, we intend to adopt a management
incentive plan. The plan will be administered by the compensation committee who
will have the authority to determine the plan's participants, as well as the
terms and conditions of incentive awards. The payment of bonuses under the
management incentive plan will be based upon the achievement of performance
goals set by the compensation committee, which may include any, all or none of
the following:
- pre-tax income or after-tax income;
- earnings or book value per share;
- sales or revenue;
- operating expenses;
- increases in the market price of common stock;
- implementation or completion of critical projects or processes;
- comparison of actual performance during a performance period against
budget for that period;
- growth of revenue; or
- reductions in expenses.
Minimum bonuses will be based on achievement of 80% of the performance goals and
maximum bonuses will be based on achievement of 150% of the performance goals. A
bonus will be paid only if the participant is employed by ScreamingMedia or its
affiliates on the day the bonus is to be paid. Under the plan, no
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payment may be made to one of our executive officers that exceeds 150% of the
officer's annual base salary. In the event of a change in control, the
performance period in effect at the time of the change in control will be deemed
to have been completed, the maximum targets will be deemed to have been
attained, and a pro rata portion of the award will be paid in cash to the
participant.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director to
the fullest extent permitted by the Delaware General Corporate Law as it now
exists or as it may be amended. As of the date of this prospectus, the Delaware
General Corporate Law permits limitations of liability for a director's breach
of fiduciary duty other than liability:
- for any breach of the director's duty of loyalty to a company or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the Delaware General Corporate Law or
- for any transaction from which the director derived an improper personal
benefit.
In addition, our bylaws provide that we must indemnify all of our directors,
officers, employees and agents for acts performed on our behalf in that
capacity.
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RELATED PARTY TRANSACTIONS
CONVERTIBLE LOANS TO THE COMPANY BY OFFICERS AND DIRECTORS
Between October 1998 and March 1999, several of our officers, directors and
related persons lent us an aggregate of $550,000, including $250,000 from Mr.
Chiat, $100,000 from Mr. Clark and $50,000 each from Brian Cavanaugh, Messrs.
Lerer and Robinson and his spouse. Our obligation to repay these loans was
evidenced by convertible promissory notes of terms between 32 and 36 months. The
promissory notes bore interest at 9.5% per annum, payable quarterly.
The promissory notes were convertible into our common stock upon and after
the earlier of (1) raising at least $1,000,000 in an equity financing and (2) a
trigger date, which ranged from April 30, 1999 to August 15, 1999. The
completion of our Series A preferred stock financing triggered conversion of the
Notes in March 1999. The number of shares receivable upon conversion of each
promissory note was determined by dividing the outstanding principal by a 7%
discount on the per-share price determined by reference to the per-share price
of our Series A preferred stock offering. Upon conversion of the promissory
notes in March 1999 at a conversion price of $1.24 per share, which reflected a
7% discount from the $1.34 per share fair value at the time of issuance, all of
the outstanding principal amount of the promissory notes was converted into an
aggregate 443,298 shares of common stock.
In 1996, we received a non-interest bearing loan from our president, Alan
S. Ellman, for $19,350 that we repaid during 1999.
RETENTION OF ROBINSON, LERER & MONTGOMERY
In April 1999, we executed an agreement employing the firm of Robinson,
Lerer & Montgomery for corporate communications services for a monthly fee of
$20,000. The services provided under this contract are general public relations
advice and consultancy services. The contract is cancelable at any time without
advance notice. Kenneth Lerer, a principal of Robinson, Lerer & Montgomery is
one of our directors. Linda Robinson, another principal of Robinson, Lerer &
Montgomery, is the spouse of James Robinson III, who is one of our directors and
principal stockholders.
INVESTMENT IN SOFTCOM, INC.
In May 1999, we invested $150,000 to purchase 384,615 shares of Series A
preferred stock of SoftCom, Inc. The SoftCom shares are convertible on a
one-for-one basis into SoftCom common stock. We also hold a warrant that expires
May 14, 2004 for purchase of up to 19,231 additional shares of Series A
preferred stock of SoftCom at an exercise price of $0.39 per share. Jay Chiat,
our chairman and former interim chief executive officer, became a director of
SoftCom at the closing of this investment. The purchase price was negotiated at
arms' length and reflects the fair market price at the time of our investment.
GUARANTEE OF LEASE OBLIGATIONS BY CHAIRMAN
In February 2000, our chairman, Jay Chiat, gave a personal guarantee in
respect of our obligations under a lease of 17,500 square feet of space adjacent
to our headquarters that we assumed from the previous tenant. The lease runs
until January 2009, and our annual obligation is approximately $0.5 million.
SALE OF SERIES C PREFERRED STOCK TO ENTITIES ASSOCIATED WITH DIRECTORS
On July 17, 2000, we sold 6,540,448 shares of Series C preferred stock in a
private placement to entities associated with Mr. David Hodgson, who became a
director upon the closing of that offering. Of these shares, 5,308,097 are held
by General Atlantic Partners 69, L.P., 408,778 shares are held by GapStar, LLC,
and 823,573 are held by GAP Coinvestment Partners II, L.P. General Atlantic
Partners, LLC is the general partner of General Atlantic Partners 69, L.P. and
the managing member of GapStar, LLC. The managing members of General Atlantic
Partners, LLC are also the general partners of GAP Coinvestment Partners II,
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L.P. Mr. Hodgson is a managing member of General Atlantic Partners, LLC and a
general partner of GAP Coinvestment Partners II, L.P.
In the same transaction, we sold 333,987 shares of Series C preferred stock
to General Electric Pension Trust. Patrick McNeela, one of our directors, is a
vice president of General Electric Investment Corporation, the investment
manager of General Electric Pension Trust.
In the same transaction, we sold 497,459 shares of Series C preferred stock
to RRE Ventures II, L.P. and 87,022 shares of Series C preferred stock to RRE
Ventures Fund II, L.P. James Robinson III, one of our directors and principal
stockholders, is a member of RRE Ventures GP II, LLC, which indirectly exercises
exclusive control over RRE Ventures II, L.P. and RRE Ventures Fund II, L.P.
In the same transaction, we sold 16,355 shares of Series C preferred stock
to AMCITO Partners, L.P. Brian Little, one of our directors, has sole voting and
dispositive power over shares owned by AMCITO Partners, L.P.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 17, 2000 by:
- each of our executive officers and directors;
- each person, entity or group known by us to own beneficially more than 5%
of our outstanding common stock; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and include shares of common
stock issuable upon the exercise of stock options or warrants that are
immediately exercisable or exercisable within 60 days. Unless otherwise
indicated, the persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
Percentage ownership calculations are based on 34,583,254 shares
outstanding as of July 17, 2000, which includes 19,602,801 shares of common
stock that will be issued on the conversion of outstanding shares of convertible
preferred stock upon completion of this offering, 1,705,921 shares of common
stock issuable on the exercise of options and 452,200 shares of common stock
issuable on the exercise of warrants.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES BENEFICIALLY OWNED
BENEFICIALLY --------------------
OWNED BEFORE AFTER
NAME PRIOR TO OFFERING OFFERING OFFERING
---- ----------------- -------- --------
<S> <C> <C> <C>
Jay Chiat................................................. 2,688,242 7.8% 6.8%
Kevin C. Clark(1)......................................... 927,226 2.7 2.3
Alan S. Ellman............................................ 4,179,048 12.1 10.6
Gregoire Sentilhes........................................ 269,841 * *
Marianne Howatson(2)...................................... 314,815 * *
Sean P. Morgan............................................ 539,088 1.6 1.4
William P. Kelly(3)....................................... 694,391 2.0 1.8
James D. Robinson III(4).................................. 2,959,527 8.6 7.5
Wm. Brian Little(5)....................................... 284,669 * *
Kenneth B. Lerer.......................................... 310,142 * *
Patrick J. McNeela(6)..................................... -- -- --
David C. Hodgson(7)(8).................................... 6,540,448 18.9 16.5
General Atlantic Partners, LLC(8)......................... 6,540,448 18.9 16.5
All executive officers and directors as a group (17
persons)................................................ 19,926,802 57.6 50.3
</TABLE>
---------------
* Represents less than 1% of outstanding shares of common stock.
(1) Includes options to purchase 576,786 shares of common stock.
(2) Consists of options to purchase 314,815 shares of common stock.
(3) Includes options to purchase 22,486 shares of common stock.
(4) Includes 175,221 shares of common stock held by members of Mr. Robinson's
family. Mr. Robinson disclaims beneficial ownership of these shares. Also
includes 497,459 shares of common stock that will be issued upon the
automatic conversion of convertible preferred stock held by RRE Ventures II,
L.P. and 87,022 shares of common stock that will be issued upon the
automatic conversion of convertible preferred stock held by RRE Ventures
Fund II, L.P. Mr. Robinson is a member of RRE Ventures GP II, LLC, which
indirectly exercises exclusive control over RRE Ventures II, L.P. and RRE
Ventures Fund II, L.P. Mr. Robinson disclaims beneficial ownership of the
shares held by RRE Ventures II, L.P. and RRE Ventures Fund II, L.P.
(5) Includes 226,432 shares of common stock that will be issued upon the
automatic conversion of our convertible preferred stock upon completion of
this offering, which are beneficially owned by Mr. Little
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through AMCITO Partners, L.P. Mr. Little has sole voting and dispositive
power over the shares held by AMCITO Partners, L.P.
(6) Excludes 1,538,904 shares of common stock that will be issued upon the
automatic conversion of our convertible preferred stock upon completion of
this offering, which are held by General Electric Pension Trust and for
which General Electric Pension Trust has sole voting and dispositive power.
Mr. McNeela is a vice president of General Electric Investment Corporation,
the investment manager of General Electric Pension Trust. Mr. McNeela
disclaims any beneficial ownership of these shares.
(7) Consists of the 6,540,448 shares of common stock that will be issued upon
the automatic conversion of convertible preferred stock beneficially owned
by General Atlantic Partners, LLC upon completion of this offering.
(8) Consists of 5,308,097 shares of common stock that will be issued upon the
automatic conversion of convertible preferred stock held by General Atlantic
Partners 69, L.P., 408,778 shares of common stock that will be issued upon
the automatic conversion of convertible preferred stock held by GapStar, LLC
and 823,573 shares of common stock that will be issued upon the automatic
conversion of convertible preferred stock held by GAP Coinvestment Partners
II, L.P., in each case upon completion of this offering. General Atlantic
Partners, LLC is the general partner of General Atlantic Partners 69, L.P.
and the managing member of GapStar, LLC. The managing members of General
Atlantic Partners, LLC are also the general partners of GAP Coinvestment
Partners II, L.P. David Hodgson is a managing member of General Atlantic
Partners, LLC and a general partner of GAP Coinvestment Partners II, L.P.
Mr. Hodgson disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
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DESCRIPTION OF CAPITAL STOCK
Under our certificate of incorporation, we are authorized to issue
100,000,000 shares of common stock and 20,000,000 shares of preferred stock.
Shares of each class have a par value of $0.01 per share. The following
description summarizes the material provisions of our capital stock.
COMMON STOCK
As of July 17, 2000, there were 12,822,332 shares of common stock
outstanding, which were held of record by approximately 50 shareholders. An
additional 19,602,801 shares of common stock will be issued to approximately 90
shareholders by the closing of this offering as the result of the mandatory
conversion of our outstanding preferred stock.
Each share of our common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of
directors. Subject to any preference rights of holders of preferred stock, the
holders of common stock are entitled to receive dividends, if any, declared from
time to time by the directors out of legally available funds. In the event of
our liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after the payment of
liabilities, subject to any rights of holders of preferred stock to prior
distribution.
The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable and the shares of common stock to be issued on completion
of this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock and to designate the
rights, preferences and privileges of each series of preferred stock, which may
be greater than the rights attached to the common stock. It will not be possible
to state the actual effect of the issuance of any shares of preferred stock on
the rights of holders of common stock until the board of directors determines
the specific rights attached to that preferred stock. The effects of issuing
preferred stock could include one or more of the following:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change of control of ScreamingMedia.
There are currently 12,459,884 shares of preferred stock outstanding,
comprising 1,527,085 shares of Series A preferred stock, 2,678,572 shares of
Series B preferred stock and 8,254,227 shares of Series C preferred stock. As of
July 17, 2000, the preferred stock was held of record by approximately 90
holders. The Series A preferred stock will automatically convert into 4,120,684
shares of common stock at the time the registration statement for this offering
becomes effective. The Series B preferred stock will automatically convert into
7,227,874 shares of common stock on closing of this offering. The Series C
convertible preferred stock will automatically convert into 8,254,227 shares of
common stock on closing of this offering. Following these conversions, there
will be no preferred stock outstanding, and we have no current plans to issue
any further shares of preferred stock.
WARRANTS
As of July 17, 2000, we had the following warrants to purchase shares of
common stock outstanding:
- Carter, Ledyard, Milburn, LLP holds a warrant for the issue of 19,275
shares at an exercise price of $2.60 per share;
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- Hut Sachs Studio holds a warrant for the issue of 19,275 shares at an
exercise price of $2.60 per share;
- Deutsche Bank Securities Inc. holds a warrant for the issue of 325,253
shares at an exercise price of $4.15 per share;
- Mad Dogs and Englishmen, our former advertising agency, holds a warrant
for the issue of 9,034 shares at an exercise price of $4.15 per share;
and
- 601 West Associates, the lessor of our headquarters, holds a warrant for
the issue of 79,365 shares at an exercise price of $12.60.
All of the warrants listed above are currently exercisable, subject to
applicable lock-up agreements, and contain standard anti-dilution provisions.
OPTIONS
As of July 17, 2000, options to purchase a total of 6,113,863 shares of
common stock were outstanding, of which 1,371,082 have vested. The exercise
prices of the vested options range from $0.37 to $5.75. In addition, 528,714 of
the outstanding options have an exercise price equal to the initial public
offering price of our common stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Some provisions of our certificate of incorporation and bylaws may be
deemed to have an anti-takeover effect and may delay or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors is elected each year. These provisions, when coupled with the
provision of our certificate of incorporation authorizing the board of directors
to fill vacant directorships or increase the size of the board of directors, may
deter a stockholder from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies created by this
removal with its own nominees.
Cumulative Voting
Our certificate of incorporation expressly denies our stockholders the
right to cumulative voting in the election of directors.
Stockholder Action; Special Meeting of Stockholders
Our certificate of incorporation eliminates the ability of stockholders to
act by written consent. It further provides that special meetings of our
stockholders may be called only by the chairman of the board of directors, the
president or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS
Our bylaws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice in
writing. To be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 90 days prior to the
anniversary date of the immediately preceding annual meeting of stockholders.
However, in the event that the annual meeting is called for a date that is not
within 30 days before or after that anniversary date, notice by the stockholder
in order to be timely must be received not later than the close of business on
the tenth day following the date on which notice of the date of the annual
meeting was mailed to stockholders or made public, whichever first occurs. Our
bylaws also specify requirements as to the form and content of a stockholder's
notice. These provisions may preclude stockholders from bringing matters before
an annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
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<PAGE> 63
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock will
be available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of ScreamingMedia by means of a proxy contest, tender
offer, merger or otherwise.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless either a corporation's certificate of incorporation or bylaws require a
greater percentage. Our certificate of incorporation imposes supermajority vote
requirements in connection with business combination transactions and the
amendment of provisions of our certificate of incorporation and bylaws,
including those provisions relating to the classified board of directors, action
by written consent and the ability of stockholders to call special meetings.
RIGHTS AGREEMENT
Under Delaware law, every corporation may create and issue rights entitling
the holders of the rights to purchase from the corporation shares of its capital
stock of any class or classes, subject to any provisions in its certificate of
incorporation. The price and terms of the shares must be stated in the
certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of the rights.
We have entered into a stockholder rights agreement. Our rights agreement
provides that each share of our common stock outstanding after this offering
will have one right to purchase one-hundredth of a preferred share attached to
it. The purchase price for one one-hundredth of a preferred share will be four
times the average closing price of our common stock for the first five days of
trading after the consummation of this offering.
Initially, the rights under our rights agreement are attached to
outstanding certificates representing our common stock and no separate
certificates representing the rights will be distributed. The rights will
separate from our common stock and be represented by separate certificates
approximately 10 days after someone acquires or commences a tender offer for 15%
of our outstanding common stock.
After the rights separate from our common stock, certificates representing
the rights will be mailed to record holders of our common stock. Once
distributed, the rights certificates alone will represent the rights.
All shares of our common stock issued prior to the date the rights separate
from the common stock will be issued with the rights attached. The rights are
not exercisable until the date the rights separate from the common stock. The
rights will expire on the tenth anniversary of the date of the completion of
this offering unless earlier redeemed or exchanged by us.
If an acquiror obtains or has the rights to obtain 15% or more of our
common stock, then each right will entitle the holder to purchase a number of
shares of our common stock equal to two times the purchase price of each right.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value of twice the purchase
price if an acquiror obtains 15% or more of our common stock and any of the
following occurs:
- we merge into another entity;
- an acquiring entity merges into us; or
- we sell more than 50% of our assets or earning power.
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<PAGE> 64
Under our rights agreement, any rights that are or were owned by an acquiror of
more than 15% of our outstanding common stock will be null and void.
Our rights agreement contains exchange provisions which provide that after
an acquiror obtains 15% or more, but less than 50% of our outstanding common
stock, our board of directors may, at its option, exchange all or part of the
then outstanding and exercisable rights for shares of our common stock. In that
event, the exchange ratio is one common share per right, adjusted to reflect any
stock split, stock dividend or similar transaction.
Our board of directors may redeem all of the outstanding rights under our
rights agreement prior to the earlier of (1) the time that an acquiror obtains
15% or more of our outstanding common stock or (2) the final expiration date of
the rights agreement. The redemption price under our rights agreement is $0.01
per right, subject to adjustment. The right to exercise the rights will
terminate upon the action of our board ordering the redemption of the rights and
the only right of the holders of the rights will be to receive the redemption
price.
Holders of the rights will have no rights as our stockholders including the
right to vote or receive dividends, simply by virtue of holding the rights.
Our rights agreement provides that the provisions of the rights agreement
may be amended by the board of directors prior to 10 days after someone acquires
or commences a tender offer for 15% of our outstanding common stock without the
approval of the holders of the rights. However, after that date, the rights
agreement may not be amended in any manner which would adversely effect the
interests of the holders of the rights, excluding the interests of any acquiror.
In addition, our rights agreement provides that no amendment may be made to
adjust the time period governing redemption at a time when the rights are not
redeemable.
Our rights agreement contains rights that have anti-takeover effects. The
rights may cause substantial dilution to a person or group that attempts to
acquire us without conditioning the offer on a substantial number of rights
being acquired. Accordingly, the existence of the rights may deter acquirors
from making takeover proposals or tender offers. However, the rights are not
intended to prevent a takeover, but rather are designed to enhance the ability
of our board to negotiate with an acquiror on behalf of all the stockholders. In
addition, the rights should not interfere with a proxy contest.
TRANSFER AGENT REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. Its address is 40 Wall Street, New York, New York
10005.
LISTING
Our common stock has been approved for quotation on The Nasdaq National
Market under the symbol "SCRM."
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales in the public markets of substantial amounts of common stock,
including shares issued on the exercise of outstanding options and warrants,
could adversely affect the market prices prevailing from time to time for the
common stock. It could also impair our ability to raise capital through future
sales of equity securities.
After completion of this offering, we will have 37,425,117 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. All of the 5,000,000 shares of
common stock sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any of
the shares that are acquired by affiliates as that term is defined in Rule 144
under the Securities Act.
Shares acquired by affiliates and the remaining shares held by existing
shareholders are restricted securities as that term is defined in Rule 144 under
the Securities Act. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144, which is summarized below. The following table illustrates the shares
eligible for sale in the public market assuming Credit Suisse First Boston
Corporation does not release any portion of the shares subject to lock-up
agreements described below and under "Underwriting."
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
625,997 Upon the date of this prospectus subject, in some cases, to
volume and manner of sale limitations under Rule 144.
89,486 After 90 days from the date of this prospectus.
23,378,429 After 180 days from the date of this prospectus, subject, in
some cases, to volume and manner of sale limitations under
Rule 144.
8,331,205 At various times after 180 days after the date of this
prospectus on expiration of applicable one year holding
periods, subject to volume and manner of sale limitations
under Rule 144.
</TABLE>
LOCK-UP
We have agreed that, without the prior written consent of Credit Suisse
First Boston, we will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities that may be converted
into or exchanged for shares of capital stock for a period of 180 days from the
date of this prospectus. Each of our officers, directors and substantially all
of our existing stockholders and warrant holders have also entered into an
agreement to the same effect. While the underwriters may release these shares
from the restrictions at any time, this will be done, if at all, only on a
case-by-case basis. The underwriters do not currently have any intention of
consenting to a waiver of these restrictions.
RULE 144
In general, Rule 144 has the effect that, beginning 90 days after the date
of this prospectus, a person who has beneficially owned ordinary shares 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:
- 1% of the total number of shares of common stock then outstanding; or
- the average weekly trading volume of the common stock on The Nasdaq
National Market during the four calendar weeks preceding the filing of
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
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<PAGE> 66
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner which was not an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, shares eligible for sale under Rule 144(k) may be
sold immediately on completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases ordinary shares from us in connection with
a compensatory stock or option plan or other written agreement before the
effective date of this prospectus is entitled to resell those shares 90 days
after the effective date of this prospectus in reliance on Rule 144, without
having to comply with the restrictions, including the holding period, contained
in Rule 144.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. It permits
non-affiliates to sell their Rule 701 shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares are required to
wait until 90 days after the date of this prospectus before selling those
shares.
STOCK OPTIONS
Following the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
issued or reserved for issuance under our various stock option plans. The
registration statement will become effective automatically upon filing. As of
July 17, 2000, options to purchase 6,113,863 shares of common stock were issued
and outstanding, of which 1,371,082 options had vested. Accordingly, shares
registered under the registration statement will, subject to vesting provisions
and Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after the 180-day lock-up agreements expire.
REGISTRATION RIGHTS
Within the six months following the closing of this offering, both the
holders of the common stock issued on conversion of our Series B preferred stock
and the holders of the common stock issued on conversion of our Series C
preferred stock may require us on up to two occasions to use our best efforts to
file a registration statement covering the public sale of part of that common
stock having an aggregate offering price of more that $10 million. We have the
right to delay any registration required by up to 90 days.
In addition to this right, both groups of holders are also entitled to
require us to register their shares on any registration that we initiate, and we
are obliged to undertake three registrations per year on Form S-3, provided that
a minimum of $3 million worth of shares of common stock are offered on each
registration.
The warrant issued to Deutsche Bank Securities Inc. gives the holder the
right to require us to include the shares issued to it on exercise of the
warrant in any future registration statement relating to our equity securities.
This right does not apply to registration statements filed in connection with
our employee stock plans.
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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a Non-U.S. Holder. As used in this prospectus, the term "Non-U.S. Holder" is
a person that is not:
- a citizen or individual resident of the United States for U.S. federal
income tax purposes;
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States;
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust, in general, if it is subject to the primary supervision of a
court within the United States and the control of one or more U.S.
persons.
An individual may, subject to some exceptions, be treated as a resident of
the United States for U.S. federal income tax purposes, instead of a
nonresident, by, among other things, being present in the United States for at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year -- counting for
these purposes all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days present
in the second preceding year. Residents are subject to U.S. federal taxes as if
they were U.S. citizens.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position, including, if the Non-U.S. Holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by determinations made at the partner
level;
- the tax consequences for the shareholders, partners or beneficiaries of a
Non-U.S. Holder;
- special tax rules that may apply to some Non-U.S. Holders, including
without limitation, banks, insurance companies, dealers in securities and
traders in securities; or
- special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a straddle, hedge or conversion transaction.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, applicable Treasury regulations, and administrative and
judicial interpretations, all as of the date of this prospectus, and all of
which may change, retroactively or prospectively. The following summary is for
general information. 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 do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
common stock, dividends paid to a Non-U.S. Holder of common stock generally will
be subject to withholding of U.S. federal income tax at a 30% rate, or a lower
rate as may be provided by an applicable income tax treaty. Canadian holders of
the common stock, for example, will generally be subject to a reduced rate of
15% under the Canada-U.S. Income Tax Treaty. Non-U.S. Holders should consult
their tax advisors regarding their entitlement to benefits under a relevant
income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment, or in the case of an individual, a
fixed base, in the United States, as provided in that treaty, referred to as
U.S. trade or
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business income, are generally subject to U.S. federal income tax on a net
income basis at regular graduated rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate U.S. Internal
Revenue Service form with the payor. Any U.S. trade or business income received
by a Non-U.S. Holder that is a corporation may also, under some circumstances,
be subject to an additional "branch profits tax" at a 30% rate or a lower rate
as specified by an applicable income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
December 31, 2000:
- a Non-U.S. Holder of common stock who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number; and
- look-through rules will apply for tiered partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit of
any excess amounts withheld by filing an appropriate claim for a refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate Non-U.S.
Holder;
- the Non-U.S. Holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for more than 182 days in the
taxable year of the disposition and meets other requirements;
- the Non-U.S. Holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to some U.S. expatriates; or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or period that the
Non-U.S. Holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in trade or business. We believe that
we have not been, are not currently, and do not anticipate becoming, a "U.S.
real property holding corporation," and thus we believe that the effects which
could arise if we were ever a "U.S. real property holding corporation" will not
apply to a Non-U.S. Holder. Even if we were, or were to become, a "U.S. real
property holding corporation," no adverse tax consequences would apply to a
Non-U.S. Holder whose holdings, direct and indirect, at all times during the
applicable period, constituted 5% or less of our common stock, provided that our
common stock was regularly traded on an established securities market.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the IRS and to each Non-U.S. Holder the amount
of dividends paid to that holder and the tax withheld with respect to those
dividends. Copies of the information returns reporting those dividends and
withholding may also be made available to the tax authorities in the country in
which the Non-U.S. Holder is a resident under the provisions of an applicable
income tax treaty or agreement.
Under some circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, Non-U.S. Holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends prior to 2001 to an address outside the United
States. For dividends paid after December 31, 2000, however, a Non-U.S. Holder
of common stock that fails to certify its Non-U.S. Holder status in accordance
with applicable U.S. Treasury Regulations may be subject to backup withholding
at a rate of 31% on payments of dividends.
The payment of the proceeds of the disposition of common stock by a holder
to or through the U.S. office of a broker through a non-U.S. branch of a U.S.
broker generally will be subject to information reporting and backup withholding
at a rate of 31% unless the holder either certifies its status as a Non-U.S.
Holder under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a Non-U.S. Holder of common stock
to or through a non-U.S. office of non-U.S. broker will not be subject to backup
withholding or information reporting unless the non-U.S. broker is a "U.S.
related person." In the case of the payment of proceeds from the disposition of
common stock by or through a non-U.S. office of a broker that is a U.S. person
or a "U.S. related person," information reporting, but currently not backup
withholding, on the payment applies unless the broker receives a statement from
the owner, signed under penalty of perjury, certifying its non-U.S. status or
the broker has documentary evidence in its files that the holder is a Non-U.S.
Holder and the broker has no actual knowledge to the contrary. For this purpose,
a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
- a foreign person, 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business; or
- effective after December 31, 2000, a foreign partnership if, at any time
during the taxable year, (A) at least 50% of the capital or profits
interest in the partnership is owned by U.S. persons or (B) the
partnership is engaged in a U.S. trade or business.
Effective after December 31, 2000, backup withholding may apply to the
payment of disposition proceeds by or through a non-U.S. office of a broker that
is a U.S. person or a "U.S. related person" unless certification requirements
are satisfied or an exemption is otherwise established and the broker has no
actual knowledge that the holder is a U.S. person. Non-U.S. Holders should
consult their own tax advisors regarding the application of the information
reporting and backup withholding rules to them, including changes to these rules
that will become effective after December 31, 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and Thomas Weisel Partners LLC are acting as representatives,
the following respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C> <C>
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Thomas Weisel Partners LLC..................................
--------
Total.......................................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this 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 our common stock 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 the
selling group members at that price less a concession of $ per share. The
underwriters and the 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
for grants of employees stock options pursuant to the terms of any plan in
effect on the date of this prospectus, issuances of securities pursuant to the
exercise of employee stock options outstanding on the date of this prospectus,
employee stock purchases pursuant to the term of any plan in effect on the date
of this prospectus or the issuance of shares pursuant to the exercise of any
warrants outstanding on the date of this prospectus.
Our officers and directors and substantially all our existing stockholders
and warrant holders 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
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common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock, whether
any such transaction is to be settled by delivery of our common stock or such
other securities, in cash or otherwise, or publicly disclose the intention to
make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 300,000 shares of common stock for our employees and certain other
persons associated with us who have expressed an interest in purchasing common
stock in the offering. The number of shares of common stock available for sale
to the general public in the offering will be reduced to the extent these
persons purchase these 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 contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock listed on The Nasdaq
Stock Market's National Market under the symbol "SCRM."
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 representatives, and may not reflect the market price for our
common stock that may prevail following this offering. We will consider, among
others, the following principal factors in determining the initial public
offering price:
- the information in this prospectus and otherwise available to the
representatives;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we will compete;
- our past and present operations;
- our past and present earnings and current financial position;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the recent prices of, and the demand for, publicly traded common stock of
generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurance that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to this offering or that an active trading market for our
common stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- 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.
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<PAGE> 72
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common stock to be higher than it would otherwise be
in the absence of these transactions. 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.
Thomas Weisel Partners, LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on numerous public offerings of equity securities. Thomas Weisel
Partners does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
In connection with the placement of 2,678,572 shares of Series B preferred
stock in our October 1999 private placement, we issued Deutsche Bank Securities
Inc., one of the representatives of the underwriters, a warrant to purchase
325,283 shares of our common stock. This warrant is exercisable at a price of
$4.15 per share. In connection with the placement of 8,254,227 shares of Series
C preferred stock on July 17, 2000, we paid a fee of $1.5 million to Credit
Suisse First Boston Corporation and $148,997 to Deutsche Bank Securities Inc.
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 (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
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.
65
<PAGE> 73
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 the 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 pursuant to 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 any 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.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. The
underwriters will be represented in connection with the offering by Cravath,
Swaine & Moore, New York, New York.
EXPERTS
The financial statements of ScreamingMedia Inc. as of December 31, 1998 and
1999 and for the years ended December 31, 1998 and 1999, included in this
prospectus, have been audited by Deloitte and Touche LLP, independent auditors,
as stated in their report appearing in this prospectus and are included in
reliance upon the report of that firm given upon their authority as experts in
accounting and auditing.
Our financial statements for the year ended December 31, 1997 included in
this prospectus and in the registration statement have been audited by David
Tarlow & Co., C.P.A., P.C., independent auditors, as stated in their report
appearing in this prospectus, and are included in reliance upon the report of
that firm given upon their authority as experts in accounting and auditing.
66
<PAGE> 74
CHANGE IN ACCOUNTANTS
Effective June 16, 1999, Deloitte & Touche LLP was engaged commencing with
the fiscal years December 31, 1998 and December 31, 1999 as our independent
auditors, replacing David Tarlow & Co., C.P.A., P.C., who had previously served
as our independent auditors. The decision to dismiss David Tarlow & Co., C.P.A.,
P.C. and to engage Deloitte & Touche LLP was approved by our board of directors.
In the period from January 1, 1997 to June 16, 1999, David Tarlow & Co., C.P.A.,
P.C. issued no audit report that was qualified or modified as to uncertainty,
audit scope or accounting principles, no adverse opinions or disclaimers of
opinion on any of our financial statements, and there were no disagreements with
David Tarlow & Co., C.P.A., P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures.
Prior to June 16, 1999, we had not consulted with Deloitte & Touche LLP on items
which involved our accounting principles or the form of audit opinion to be
issued on our financial statements.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is a part of a registration statement on Form S-1 that we
have filed with the Securities and Exchange Commission under the Securities Act,
with respect to the common stock offered in this prospectus. This prospectus
does not contain all the information which is in the registration statement.
Certain parts of the registration statement are omitted as allowed by the rules
and regulations of the SEC. We refer you to the registration statement for
further information about our company and the securities offered in this
prospectus. You can inspect and copy the registration statement and the reports
and other information we file with the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330. The
same information will be available for inspection and copying at the regional
offices of the SEC located at 7 World Trade Center, 13(th) Floor, New York, N.Y.
10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can also obtain copies of this material from the public
reference room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC also maintains a Web site which provides on-line
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
SEC. You can inspect and copy these reports and other information of our company
at the locations set forth above or download these reports from the SEC's Web
site.
Our common stock has been approved for quotation on The Nasdaq National
Market.
67
<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Independent Auditors' Report................................ F-3
Balance Sheets as of December 31, 1998 and 1999 and as of
June 30, 2000 (unaudited)................................. F-4
Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and for the six month periods ended
June 30, 1999 (unaudited) and 2000 (unaudited)............ F-6
Statements of Stockholders' Equity (deficiency) for the
years ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 2000 (unaudited)........................... F-7
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and for the six month periods ended
June 30, 1999 (unaudited) and 2000 (unaudited)............ F-8
Notes to Financial Statements............................... F-10
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ScreamingMedia Inc.
We have audited the accompanying balance sheets of ScreamingMedia Inc. (the
"Company") as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficiency) and cash flows for each of the two
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1999, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
New York, New York
January 19, 2000 (July 17, 2000 as to
Note 12)
F-2
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ScreamingMedia Inc.
New York, New York
We have audited the accompanying statements of operations, stockholders
equity (deficiency) and cash flows of ScreamingMedia Inc. for the year ended
December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
ScreamingMedia Inc. for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ DAVID TARLOW & CO., C.P.A.,
P.C.
--------------------------------------
David Tarlow & Co., C.P.A., P.C.
New York, New York
December 28, 1999
F-3
<PAGE> 78
SCREAMINGMEDIA INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 2000 2000
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 120,357 $ 22,121,667 $ $9,691,179
Accounts receivable, net of allowance
for doubtful accounts of $10,000,
$138,802 and $500,000 as of
December 31, 1998 and 1999 and June
30, 2000, respectively............. 92,112 1,398,980 2,656,870
Prepaid expenses...................... -- 3,248,295 1,861,553
------------ ------------ ------------
Total current assets.......... 212,469 26,768,942 14,209,602
PROPERTY AND EQUIPMENT -- Net of
accumulated depreciation.............. 41,333 4,552,495 11,216,667
INVESTMENTS............................. -- 349,987 349,987
DEFERRED ISSUANCE COSTS................. -- -- 2,374,068
OTHER ASSETS............................ 20,232 698,751 1,822,086
------------ ------------ ------------
TOTAL ASSETS.................. $ 274,034 $ 32,370,175 $ 29,972,410
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued
expenses........................... $ 124,249 $ 3,273,527 $ 6,850,587
Current portion of notes payable --
stockholder........................ 19,351 -- --
Deferred revenue...................... 45,108 873,360 2,228,809
Current portion of capital lease
obligations........................ -- 691,643 1,630,606
------------ ------------ ------------
Total current liabilities..... 188,708 4,838,530 10,710,002
------------ ------------ ------------
NONCURRENT LIABILITIES:
Notes payable -- stockholders, less
current portion.................... 275,000 -- --
Capital lease obligations, less
current portion.................... -- 646,586 3,578,126
------------ ------------ ------------
Total liabilities............. 463,708 5,485,116 14,288,128
------------ ------------ ------------
COMMITMENTS
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series B convertible preferred stock,
$0.01 par value, no shares
authorized, issued, and
outstanding, 1998, 2,678,572 shares
authorized, issued, and
outstanding, 1999, 2,678,572 shares
authorized, issued and outstanding,
2000, no shares authorized, issued
and outstanding 2000 -- pro forma.. -- 27,433,838 27,742,200 $ --
------------ ------------ ------------ -----------
</TABLE>
F-4
<PAGE> 79
BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 2000 2000
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $0.0001 par value,
4,000,000 shares authorized and
issued, and 3,620,000 shares
outstanding at December 31, 1998
and no shares authorized, issued,
and outstanding at December 31,
1999, June 30, 2000 and 2000 -- pro
forma.............................. 400 -- -- --
Series A convertible preferred stock,
$0.01 par value, no shares
authorized, issued, and
outstanding, 1998, 1,527,085 shares
authorized, issued, and outstanding
at December 31, 1999 and June 30,
2000, and no shares authorized,
issued and outstanding at June 30,
2000 -- pro forma.................. -- 15,271 15,271 --
Common stock, $0.0001 par value,
3,400,000 shares authorized and
issued, and 2,720,000 shares
outstanding at December 31, 1998
and no shares authorized, issued
and outstanding at December 31,
1999, June 30, 2000, and
2000 -- pro forma.................. 340 -- -- --
Common stock, $0.01 par value, no
shares authorized, issued, and
outstanding, 1998, 100,000,000
shares authorized and 14,040,600,
14,454,879 and 25,803,437 issued
and 12,475,521, 12,822,332 and
24,170,914 outstanding at December
31, 1999, June 30, 2000 and
2000 -- pro forma, respectively.... -- 140,406 144,549 258,034
Additional paid-in capital............ 474,874 22,820,644 42,157,606 69,801,592
Warrants.............................. -- 787,000 787,102 787,102
Deferred compensation................. -- (10,379,049) (18,364,487) (18,364,487)
Treasury stock........................ (19,311) (19,311) (1,019,311) (1,019,311)
Accumulated deficit................... (645,977) (13,913,740) (35,778,648) (35,778,648)
------------ ------------ ------------ -----------
Total stockholders' equity
(deficiency)................ (189,674) (548,779) (12,057,918) $15,684,282
------------ ------------ ------------ ===========
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)................... $ 274,034 $ 32,370,175 $ 29,972,410
============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 80
SCREAMINGMEDIA INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
--------- ---------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Services.................................. $ 246,143 $ 308,661 $ 2,479,660 $ 558,042 $ 6,260,360
Set-up fee................................ 40,865 67,582 492,360 94,709 1,078,724
Other..................................... 287,090 190,564 13,170 8,518 85,082
--------- ---------- ------------ ----------- ------------
Total revenue...................... 574,098 566,807 2,985,190 661,269 7,424,166
--------- ---------- ------------ ----------- ------------
OPERATING EXPENSES:
Cost of services (excluding depreciation
of $--, $--, and $118,702 in 1997, 1998
and 1999 and $1,572 and $249,212 for the
six months ended June 30, 1999 and 2000,
respectively, shown below).............. 69,801 130,111 973,518 156,101 2,309,596
Research and development (excluding stock-
based compensation of $--, $--, and
$63,943 in 1997, 1998 and 1999, and $--
and $1,150,036, for the six months ended
June 30, 1999 and 2000, respectively,
shown below)............................ 107,278 97,077 893,686 318,286 1,954,299
Sales and marketing (excluding stock-based
compensation of $--, $--, and $1,821,708
in 1997, 1998 and 1999, and $-- and
$2,536,228, for the six months ended
June 30, 1999 and 2000, respectively,
shown below)............................ 87,200 104,204 3,768,005 520,080 7,225,472
General and administrative (excluding
stock-based compensation of $25,000,
$350,000 and $4,176,647, in 1997, 1998
and 1999 and $134,372 and $6,164,397,
for the six months ended June 30, 1999
and 2000, respectively, shown below).... 346,214 454,970 4,330,384 818,943 6,721,532
Depreciation and amortization............. 33,117 26,119 451,309 47,273 1,280,923
Stock-based compensation.................. 25,000 350,000 6,062,298 134,372 9,850,661
--------- ---------- ------------ ----------- ------------
Total operating expenses........... 668,610 1,162,481 16,479,200 1,995,055 29,342,483
--------- ---------- ------------ ----------- ------------
OPERATING LOSS.............................. (94,512) (595,674) (13,494,010) (1,333,786) (21,918,317)
--------- ---------- ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Interest income........................... -- -- 381,373 30,788 438,904
Interest expense.......................... (449) (10,993) (53,102) -- (77,023)
Other expense............................. -- (3,160) -- -- (110)
--------- ---------- ------------ ----------- ------------
Total other income (expense)....... (449) (14,153) 328,271 30,788 361,771
--------- ---------- ------------ ----------- ------------
NET LOSS.................................... $ (94,961) $ (609,827) $(13,165,739) $(1,302,998) $(21,556,546)
--------- ---------- ------------ ----------- ------------
BASIC NET LOSS PER SHARE.................... $ (0.06) $ (0.35) $ (1.07) $ (0.11) $ (1.61)
========= ========== ============ =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING......................... 1,585,410 1,730,681 12,298,091 12,120,332 13,425,004
========= ========== ============ =========== ============
Pro forma basic net loss per share
(unaudited)............................... $ (0.77) $ (0.87)
============ ============
Pro forma weighted average number of shares
of common stock outstanding (unaudited)... 17,038,007 24,773,578
============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 81
SCREAMINGMEDIA INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND THE SIX MONTHS ENDED JUNE 30,
2000 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
-------------------
PREFERRED STOCK SERIES A COMMON STOCK COMMON STOCK
------------------- ------------------- ------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... 3,250,000 $325 -- $ -- 3,230,000 $ 323 -- $ --
Stock issuance.................... 750,000 75 -- -- 170,000 17 -- --
Net loss for the year ended
December 31, 1997............... -- -- -- -- -- -- -- --
---------- ---- --------- ------- ---------- ----- ---------- --------
BALANCE, DECEMBER 31,
1997.............................. 4,000,000 400 -- -- 3,400,000 340 -- --
Issuance of shares from treasury
for directors' fees............. -- -- -- -- -- -- -- --
Interest expense on convertible
note............................ -- -- -- -- -- -- -- --
Net loss for the year ended
December 31, 1998.............. -- -- -- -- -- -- -- --
---------- ---- --------- ------- ---------- ----- ---------- --------
BALANCE, DECEMBER 31,
1998.............................. 4,000,000 400 -- -- 3,400,000 340 -- --
Reincorporation................... (4,000,000) (400) -- -- (3,400,000) (340) 13,492,064 134,921
Stock grants...................... -- -- -- -- -- -- 105,238 1,052
Issuance of Series A preferred
stock........................... -- -- 1,527,085 15,271 -- -- -- --
Warrants granted to investment
bankers......................... -- -- -- -- -- -- -- --
Warrants granted for legal
services........................ -- -- -- -- -- -- -- --
Warrants granted for architectural
services........................ -- -- -- -- -- -- -- --
Conversion of notes into common
stock........................... -- -- -- -- -- -- 443,298 4,433
Interest expense on convertible
notes........................... -- -- -- -- -- -- -- --
Issuance of stock options to
employees....................... -- -- -- -- -- -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
Preferred stock dividends......... -- -- -- -- -- -- -- --
---------- ---- --------- ------- ---------- ----- ---------- --------
BALANCE, DECEMBER 31, 1999......... -- -- 1,527,085 15,271 -- -- 14,040,600 140,406
Issuance of stock options to
employees....................... -- -- -- -- -- -- -- --
Warrant granted to sublessor...... -- -- -- -- -- -- -- --
Exercise of warrant granted to
sublessor....................... -- -- -- -- -- -- 67,460 675
Exercise of stock options by
employees....................... -- -- -- -- -- -- 346,819 3,468
Warrant granted to advertising
firm............................ -- -- -- -- -- -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
Preferred stock dividends......... -- -- -- -- -- -- -- --
---------- ---- --------- ------- ---------- ----- ---------- --------
BALANCE, JUNE 30, 2000
(Unaudited)....................... -- $ -- 1,527,085 $15,271 -- $ -- 14,454,879 $144,549
========== ==== ========= ======= ========== ===== ========== ========
<CAPTION>
TREASURY STOCK
----------------------------------------------
ADDITIONAL COMMON STOCK PREFERRED STOCK
PAID-IN DEFERRED ------------------------ -------------------
CAPITAL WARRANTS COMPENSATION SHARES AMOUNT SHARES AMOUNT
---------- -------- ------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... $ 100,352 $ -- $ -- (1,079,365) $ (13,318) (380,000) $(12,652)
Stock issuance.................... 24,908 -- -- -- -- -- --
Net loss for the year ended
December 31, 1997............... -- -- -- -- -- -- --
----------- -------- ------------ ---------- ----------- -------- --------
BALANCE, DECEMBER 31,
1997.............................. 125,260 -- -- (1,079,365) (13,318) (380,000) (12,652)
Issuance of shares from treasury
for directors' fees............. 343,341 -- -- 539,683 6,659 -- --
Interest expense on convertible
note............................ 6,273 -- -- -- -- -- --
Net loss for the year ended
December 31, 1998.............. -- -- -- -- -- -- --
----------- -------- ------------ ---------- ----------- -------- --------
BALANCE, DECEMBER 31,
1998.............................. 474,874 -- -- (539,682) (6,659) (380,000) (12,652)
Reincorporation................... (134,181) -- -- (1,025,397) (12,652) 380,000 12,652
Stock grants...................... 76,723 -- -- -- -- -- --
Issuance of Series A preferred
stock........................... 5,381,176 -- -- -- -- -- --
Warrants granted to investment
bankers......................... -- 687,000 -- -- -- -- --
Warrants granted for legal
services........................ -- 50,000 -- -- -- -- --
Warrants granted for architectural
services........................ -- 50,000 -- -- -- -- --
Conversion of notes into common
stock........................... 545,567 -- -- -- -- -- --
Interest expense on convertible
notes........................... 35,138 -- -- -- -- -- --
Issuance of stock options to
employees....................... 16,441,347 -- (16,441,347) -- -- -- --
Amortization of deferred
compensation.................... -- -- 6,062,298 -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Preferred stock dividends......... -- -- -- -- -- -- --
----------- -------- ------------ ---------- ----------- -------- --------
BALANCE, DECEMBER 31, 1999......... 22,820,644 787,000 (10,379,049) 1,565,079 (19,311) -- --
Issuance of stock options to
employees....................... 17,836,099 -- (17,836,099) -- -- -- --
Warrant granted to sublessor...... -- 740,000 -- -- -- -- --
Exercise of warrant granted to
sublessor....................... 1,019,325 (740,000) -- 67,460 (1,000,000) -- --
Exercise of stock options by
employees....................... 481,538 -- -- -- -- -- --
Warrant granted to advertising
firm............................ -- 102 -- -- -- -- --
Amortization of deferred
compensation.................... -- -- 9,850,661 -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Preferred stock dividends......... -- -- -- -- -- -- --
----------- -------- ------------ ---------- ----------- -------- --------
BALANCE, JUNE 30, 2000
(Unaudited)....................... $42,157,606 $787,102 $(18,364,487) 1,632,539 $(1,019,311) -- $ --
=========== ======== ============ ========== =========== ======== ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----
<S> <C> <C>
BALANCE, JANUARY 1, 1997........... $ 58,811 $ 133,841
Stock issuance.................... -- 25,000
Net loss for the year ended
December 31, 1997............... (94,961) (94,961)
------------ ------------
BALANCE, DECEMBER 31,
1997.............................. (36,150) 63,880
Issuance of shares from treasury
for directors' fees............. -- 350,000
Interest expense on convertible
note............................ -- 6,273
Net loss for the year ended
December 31, 1998.............. (609,827) (609,827)
------------ ------------
BALANCE, DECEMBER 31,
1998.............................. (645,977) (189,674)
Reincorporation................... -- --
Stock grants...................... -- 77,775
Issuance of Series A preferred
stock........................... -- 5,396,447
Warrants granted to investment
bankers......................... -- 687,000
Warrants granted for legal
services........................ -- 50,000
Warrants granted for architectural
services........................ -- 50,000
Conversion of notes into common
stock........................... -- 550,000
Interest expense on convertible
notes........................... -- 35,138
Issuance of stock options to
employees....................... -- --
Amortization of deferred
compensation.................... -- 6,062,298
Net loss.......................... (13,165,739) (13,165,739)
Preferred stock dividends......... (102,024) (102,024)
------------ ------------
BALANCE, DECEMBER 31, 1999......... (13,913,740) (548,779)
Issuance of stock options to
employees....................... -- --
Warrant granted to sublessor...... -- 740,000
Exercise of warrant granted to
sublessor....................... -- (720,000)
Exercise of stock options by
employees....................... -- 485,006
Warrant granted to advertising
firm............................ -- 102
Amortization of deferred
compensation.................... -- 9,850,661
Net loss.......................... (21,556,546) (21,556,546)
Preferred stock dividends......... (308,362) (308,362)
------------ ------------
BALANCE, JUNE 30, 2000
(Unaudited)....................... $(35,778,648) $(12,057,918)
============ ============
</TABLE>
See notes to financial statements.
F-7
<PAGE> 82
SCREAMINGMEDIA INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss....................... $ (94,961) $(609,827) $(13,165,739) $(1,302,998) $(21,556,546)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization.............. 33,117 26,119 451,309 47,273 1,280,923
Stock/warrants issued for
services.................. 25,000 350,000 105,400 -- --
Interest from beneficial
conversion................ -- 6,273 35,138 -- --
Stock-based compensation.... -- -- 6,062,298 134,372 9,850,661
Changes in operating assets
and liabilities:
Decrease (increase) in
account receivable..... 41,114 (5,898) (1,306,868) (257,196) (1,257,890)
(Increase) in prepaid
expenses and other
assets................. -- (1,000) (3,926,813) (306,697) (1,010,930)
Increase in account
payable and accrued
expenses............... 19,448 79,210 3,149,277 332,971 3,577,430
Increase in deferred
revenue................ -- 45,108 828,252 133,759 1,355,449
---------- --------- ------------ ----------- ------------
Net cash provided by
(used in) operating
activities........... 23,718 (110,015) (7,767,746) (1,218,516) (7,760,903)
---------- --------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................... (13,218) (6,675) (3,415,656) 516,818 (3,543,228)
Purchase of investments........ -- -- (349,987) (299,987) --
---------- --------- ------------ ----------- ------------
Net cash used in
investing
activities........... (13,218) (6,675) (3,765,643) (816,805) (3,543,228)
---------- --------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from the issuance of
convertible preferred stock,
net......................... -- -- 28,018,814 -- --
Borrowings from directors and
officers.................... -- 252,114 275,000 275,000 --
Repayments of loans to
stockholders................ (10,500) (15,067) (19,350) (19,350) --
Repayment of capital lease
obligation.................. -- -- (208,587) -- (531,363)
Proceeds from sale of Series A
Preferred Stock............. -- -- 5,468,822 5,474,417 --
</TABLE>
F-8
<PAGE> 83
STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Payments for the repurchase of
treasury stock.............. -- -- -- -- (1,000,000)
Proceeds from exercise of
warrants and stock
options..................... -- -- -- -- 405,006
---------- --------- ------------ ----------- ------------
Net cash (used in)
provided by financing
activities........... (10,500) 237,047 33,534,699 5,730,067 (1,126,357)
---------- --------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN
CASH........................... -- 120,357 22,001,310 3,694,746 (12,430,488)
CASH, BEGINNING OF YEAR.......... -- -- 120,357 120,357 22,121,667
---------- --------- ------------ ----------- ------------
CASH, END OF PERIOD.............. $ -- $ 120,357 $ 22,121,667 $ 3,815,103 $ 9,691,179
========== ========= ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest......... $ 449 $ 35 $ 22,648 $ -- $ 77,023
========== ========= ============ =========== ============
Cash paid for income taxes..... $ 688 $ 1,018 $ 1,171 $ -- $ --
========== ========= ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF
NON-CASH TRANSACTIONS:
Fixed assets acquired under
capital leases............ $ -- $ -- $ 1,531,418 $ 120,351 $ 4,401,866
========== ========= ============ =========== ============
Conversion of promissory
notes into common stock... $ -- $ -- $ 550,000 $ 550,000 $ --
========== ========= ============ =========== ============
Warrant granted to
investment bankers........ $ -- $ -- $ 687,000 $ -- $ --
========== ========= ============ =========== ============
Warrant granted for legal
services.................. $ -- $ -- $ 50,000 $ -- $ --
========== ========= ============ =========== ============
Warrant granted for
architectural services.... $ -- $ -- $ 50,000 $ -- $ --
========== ========= ============ =========== ============
Warrant issued for common stock
to sublessor in connection
with new lease.............. $ -- $ -- $ -- $ -- $ 740,000
========== ========= ============ =========== ============
</TABLE>
See notes to financial statements.
F-9
<PAGE> 84
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
ScreamingMedia Inc. (formerly ScreamingMedia.net, Inc.) (the "Company") was
incorporated in the state of Delaware on January 22, 1999, for the purpose of
reincorporating The Interactive Connection, Inc. ("Interactive"), a corporation
incorporated in the state of New York on August 16, 1993. On January 28, 1999, a
merger took place between these two companies (under common control) with the
Company being the surviving corporation. The merger was treated as if it were a
pooling of interests (see Note 10).
The Company's primary business is aggregating, processing, filtering and
delivering content to its customers. The Company receives the data from various
content providers, processes and filters it using customized software to meet
individual customers' needs, and then distributes the content almost
instantaneously to such customers. Prior to 1999, the Company derived revenue
from other services, including Web hosting, server hosting and maintenance and
Web design and consulting.
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
BASIS OF PRESENTATION -- The financial statements of the Company have been
prepared on the accrual basis of accounting. A summary of the major accounting
policies followed in the preparation of the accompanying financial statements,
which conform to generally accepted accounting principles, is presented below.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION --
Property and equipment are stated at cost, and in the case of equipment under
capital leases, the present value of the future minimum lease payments, less
accumulated depreciation and amortization. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives of the
depreciable assets, which range from three to seven years, or, if shorter, the
lease term. Improvements are capitalized, while repair and maintenance costs are
charged to operations as incurred.
INVESTMENTS -- Investments of less than 20% of the voting interest of other
companies are presented at cost. In the event that management identifies an
impairment in the estimated fair value of an investment to an amount below cost
(other than a temporary decline), such investment will be written down to fair
market value.
DEFERRED ISSUANCE COSTS -- The Company has deferred specific incremental
costs directly attributable to its initial public offering. These costs, which
exclude management salaries and other general and administrative expenses, will
be charged against the gross proceeds of the offering. If the offering is
cancelled, such costs will be expensed.
F-10
<PAGE> 85
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
IMPAIRMENT OF ASSETS -- The Company's long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When such events occur, the Company
measures impairment by comparing the carrying value of the long-lived asset to
the estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows were less than the carrying amount of the assets, the Company
would recognize an impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. The Company determined that, as of
December 31, 1998 and 1999, there had been no impairment in the carrying value
of its long-lived assets.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE -- As of
January 1, 1999, costs of computer software developed or obtained for internal
use are capitalized while in the application development stage and are expensed
while in the preliminary stage and post-implementation stage. The Company
amortizes these capitalized costs over the life of the systems, which is
estimated to be two years. As of December 31, 1999, the Company capitalized
approximately $1,314,000 of internal development and software purchase costs
relating to its internal use software incurred during the application
development stage. Prior to January 1, 1999, the Company had no significant
costs related to software development. Normal maintenance of internal use
software is expensed as incurred.
DEFERRED REVENUES -- Deferred revenues represents amounts billed in excess
of revenues recognized. Such deferred revenues relate to set-up fees. (See
revenue recognition below.) Included in accounts receivable are amounts due
(under contract) relating to deferred revenues.
REVENUE RECOGNITION -- Income is derived primarily from the Company's
services and related set-up fees. Services contracts have a minimum monthly
charge. The minimum revenues from these services, net of rebates and allowances,
are recognized on a straight-line basis, over the lives of the contracts, which
are typically for terms of one year. Revenue amounts in addition to the minimum
charge are recognized as the services are delivered. Revenue for set-up fees are
recognized ratably over the initial term of the contract, commencing with the
service start date specified in the contract. The Company has also derived
revenue from its other Internet-related activities such as Web Site development,
custom programming and hosting. Such revenue is recognized as earned over the
term of each agreement.
ADVERTISING COSTS -- The costs of advertising are expensed as incurred.
INCOME TAXES -- The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates currently in effect. State
and local taxes are based on factors other than income.
NET LOSS PER COMMON SHARE -- Basic loss per common share was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding. Diluted loss per share has not been presented since the impact of
options, warrants and conversion of preferred shares would have been anti-
dilutive (see Notes 9 and 10).
UNAUDITED PRO FORMA NET LOSS PER SHARE AND UNAUDITED PRO FORMA
STOCKHOLDERS' EQUITY -- Unaudited pro forma net loss per share has been computed
in the same manner as net loss per common share
F-11
<PAGE> 86
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
as described above and also gives effect to the conversion of all convertible
preferred stock that will automatically occur upon completion of the Company's
initial public offering (using the if-converted method) (see Notes 9 and 10). If
the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding as of June 30, 2000 will automatically
be converted into an aggregate of 11,348,574 shares of common stock, based on
the shares of all convertible preferred stock outstanding at June 30, 2000.
Unaudited pro forma stockholders' equity at June 30, 2000, as adjusted for the
conversion of all convertible preferred stock, is disclosed on the balance
sheet. Pro forma basic net loss per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1999 2000
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Net loss....................................... $(13,165,739) $(21,556,546)
============ ============
Shares used in computing basic net loss per
share........................................ 12,298,091 13,425,004
Adjusted to reflect the effect of the automatic
conversion of all convertible preferred stock
from the date of issuance.................... 4,739,916 11,348,574
------------ ------------
Weighted average shares used in computing pro
forma basic net loss per share............... 17,038,007 24,773,578
============ ============
Pro forma basic net loss per share............. $ (0.77) $ (0.87)
============ ============
</TABLE>
STOCK SPLITS -- On December 22, 1999, the Board of Directors of the Company
approved a 100% stock dividend (two-for-one stock split). Additionally, on April
11, 2000, the Company effected a 1.7 for one stock split. The Company's
financial statements have been retroactively adjusted to show the effect of
these stock splits for all periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and
notes payable, are carried at cost, which approximates their fair value because
of the short-term maturity of these instruments and the relatively stable
interest rate environment.
RECENT ACCOUNTING PRONOUNCEMENTS -- Effective January 1, 1998, the Company
adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the way business enterprises
report information about operating segments, as well as enterprise-wide
disclosures about products and services, geographic areas and major customers.
Management believes the Company operates in one segment. The Company's customers
are located in eight countries around the world with the majority being in the
United States. All of the Company's transactions have been conducted in United
States dollars. The Company does not have any material revenues or assets
outside of the United States. In 1999, one customer accounted for approximately
12% of net revenue.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires an entity to recognize all derivatives as either an asset or liability
and to measure those instruments at fair value, as well as to identify the
conditions for which a derivative may be specifically designated as a hedge.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The
Company does not currently engage or plan to engage in any derivative or hedging
activities.
F-12
<PAGE> 87
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement requires
companies to capitalize qualifying computer software costs which are incurred
during the application development stage and to amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The Company adopted the requirements of SOP
98-1 as of January 1, 1999.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain areas of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company believes that its current revenue recognition
principles comply with SAB No. 101.
3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company maintains cash and cash equivalents with
two high credit quality domestic financial institutions. The Company performs
periodic evaluations of the relative credit standing of these institutions. From
time to time, the Company's cash balances with any one financial institution may
exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are generally located in the United States. The
Company performs ongoing credit evaluations and generally does not require
collateral on accounts receivable. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of customers,
historical trends and other information; to date, such losses have been within
management's expectations.
4. INVESTMENTS
In May 1999, the Company paid $150,000 to purchase 384,615 shares of Series
A convertible preferred stock of SoftCom, Inc. ("SoftCom"), convertible on a
one-for-one basis into SoftCom common stock. The Company also holds a warrant
that expires on May 14, 2004, to purchase up to 19,231 additional shares of
Series A convertible preferred stock of SoftCom at an exercise price of $0.39
per share. The Chairman of the Company's Board of Directors serves on the Board
of Directors of SoftCom.
In June 1999, the Company paid $199,987 to purchase 11,996 shares of Series
A convertible preferred stock of i-Recall, Inc. ("i-Recall"), convertible on a
one-for-one basis into i-Recall common stock.
These investments represent ownership interest of less than 20% of
SoftCom's and i-Recall's equity and are accounted for under the cost method.
These securities are carried at cost since neither the SoftCom securities nor
the i-Recall securities are traded on a public market and there are no other
readily determinable fair values of such securities.
F-13
<PAGE> 88
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
5. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software and computer equipment,
including assets under capital
leases................................. $ 144,440 $3,359,869 $ 8,751,334
Construction in process.................. -- 103,240 733,504
Leasehold improvements................... -- 1,117,907 1,899,900
Office furniture and equipment........... 39,775 565,670 1,507,043
--------- ---------- -----------
184,215 5,146,686 12,891,781
Less: accumulated depreciation and
amortization........................... (142,882) (594,191) (1,675,114)
--------- ---------- -----------
Property and equipment, net............ $ 41,333 $4,552,495 $11,216,667
========= ========== ===========
</TABLE>
Depreciation expense (including assets under capital leases) amounted to
$32,921, $26,119, $451,309, $47,273 and $1,080,923 for the years ended December
31, 1997, 1998 and 1999 and for the six months ended June 30, 1999 (Unaudited)
and 2000 (Unaudited), respectively.
6. INCOME TAXES
No provision for income taxes has been made because the Company has
sustained cumulative losses since the commencement of operations. At December
31, 1999, the Company had net operating loss carryforwards ("NOLs") of
approximately $13,767,000, which will be available to reduce future taxable
income. The NOLs are expected to expire in the following years (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2008........................................................ $ 13
2010........................................................ 51
2012........................................................ 578
2013........................................................ 54
2014........................................................ 13,071
-------
$13,767
=======
</TABLE>
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets.................................. $ 307,421 $ 6,549,864
Less valuation allowance............................. (307,421) (6,549,864)
--------- -----------
Net deferred taxes................................... $ -- $ --
========= ===========
</TABLE>
The Company's NOLs primarily generated the deferred tax assets. At December
31, 1998 and 1999, a valuation allowance was provided as the realization of the
deferred tax benefits is not likely.
F-14
<PAGE> 89
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
6. INCOME TAXES -- (CONTINUED)
The effective tax rate varies from the U.S. Federal statutory tax rate for
the years ended December 31, principally due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory tax................................. 35% 35% 35%
State and local taxes...................................... 12 12 12
Valuation allowance........................................ (47) (47) (47)
--- --- ---
Effective tax rate......................................... --% --% --%
=== === ===
</TABLE>
7. COMMITMENTS
OFFICE LEASES -- The Company leases office space in New York under
noncancelable operating leases expiring on March 31, 2009. These leases contain
provisions for escalations due to increases in real estate taxes and operating
costs.
The following schedule reflects future required minimum lease payments at
December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $ 580,875
2001........................................................ 581,636
2002........................................................ 572,852
2003........................................................ 576,334
2004........................................................ 576,334
Thereafter.................................................. 2,606,601
----------
Total....................................................... $5,494,632
==========
</TABLE>
Rent expense under these leases was $65,505, $70,260, $295,672, $58,137 and
$582,778 for the years ended December 31, 1997, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000, respectively.
EQUIPMENT LEASES -- Fixed assets included assets acquired under capital
leases of $0 and $1,531,418 at December 31, 1998 and 1999, respectively. The
related accumulated amortization was $0 and $141,371 as of December 31, 1998 and
1999, respectively.
F-15
<PAGE> 90
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
7. COMMITMENTS -- (CONTINUED)
The Company is a lessee under several capital lease agreements expiring
through 2002 with third parties for certain equipment. Future minimum lease
payments under noncancelable capital leases, together with the present value of
the net minimum payments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
2000........................................................ $ 768,163
2001........................................................ 523,047
2002........................................................ 162,280
----------
Total minimum lease payments................................ 1,453,490
Less: amount representing interest.......................... (115,261)
----------
Present value of minimum capital lease payments............. 1,338,229
Less: current portion....................................... (691,643)
----------
Long-term capitalized lease obligations..................... $ 646,586
==========
</TABLE>
The assets and liabilities under capital leases are recorded at the present
value of the minimum lease payments using effective interest rates ranging from
2.85% to 9.43% per annum as of December 31, 1999.
On March 8, 2000, the Company entered into a 5 year capital lease for
approximately $3.0 million for future delivery of a software system and related
computer equipment.
8. RELATED PARTY TRANSACTIONS AND BALANCES
In October 1998, the Company entered into a convertible promissory note due
on October 19, 2001, with an officer of the Company whereby the Company received
cash of $250,000. In addition, in February and March 1999, the Company entered
into five convertible promissory notes with certain directors, officers and the
spouse of a director of the Company whereby the Company received cash totaling
$300,000. During 1999, these notes were converted into 443,298 shares of the
Company's common stock, which reflected a 7% discount from the then-fair value
of the common stock, which aggregated $41,411, as determined by reference to the
per-share price of the Company's Series A Preferred Stock offering. The
intrinsic value of this beneficial conversion feature has been recorded as
interest expense ratably from the date of issuance to the earliest date on which
the notes could be converted into common stock ranging from 0 to 6 months,
resulting in additional interest expense of $6,273 and $35,138 in 1998 and 1999,
respectively.
In 1996, the Company entered into a promissory note with its president for
$19,350 that it repaid during 1999.
In April 1999, the Company entered into an agreement with a corporate
communications service firm ("Communications") for a monthly fee of $20,000. A
principal of Communications is a director of the Company. Additionally, another
principal of Communications is the spouse of a different director of the
Company. The Company has determined that the terms of this agreement are at
arms-length.
In February 2000, the Company's Chairman gave a personal guarantee in
respect to the Company's obligations under an office lease.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In October 1999, the Company issued 2,678,572 shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock") through a private
placement for $30,000,000 resulting in net proceeds to the
F-16
<PAGE> 91
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
Company of $28,018,814. Each share of Series B Preferred Stock is convertible,
at any time, at the option of the holder, into 2.6984 shares of common stock.
The Series B Preferred Stock was recorded at $27,331,814 which reflects the
face amount of the preferred stock reduced by all issuance costs, resulting in a
discount of $2,668,186. The Company recorded a $102,024 deemed dividend (for
periodic accretion) in 1999 and $308,362 for the six months ended June 30, 2000
(Unaudited).
The Company will be required to redeem all outstanding shares of Series B
Preferred Stock on and after December 31, 2003, at the original purchase price
of $11.20 per share plus all declared but unpaid dividends, if any. Holders of a
majority of outstanding shares of Series B Preferred Stock may, at any time,
have the Company redeem all then outstanding shares of Series B Preferred Stock
at the original purchase price plus declared but unpaid dividends, if any. Each
share of Series B Preferred Stock will be automatically converted into 2.6984
shares of common stock upon the earlier of: (a) completion by the Company of an
initial public offering raising gross proceeds of at least $30,000,000 and at an
offering price per share of at least 150% of the then applicable conversion
price, or (b) obtaining the written consent of the holders of at least 66 2/3%
of the shares of Series B Preferred Stock then outstanding. This conversion
ratio is based on the split-adjusted conversion price of $4.15 per share.
If total net revenue for the year ending December 31, 2000, is less than
$13,650,000, the conversion price will be reduced as follows: (a) to $3.64 if
net revenues for the year ending December 31, 2000, are at least $11,600,000 but
less than $13,650,000 or (b) to $3.00 if net revenues for the year ending
December 31, 2000, are less than $11,600,000. The carrying value of the Series B
Preferred Stock is equal to its redemption value, net of offering costs, as no
dividends have been declared or paid on these shares.
The Series B Preferred Stock is senior to the Series A Preferred Stock,
which in turn is senior to the Common Stock with respect to payment of
dividends, if any, and liquidation preference. Series B and Series A Preferred
Stockholders are entitled to voting rights equal to the number of shares of
Common Stock into which the preferred stock is convertible. The Series B and A
holders have additional voting rights regarding matters that affect their
respective series of preferred stock. Series B Preferred Stockholders have
certain additional voting rights.
The Company incurred fees and expenses of $1,981,186 relating to the
placement of the Series B Preferred Stock and also issued a five year warrant on
to the placement agent to purchase 325,253 shares of common stock at an exercise
price of $4.15 per share until June 7, 2004. The Company calculated the value of
such warrant to be $687,000 using the Black-Scholes valuation method using the
following assumptions: no dividend yield, a volatility factor of 50%, risk free
interest rate of 6.0% and reduced additional paid-in capital by such amount.
10. STOCKHOLDERS' EQUITY (DEFICIENCY)
In January 1999, the Company was reincorporated in the state of Delaware.
Pursuant to that reorganization, common stockholders of Interactive received one
share of common stock of the Company with a par value of $0.01 per share in
exchange for each common share of Interactive with a par value of $0.0001 per
share. In addition, each preferred stockholder of Interactive received 2.6984
shares of the Company's common stock in exchange for each share of Interactive
preferred stock owned. Shares of common treasury stock and shares of preferred
treasury stock of Interactive common were replaced by shares of common treasury
stock of the Company at exchange rates of one for one and 2.6984 for one,
respectively.
PREFERRED STOCK -- The Company is authorized to issue up to 20,000,000
shares of preferred stock.
F-17
<PAGE> 92
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
10. STOCKHOLDERS' EQUITY (DEFICIENCY) -- (CONTINUED)
In March 1999 and April 1999, the Company issued 1,527,085 shares of Series
A Convertible Preferred Stock ("Series A Preferred Stock") through a private
placement, in consideration of gross proceeds to the Company of $5,500,000.
Each share of Series A Preferred Stock is convertible at any time at the
election of the preferred stockholders into 2.6984 shares of common stock,
subject to the provisions set forth in the Company's Certificate of
Incorporation. The preferred stockholders are entitled to voting rights equal to
the number of shares of common stock into which the Series A Preferred Stock is
convertible. The Series A Preferred Stock will automatically be convertible into
common stock upon the effectiveness of the filing by the Company of a
registration statement with Securities and Exchange Commission in connection
with the Company's initial public offering.
TREASURY STOCK -- At December 31, 1998 and 1999, common treasury stock was
comprised of 539,682 and 1,565,079 shares of common stock with a cost basis of
$6,659 and $19,311, respectively. At December 31, 1998 preferred treasury stock
consisted of 380,000 shares of preferred stock with a cost basis of $12,652. In
January 1999, pursuant to the reorganization of the Company, all of the shares
of preferred stock held in treasury were converted to 1,025,397 shares of common
stock held in treasury. There are no preferred shares of treasury stock at
December 31, 1999. During October 1998, the Company issued 539,683 shares of
common stock from shares held in treasury stock to two directors and recorded
compensation expense of $350,000 in connection with such grants. Such
compensation expense equaled the fair value of the stock at the time of grant.
WARRANTS -- In June 1999, in connection with legal services provided, the
Company issued a warrant to purchase up to 19,275 shares of Common Stock at an
exercise price of $2.60 per share. The warrant was valued at $50,000, using the
Black-Scholes options pricing model with the following assumptions: no dividend
yield, a volatility factor of 50%, risk free interest rate of 6.0%, and an
expected life of 5 years. The warrant may be exercised at any time prior to June
10, 2004. The exercise price and the number and type of securities for which the
warrant is exercisable are subject to adjustment in the event the Company issues
any stock dividends, combines or splits its Common Stock or issues rights to
acquire Common Stock under certain circumstances.
In June 1999, in connection with architectural services provided, the
Company issued a warrant to purchase up to 19,275 shares of Common Stock at an
exercise price of $2.60 per share. The warrant was valued at $50,000, which was
the invoiced amount of the services provided. The warrant may be exercised at
any time prior to June 15, 2004. The exercise price and the number and type of
securities for which the warrant is exercisable are subject to adjustment in the
event the Company issues any stock dividends, combines or splits its Common
Stock or issues rights to acquire Common Stock under certain circumstances.
On February 4, 2000, the Company entered into an agreement with another
tenant with contiguous space in the building to sublease the space with consent
of the landlord. The lease expires on January 31, 2009, and results in
additional straight line rent expense of $513,000 per year. The Company issued a
warrant to the tenant allowing the tenant the right to purchase 67,460 shares of
the Company's common stock at an exercise price of $4.15 per share. This warrant
may be exercised at any time and expires on February 4, 2005.
In addition, the tenant may require the Company to buy back the warrant at
$10.67 per share. The fair market value of the common stock at the issuance date
of the warrant is $14.82 per share. The value of the warrant has been determined
to be $740,000; such value was derived by using the Black-Scholes option model.
The value of the warrant will be amortized ratably over the life of the
additional space.
F-18
<PAGE> 93
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
10. STOCKHOLDERS' EQUITY (DEFICIENCY) -- (CONTINUED)
On March 9, 2000, the tenant exercised the warrant and received 67,460
shares of common stock for which the Company received $280,000.
On May 8, 2000, a former employee of the Company exercised options to
acquire 269,841 shares of common stock for which the Company received $360,000.
On June 22, 2000, the Company repurchased 67,460 shares of common stock for
$1,000,000 in accordance with the terms of a warrant agreement. These
repurchased shares have been recorded as Treasury Stock in the Company's
financial statements.
In the first quarter of 2000, the Company established the Employee Stock
Purchase (the "Plan") for the benefit of employees of the Company. The Plan is
intended to provide the employees an opportunity to purchase common shares, par
value $.01 per share. The maximum number of shares reserved under the Plan is
357,143 shares, plus an annual increase to be added on the first day of the
Company's fiscal year beginning in 2001 equal to the lesser of (i) 158,730
shares, (ii) 0.5% of the shares outstanding on such date or (iii) a lesser
amount determined by the Plan committee. As of March 31, 2000 no shares have
been issued under the Plan.
11. STOCK OPTION PLAN
The Company has established the 1999 Stock Option Plan (the "Plan") to
provide for the granting of nonqualified stock options and incentive stock
options to employees, directors and advisors to reward them for service to the
Company and to provide incentives for future service and enhancement of
shareholder value. As amended in April 1999, the Plan authorized the issuance of
stock options covering up to 6,746,032 shares of Common Stock. The options vest
in accordance with the terms of the agreements entered into by the Company and
the grantee of the options which range from immediate vesting to vesting ratably
over a four year period. A total of 5,155,776 options have been granted under
this plan at December 31, 1999. The weighted-average grant-date fair value of
the 5,155,776 stock options granted during 1999 was $3.58 per share. Of this
amount, 4,878,449 options having a weighted-average grant-date fair value of
$3.75 were granted at exercise prices below fair value of the Company's common
stock at the time of issuance. The remaining 277,343 options having a
weighted-average grant-date fair value of $0.45 were granted at exercise prices
in excess of the fair value of the Company's common stock at the time of
issuance.
In the first quarter of 2000, the Company established the 2000 Equity
Incentive Plan (the "Plan") to provide for the granting of options (including
Incentive Stock Options), Restricted Stock, Phantom Stock, Stock Bonuses and
other stock-based Awards to promote the long-term growth and profitability of
the Company. The Plan is intended to provide key people with incentives to
improve stockholder value and to contribute to the growth and financial success
of the Company and attract, retain and reward employees. The maximum number of
shares of the Common Stock reserved for issuance under the Plan is 3,174,603
shares. As of June 30, 2000 no shares have been issued under the Plan.
During the six months ended June 30, 2000 (Unaudited), options to purchase
1,717,095 shares of common stock were granted. The weighted-average grant date
fair value of the 1,717,095 shares granted was $4.18 per share. All of these
options granted during the six months ended June 30, 2000 had exercise prices
below fair value of the Company's stock at the time of issuance.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options.
F-19
<PAGE> 94
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
11. STOCK OPTION PLAN -- (CONTINUED)
Transactions involving the incentive stock options granted are summarized
as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN SHARES) PRICE
----------- --------
<S> <C> <C>
Outstanding, January 1, 1999............................ -- $ --
Granted................................................. 5,155,776 $1.63
Exercised............................................... -- $ --
Forfeited............................................... (247,865) $0.62
--------- -----
Outstanding, December 31, 1999.......................... 4,907,911 $1.68
Granted................................................. 1,717,005 $3.58
Exercised............................................... (346,817) $1.39
Forfeited............................................... (852,339) $1.40
--------- -----
Outstanding, June 30, 2000 (Unaudited).................. 5,425,708 $2.33
========= =====
</TABLE>
There were 1,177,900 and 1,372,113 options exercisable at December 31,
1999, and June 30, 2000, respectively.
The following information is as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES (IN SHARES) (IN YEARS) PRICE (IN SHARES) PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.37..................................... 439,841 3.25 $0.37 140,129 $0.37
$1.33..................................... 2,669,867 3.25 $1.33 713,441 $1.33
$2.41-$2.60............................... 1,765,822 3.25 $2.47 324,330 $2.41
$4.08-$4.15............................... 32,381 3.25 $4.15 -- $ --
</TABLE>
The following information is as of June 30, 2000 (Unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE (IN SHARES) (IN YEARS) PRICE (IN SHARES) PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.37..................................... 274,937 3.25 $0.37 216,808 $0.37
$1.33..................................... 1,736,655 3.25 $1.33 646,309 $1.33
$2.41-$2.60............................... 2,881,004 3.25 $2.51 501,454 $2.42
$4.08-$4.15............................... 32,380 3.25 $4.15 -- $ --
$5.67-$5.75............................... 500,732 3.25 $5.74 7,542 $5.74
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," provides for a
fair value based method of accounting for employee options and options granted
to non-employees and measures compensation expense using an option valuation
model that takes into account, as of the grant date, the exercise price and
expected life of the option, the current price of the underlying stock and its
expected volatility, expected dividends on the stock, and the risk-free interest
rate for the expected term of the options.
F-20
<PAGE> 95
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
11. STOCK OPTION PLAN -- (CONTINUED)
In connection with the issuance of options to certain employees and
directors at prices below fair market value, the Company had recorded deferred
compensation of $10,379,049 and $18,364,487 as of December 31, 1999 and June 30,
2000 (Unaudited), respectively, net of recognized compensation expense of
$6,062,298, $134,372 and $9,850,661 for the year ended December 31, 1999 and for
the six months ended June 30, 1999 (Unaudited) and 2000 (Unaudited),
respectively, representing the unamortized difference between the exercise price
and the estimated fair market value of the Company's common stock at such date.
Such amount is included as a reduction of stockholders' equity (deficiency) and
is being amortized by charges to operations over the vesting period.
Pro forma disclosure as if the Company had adopted the cost recognition
requirement under SFAS 123 is presented below for the year ended December 31,
1999 and six months ended June 30, 2000.
<TABLE>
<CAPTION>
JUNE 30, 2000
DECEMBER 31, 1999 (UNAUDITED)
----------------- -------------
<S> <C> <C>
Net loss -- as reported......................... $(13,165,739) $(21,556,546)
Net loss -- pro forma........................... $(13,909,885) $(22,314,953)
Net loss per common share -- as reported........ $ (1.07) $ (1.61)
Net loss per common share -- pro forma.......... $ (1.13) $ (1.66)
</TABLE>
The fair value of options granted under the Plan for the year ended
December 31, 1999 and the six months ended June 30, 2000, in complying with SFAS
No. 123, was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used: no dividend
yield, a volatility factor of 50%, risk-free interest rate of 6.0% and expected
lives of 3.25 years.
12. SUBSEQUENT EVENTS
On July 17, 2000, the Company issued 8,254,227 shares of Series C
Convertible Redeemable Preferred Stock ("Series C Preferred Stock") through a
private placement for $47,957,059 to existing shareholders and certain new
investors in an offering resulting in net proceeds to the Company of
$46,180,259. Each share of Series C is convertible, at any time, at the option
of the holder, into one share of Common Stock.
The Series C Preferred Stock was recorded at $46,180,259 which reflects the
face amount of the preferred stock reduced by all issuance costs, resulting in a
discount of $1,776,800. The Company will accrete a deemed dividend for this
amount through periodic accretions and reclassify such amount from Accumulated
Deficit to Series C Redeemable Preferred Stock.
The Company will be required to redeem all outstanding shares of Series C
Preferred Stock on and after December 31, 2003 at $5.81 per share plus all
declared but unpaid dividends, if any. If total net revenue for the year ending
December 31, 2000, is less than $13,650,000, the conversion price will be
reduced as follows: (a) to $5.09 if net revenues for the year ending December
31, 2000, are at least $11,600,000 but less than $13,650,000 or (b) to $4.20 if
net revenues for the year ending December 31, 2000, are less than $11,600,000.
The carrying value of the Series C Preferred stock is equal to its redemption
value, net of offering costs, as no dividends have been declared or paid on
these shares.
The Series C Preferred Stock will be automatically converted into 8,254,227
shares of common stock upon the earlier of (a) completion by the Company of an
initial public offering raising gross proceeds of at least $30,000,000 and at an
offering price per share of at least 150% of the then applicable conversion
price, or (b) obtaining the written consent of the holders of at least 66 2/3%
of the shares of Series C Preferred Stock then outstanding. Holders of a
majority of outstanding shares of Series C Preferred Stock may, at any time,
F-21
<PAGE> 96
SCREAMINGMEDIA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 1999 (UNAUDITED) AND
2000 (UNAUDITED)
have the Company redeem all then outstanding shares of Series B Preferred Stock
at the original purchase price plus declared but unpaid dividends, if any.
The Series C Preferred Stock is ranked pari passu to the Series B Preferred
Stock and is senior to the Series A Preferred Stock, which in turn is senior to
the Common Stock with respect to payment of dividends, if any, and liquidation
preference. Series C and Series B and Series A Preferred Stockholders are
entitled to voting rights equal to the number of shares of Common Stock into
which the preferred stock is convertible. The Series C, B and A holders have
additional voting rights regarding matters that affect their respective series
of preferred stock. Series C and Series B Preferred Stockholders have certain
additional voting rights.
In connection with the issuance of the Series C Preferred Stock, the
Company has recorded a deemed dividend of $46,180,259 (the maximum amount for
the beneficial conversion feature in converting Series C Preferred Stock into
Common Stock).
On July 17, 2000, the Board of Directors of the Company and the Company's
stockholders approved a one for 1.26 reverse stock split. As a result of such
stock split, one share of Series A Preferred Stock or Series B Preferred Stock
is now convertible into 2.6984 shares of common stock. The Company's financial
statements have been retroactively adjusted to show the effect of this stock
split for all periods presented.
On July 14, 2000, the Company entered into a lease modification agreement
whereby it leased additional space from its primary landlord through March 2009.
As a result, the Company will incur additional straight-line rent expense of
approximately $725,000 per year.
In connection with such lease, the Company granted the landlord a warrant
to purchase 79,365 shares of Common Stock at an exercise price of $12.60 per
share. The warrant may be exercised at any time prior to July 14, 2003. The
exercise price and the number and type of securities for which the warrant is
exercisable are subject to adjustment in the event the Company issues any stock
dividends, combines or splits its Common Stock or issues rights to acquire
Common Stock under certain circumstances. The fair value at the time of issuance
was $12.00 per share. The value of the warrant has been determined to be
$221,823. Such value was derived by using the Black-Scholes option pricing model
with the following assumptions: no dividend yield, a volatility factor of 80%, a
risk free interest rate of 5.32% and an expected life of seven months. The value
of the warrant will be amortized ratably over the life of the additional space.
******
F-22
<PAGE> 97
[SCREAMING MEDIA LOGO]
<PAGE> 98
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, other than
underwriting discounts and commissions, all of which will be paid by the
Company. All amounts are estimates, other than the registration fee and the NASD
fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 19,800
NASD fee.................................................... 8,000
Nasdaq National Market application and listing fee.......... 95,000
Accounting fees and expenses................................ 550,000
Legal fees and expenses..................................... 850,000
Printing and engraving...................................... 600,000
Transfer Agent fees and expenses............................ 3,500
Miscellaneous expenses...................................... 373,700
----------
Total............................................. $2,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL") as amended
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of ScreamingMedia) by reason of the fact that the
person is or was a director, officer, agent or employee of the ScreamingMedia or
is or was serving at our request as a director, officer, agent, or employee of
another corporation, partnership, joint venture, trust or other enterprise
against expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of ScreamingMedia, and with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful. The
power to indemnify applies to actions brought by or in the right of the
ScreamingMedia as well but only to the extent of defense expenses (including
attorneys' fees but excluding amounts paid in settlement) actually and
reasonably incurred and not to any satisfaction of judgment or settlement of the
claim itself, and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication of negligence or
misconduct in the performance of his duties to ScreamingMedia, unless the court
believes that in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to such
actions to be entered in the books containing the minutes of the meetings of the
board of directors at the time such action occurred or immediately after such
absent director receives notice of the unlawful acts.
II-1
<PAGE> 99
Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to ScreamingMedia or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated Bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our Board of Directors; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in our Amended and Restated
Certificate of Incorporation and Amended and Restate Bylaws are not exclusive of
any other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, we maintain
insurance on behalf of its directors and executive officers insuring them
against any liability asserted against them in their capacities as directors or
officers or arising out of such status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, we have issued and sold the following securities:
On October 20, 1998, our predecessor The Interactive Connection, Inc.,
issued a convertible promissory note to Jay Chiat, in the amount of $250,000,
due on October 19, 2001. This note was converted in April 1999 for 201,496
shares of Common Stock.
On January 28, 1999, we issued a total of 2,799,603 shares of Common Stock
to common stockholders of Interactive, who received one share of Common Stock of
the Company in exchange for each Common Share of Interactive. In addition, each
Preferred Stockholder of The Interactive Connection, Inc. received two shares of
the Company's Common Stock in exchange for each share of Interactive's Preferred
Stock owned. We also issued 101,190 shares of common stock to Brian Cavanaugh in
exchange for services rendered to the Company and 269,841 shares each of common
stock to Ken Lerer and Peter Leitner. These transactions are exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.
On February 15, 1999, we issued convertible promissory notes to James D.
Robinson, Linda Robinson, Ken Lerer and Kevin C. Clark for a total amount of
$250,000, due on December 10, 2001. All notes were converted in April 1999 for a
total of 201,496 shares of Common Stock and are exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
On March 9, 1999, we issued a convertible promissory note to Brian
Cavanaugh, in the amount of $50,000, due on December 10, 2001. This note was
converted in April 1999 for 40,301 shares of Common Stock and is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.
On March 18, 1999, we issued and sold 1,107,366 shares of Series A
Preferred Stock for gross proceeds of $4.0 million to accredited investors,
exempt from the registration requirements of the Securities Act pursuant to
Regulation D.
II-2
<PAGE> 100
In April 1999, we issued and sold an additional 419,719 shares of Series A
Preferred Stock to accredited investors for gross proceeds of $1.5 million
exempt from the registration requirements of the Securities Act pursuant to
Regulation D.
In April 1999, we granted Danny Hills, Peter Adams, George Russell and
George Cain, members of our advisory board, options to purchase an aggregate of
74,962 shares of Common Stock at $1.34 per share, exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) and Rule 701.
In July 1999, we granted Brian Cavanaugh, Steve Tempini and Chris O'Brien,
members of our advisory board, options to purchase an aggregate 56,221 shares of
common stock at $1.34 per share, exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) and Rule 701.
In July 1999, we granted Wm. Brian Little, a director of the Company, a
five-year option to purchase 37,479 shares of Common Stock at $1.34 per share.
All options granted to directors and advisors were fully vested upon grant and
are exempt from the registration requirements of the Securities Act pursuant to
Rule 701.
In August 1999, we issued 4,048 shares of common stock to Elena Salij in
consideration for consultancy services, exempt from the registration
requirements of the Securities Act pursuant to Rule 701.
On August 16, 1999, we issued a warrant to Mad Dogs and Englishmen for the
issue of 9,034 shares of common stock at an exercise price of $4.15 per share,
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2).
On October 6, 1999, we issued and sold 2,678,572 shares of our Series B
Convertible Preferred Stock at a price of $11.20 per share with Deutshe Bank
Securities Inc. serving as our exclusive placement agent to a group of
institutional accredited investors and a limited number of individuals, exempt
from the registration requirements pursuant to Section 4(2) and Regulation D.
On December 27, 1999, we granted a non-qualified stock option to Wm. Brian
Little to purchase 20,759 shares of Common Stock at an exercise price of $2.41
per share, exempt from the registration requirements of the Securities Act
pursuant to Rule 701.
On June 15, 1999, we issued a warrant to HutSachs Studio for the issue of
19,275 shares, at an exercise price of $2.60 per share, exempt from the
registration requirements of the Securities Act pursuant to Section 4(2).
On July 14, 2000, we issued a warrant to 601 West Associates, LLC for the
issue of 79,365 shares of common stock at an exercise price of $12.60 per share,
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2).
On July 17, 2000, we issued and sold 8,254,227 shares of our Series C
Convertible Preferred Stock at a price of $5.81 per share to a group of
institutional accredited investors, exempt from the registration requirements of
the Securities Act pursuant to Section 4(2).
In addition, as of July 17, 2000, the Company has granted options to
purchase a total of 5,585,149 shares of Common Stock to employees, including
certain senior managers, at a weighted average exercise price of approximately
$2.43 per share, exempt from the registration requirements of the Securities Act
pursuant to Rule 701. The Company has granted an additional 528,714 options with
an exercise price equal to the initial public offering price of our common stock
pursuant to Rule 701.
II-3
<PAGE> 101
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1 Form of Underwriting Agreement.+
3.1 Amended and Restated Certificate of Incorporation of the
Company.+
3.1.1 Certificate of Amendment+
3.2 Form of Amended and Restated By-laws of the Company.+
4.1 Form of ScreamingMedia's stock certificate.+
4.2 Form of ScreamingMedia's Rights Plan.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.+
10.1 Master Lease Agreement No. 13330 dated July 16, 1999 by and
among the Registrant and Data General Corporation.+
10.2 Master Agreement No. 2430 dated December 9, 1999 by and
among the Registrant and Cisco Systems Capital Corporation.+
10.3 Master Lease Agreement No. 7345913 dated May 25, 1999 by and
among the Registrant and Dell Financial Services L.P.+
10.4.1 Agreement of Lease dated March 31, 1999, by and among the
Registrant and 601 West Associates LLC.+
10.4.2 First Lease Modification Agreement dated June 18, 1999 by
and among the Registrant and 601 West Associates LLC.+
10.5 Sublease Agreement dated February 4, 2000 by and among the
Registrant and Tomar Studio, Inc.+
10.6 Warrant Agreement dated June 7, 1999, by and among the
Registrant and Deutsche Bank Securities Inc.+
10.7 Warrant Agreement dated June 10, 1999, by and among the
Registrant and Carter, Ledyard, Milburn, LLP.+
10.8 Warrant Agreement dated February 4, 2000 by and among the
Registrant and Tomar Associates, Inc.+
10.9 Letter Employment Agreement dated June 7, 1999 between the
Registrant and Marianne Howatson.+
10.10 Employment Agreement dated November 8, 1999, between the
Registrant and Kevin C. Clark.+
10.11 Series A Preferred Stock Purchase Agreement dated as of June
8, 1999 by and among the Registrant, the investors named
therein and i-Recall, Inc.+
10.12 Preferred Stock Purchase Agreement of Series A Preferred
Stock dated as of May 14, 1999 by and among the Registrant
and SoftCom, Inc.+
10.13 1999 Stock Option Plan.+
10.14 Form of 2000 Equity Incentive Plan.+
10.15 Form of ScreamingMedia Management Incentive Plan.+
10.16 Agreement dated April 1999, by and among the Registrant and
Robinson, Lerer & Montgomery.+
10.17 Warrant Agreement dated June 15, 1999 by and among the
Registrant and Hut Sachs Studio.+
10.18 Form of Employee Stock Purchase Plan.+
10.19 Common Stock Purchase Agreement dated April 6, 2000 between
the Registrant and Spyglass, Inc.+
10.20.1 Agreement dated January 28, 2000 by and among the
Registrant, Tomar Studios, Inc. and Jay Chiat.+
</TABLE>
II-4
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.20.2 Amendment No. 1 to Agreement by and among the Registrant,
Tomar Studios, Inc. and Jay Chiat dated February 4, 2000.+
10.20.3 Guaranty of Jay Chiat dated February 4, 2000.+
10.21 Master Lease Agreement dated March 2, 2000 between the
Registrant and Jacom Computer Services, Inc.+
10.22 Lease Agreement dated February 17, 2000 between the
Registrant and Working Capital Technologies of America.+
10.23 Lease Agreement dated June 13, 2000 between the Registrant
and Northburgh House Limited.+
10.24 Warrant Agreement dated August 16, 1999 between the
Registrant and Mad Dogs and Englishmen.+
10.25 Employment Agreement dated March 8, 2000 between the
Registrant and David Obstler.+
10.26 Employment Agreement dated May 26, 2000 between the
Registrant and J. Terrence Waters.+
10.27 Investor Rights Agreement dated October 6, 1999 between the
Registrant and the holders of Series B Convertible Preferred
Stock.+
10.28 Form of Investor Rights Agreement dated July 17, 2000
between the Registrant and the holders of Series C
Convertible Preferred Stock.+
10.29 Lease Modification and Expansion Agreement dated July 14,
2000 between the Registrant and 601 West Associates, LLC.+
10.30 Common Stock Purchase Warrant dated July 14, 2000 between
the Registrant and 601 West Associates, LLC.+
16 Letter regarding change in certifying accountant.+
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of David Tarlow & Co., C.P.A., P.C.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).+
24 Power of Attorney.+
24.1 Power of Attorney of Robert B. Peck.+
24.2 Power of Attorney of David C. Hodgson+
27.1 Financial Data Schedule.+
99.1 Consent of thehealthchannel.com.+
99.2 Consent of The Black World Today.+
99.3 Consent of Sun Microsystems, Inc.+
99.4 Consent of EVOTE.COM.+
99.5 Consent of InteliHealth.+
99.6 Consent of IDC.+
99.7 Consent of United Media relating to the logo of Scripps
Howard News Service.+
99.8 Consent of Christian Science Monitor.+
99.9 Consent of New York Times Syndicate.+
99.10 Consent of USA Today.com.+
99.11 Consent of Knight Ridder/Tribune.+
99.12 Consent of Brill Editorial Services, Inc.+
</TABLE>
II-5
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
99.13 Consent of Red Herring Communications, Inc.+
99.14 Consent of Marks & Frederick Associates LLC as agent for
Deutsche Presse-Agentur GmbH.+
99.15 Consent of Imagine Media, Inc.+
</TABLE>
---------------
+ Previously filed.
b. Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrants hereby undertake to provide to the underwriters
at the closing 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
registrants pursuant to the provisions described in Item 14, or otherwise, the
registrants have been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification by the registrants 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 registrants will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on July 31, 2000.
SCREAMINGMEDIA INC.
By: *
------------------------------------
Name: Kevin C. Clark
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Chairman of the Board July 31, 2000
------------------------------------
Jay Chiat
* President Chief Operating Officer and Director July 31, 2000
------------------------------------
Alan S. Ellman
* Chief Executive Officer and Director July 31, 2000
------------------------------------
Kevin C. Clark
* Chief Financial Officer July 31, 2000
------------------------------------
David M. Obstler
* Principal Accounting Officer July 31, 2000
------------------------------------
Robert B. Peck
* General Counsel, Secretary and Director July 31, 2000
------------------------------------
William P. Kelly
* Director July 31, 2000
------------------------------------
James D. Robinson III
* Director July 31, 2000
------------------------------------
Wm. Brian Little
* Director July 31, 2000
------------------------------------
Kenneth B. Lerer
* Director July 31, 2000
------------------------------------
Patrick J. McNeela
* Director July 31, 2000
------------------------------------
David C. Hodgson
*By: /s/ WILLIAM P. KELLY
------------------------------
Attorney-in-fact
</TABLE>
II-7
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1 Form of Underwriting Agreement.+
3.1 Amended and Restated Certificate of Incorporation of the
Company.+
3.1.1 Certificate of Amendment.+
3.2 Form of Amended and Restated By-laws of the Company.+
4.1 Form of ScreamingMedia's stock certificate.+
4.2 Form of ScreamingMedia's Rights Plan.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.+
10.1 Master Lease Agreement No. 13330 dated July 16, 1999 by and
among the Registrant and Data General Corporation.+
10.2 Master Agreement No. 2430 dated December 9, 1999 by and
among the Registrant and Cisco Systems Capital Corporation.+
10.3 Master Lease Agreement No. 7345913 dated May 25, 1999 by and
among the Registrant and Dell Financial Services, L.P.+
10.4.1 Agreement of Lease dated March 31, 1999, by and among the
Registrant and 601 West Associates LLC.+
10.4.2 First Lease Modification Agreement dated June 18, 1999 by
and among the Registrant and 601 West Associates LLC.+
10.5 Sublease Agreement dated February 4, 2000 by and among the
Registrant and Tomar Studios, Inc.+
10.6 Warrant Agreement dated June 7, 1999, by and among the
Registrant and Deutsche Bank Securities Inc.+
10.7 Warrant Agreement dated June 10, 1999, by and among the
Registrant and Carter, Ledyard, Milburn, LLP.+
10.8 Warrant Agreement dated February 4, 2000 by and among the
Registrant and Tomar Studios, Inc.+
10.9 Letter Employment Agreement date June 7, 1999 between the
Registrant and Marianne Howatson.+
10.10 Employment Agreement dated November 8, 1999, 2000 between
the Registrant and Kevin C. Clark.+
10.11 Series A Preferred Stock Purchase Agreement dated as of June
8, 1999 by and among the Registrant, the investors named
therein and i-Recall, Inc.+
10.12 Preferred Stock Purchase Agreement of Series A Preferred
Stock dated as of May 14, 1999 by and among the Registrant
and SoftCom, Inc.+
10.13 1999 Stock Option Plan.+
10.14 Form of 2000 Equity Incentive Plan.+
10.15 Form of ScreamingMedia Management Incentive Plan.+
10.16 Agreement dated April 1999, by and among the Registrant and
Robinson, Lerer & Montgomery.+
10.17 Warrant Agreement dated June 15, 1999, by and among the
Registrant and Hut Sachs Studio.+
10.18 Form of Employee Stock Purchase Plan.+
10.19 Common Stock Purchase Agreement dated April 6, 2000 between
the Registrant and Spyglass, Inc.+
10.20.1 Agreement dated January 29, 2000 by and among the
Registrant, Tomar Studios, Inc. and Jay Chiat.+
10.20.2 Amendment No. 1 to Agreement by and among the Registrant,
Tomar Studios, Inc. and Jay Chiat dated February 4, 2000.+
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.20.3 Guaranty of Jay Chiat dated February 4, 2000.+
10.21 Master Lease Agreement dated March 2, 2000 between the
Registrant and Jacom Computer Services, Inc.+
10.22 Lease Agreement dated February 17, 2000 between the
Registrant and Working Capital Technologies of America.+
10.23 Lease Agreement dated June 13, 2000 between the Registrant
and Northburgh House Limited.+
10.24 Warrant Agreement dated August 16, 1999 between the
Registrant and Mad Dogs and Englishmen.+
10.25 Employment Agreement dated March 8, 2000 between the
Registrant and David Obstler.+
10.26 Employment Agreement dated May 26, 2000 between the
Registrant and J. Terrence Waters.+
10.27 Investor Rights Agreement dated October 6, 1999 between the
Registrant and the holders of Series B Convertible Preferred
Stock.+
10.28 Form of Investor Rights Agreement dated July 17, 2000
between the Registrant and the holders of Series C
Convertible Preferred Stock.+
10.29 Lease Modification and Expansion Agreement dated July 14,
2000 between the Registrant and 601 West Associates, LLC.+
10.30 Common Stock Purchase Warrant dated July 14, 2000 between
the Registrant and 601 West Associates, LLC.+
16 Letter regarding change in certifying accountant.+
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of David Tarlow & Co., C.P.A., P.C.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).+
24 Power of Attorney.+
24.1 Power of Attorney of Robert B. Peck.+
24.2 Power of Attorney of David C. Hodgson+
27.1 Financial Data Schedule.+
99.1 Consent of thehealthchannel.com.+
99.2 Consent of The Black World Today.+
99.3 Consent of Sun Microsystems, Inc.+
99.4 Consent of EVOTE.COM.+
99.5 Consent of InteliHealth.+
99.6 Consent of IDC.+
99.7 Consent of United Media relating to the logo of Scripps
Howard News Service.+
99.8 Consent of Christian Science Monitor.+
99.9 Consent of New York Times Syndicate.+
99.10 Consent of USA Today.com.+
99.11 Consent of Knight Ridder/Tribune.+
99.12 Consent of Brill Editorial Services, Inc.+
99.13 Consent of Red Herring Communications, Inc.+
99.14 Consent of Marks & Frederick Associates LLC as agent for
Deutsche Presse-Agentur GmbH.+
99.15 Consent of Imagine Media, Inc.+
</TABLE>
---------------
+ Previously filed.
