<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-32034
1,675,000 Bearer Ordinary Shares
[INTERSHOP LOGO APPEARS HERE]
in the form of 3,350,000 American Depositary Shares
------------
We are offering 3,350,000 American Depositary Shares. Each ADS represents
1/2 of one bearer ordinary share and will be evidenced by an American
Depositary Receipt.
Prior to this offering, there has been no public market for our ADSs. Our
ordinary shares are listed on the Neuer Markt of the Frankfurt Stock Exchange
under the symbol ISH. On September 26, 2000, the last reported sale price was
(Euro)75.02 per ordinary share, which is equivalent to $33.01. Our ADSs have
been approved for listing on The Nasdaq Stock Market's National Market under
the symbol "ISHP."
We have granted the underwriters an option to purchase a maximum of 500,000
additional ADSs to cover over-allotments of ADSs.
Investing in our ADSs involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions INTERSHOP
------------- ------------- -------------
<S> <C> <C> <C>
Per ADS.................................... $32.09 $1.93 $30.16
Total...................................... $107,501,500 $6,465,500 $101,036,000
</TABLE>
Delivery of the ADSs will be made on or about October 4, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Chase H&Q
U.S. Bancorp Piper Jaffray
The date of this prospectus is September 28, 2000.
<PAGE>
Inside Front Cover:
The following captions accompany a graphical depiction of our products on the
inside front cover:
"Sell Anywhere with Intershop"
"Sell direct to businesses and consumers over the Internet"
"Sell indirect through affiliate sites, online marketplaces and distributors'
websites"
"Enable merchants to sell their products on line"
"Enable marketplaces: Bring multiple buyers and sellers together at your online
marketplace"
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Consolidated Financial Data...................................... 5
Risk Factors............................................................. 6
Presentation of Financial Information.................................... 15
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Price Range of Ordinary Shares........................................... 17
Exchange Rate Information................................................ 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business................................................................. 35
Management............................................................... 49
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Relationships and Related Transactions............................. 54
Principal Shareholders..................................................... 57
Description of Capital Stock............................................... 58
Shares Eligible for Future Sale............................................ 67
Description of American Depositary Shares.................................. 69
The German Equity Market................................................... 77
German Taxation............................................................ 79
Taxation of U.S. Investors................................................. 83
Limitations Affecting Security Holders..................................... 89
Underwriting............................................................... 90
Notice to Canadian Residents............................................... 93
Legal Matters.............................................................. 94
Experts.................................................................... 94
Available Information...................................................... 94
Index to Consolidated 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 October 24, 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the entire prospectus carefully, including the financial data
and related notes, before making an investment decision.
INTERSHOP Communications
We are a global provider of electronic commerce software. Electronic commerce
software applications are software applications that help businesses market and
sell their products and services over the Internet. Our products are targeted
toward large businesses, both those that sell their own products and services
online and those that assist other businesses in selling their products and
services online. Our products can be used to address entry-level electronic
commerce storefronts, as well as more advanced electronic commerce business
models such as online marketplaces. We market our software applications and
professional services to large businesses that have the ability to manage their
own electronic commerce sites. We also market our products and services to
application service providers, or ASPs. ASPs are companies that, with the help
of our software applications, manage electronic commerce sites for the growing
number of small- and medium-sized businesses seeking to establish a business
presence on the Internet. Businesses also use our software applications to
enable sellers of products and services by providing a forum for bringing
buyers and sellers together online. By offering products that provide solutions
to a range of distinct business models, we can meet the needs of our customers
as they evolve from entry-level to more sophisticated electronic commerce
operations while remaining on our software platform.
The growth of the Internet has fueled the demand for electronic commerce
technologies. These technologies support a wide range of online business
functions, from enabling transactions to providing marketing data about
customers. According to International Data Corporation, or IDC, the market for
Internet commerce applications is expected to grow from $1.7 billion in 1999 to
$13.2 billion by 2003.
Many existing electronic commerce software packages provided by our
competitors successfully display products and process orders. However, few
software packages can combine these basic functions with the ability to
integrate with existing business systems, to be deployed rapidly and to provide
intelligent merchandising capabilities, such as customer profiling, shopping
lists and cross-selling that allow companies to provide their online customers
with an individualized shopping experience. We believe that a large market
opportunity exists for a solution such as ours that meets the extensive
requirements of businesses developing an online presence.
We intend to continue to strengthen our position as a leading provider of
electronic commerce software applications enabling businesses to sell products
and services over the Internet. Key elements of our strategy include:
. Extending our leadership in the electronic commerce software market;
. Expanding our leadership position in providing software to ASPs;
. Providing solutions for a wide range of electronic commerce business
models;
. Continuing to expand our presence in the enterprise market by increasing
our sales and marketing capabilities;
. Strengthening our network of sales and technology partners; and
. Leveraging our global presence to capitalize on the growth in the
electronic commerce market.
3
<PAGE>
We have operations in the United States, Europe, and Asia and a worldwide
network of over 600 channel partners, including PricewaterhouseCoopers,
Deutsche Telekom, Unisys, Nortel Networks and PSI Net. Our global presence
allows us to work closely with large businesses and ASPs that operate
internationally. In 1998, customers using our products established over 5,500
new electronic commerce sites. According to IDC, this placed us in the top
three companies cited in the survey in terms of the number of sites
established. By June 30, 2000, approximately 300,000 electronic commerce sites
had been licensed to be deployed on our products worldwide by ASPs and
enterprises such as Bosch, Canon, Hewlett Packard, MindSpring, PSI Net, Nortel
Networks and U S West.
We began doing business in 1992 as NetConsult Computersysteme GmbH. In April
1998, we incorporated as a German stock corporation. We are a holding company
and own seven subsidiaries that conduct all of our worldwide operations. For
the six months ended June 30, 2000, we had net income of (Euro)3.0 million, and
we had an accumulated net deficit of (Euro)53.6 million as of June 30, 2000.
Our operational headquarters are located at 303 Second Street, 10th Floor
North, San Francisco, CA 94107, and our telephone number at that address is
(415) 844-1500. Our principal executive offices are located at Amsinckstrabe
57, 20097 Hamburg, Germany. Our website is located at www.intershop.com. The
information on our website is not part of this prospectus.
"INTERSHOP" is a registered trademark of our company. This prospectus
contains product names and trademarks of our company and other organizations.
The Offering
<TABLE>
<S> <C>
ADSs offered........................................ 3,350,000 ADSs representing
1,675,000 ordinary shares
Ordinary shares that will be outstanding after this 87,030,940 ordinary shares, which is
offering........................................... equivalent to 174,061,880 ADSs
Use of proceeds..................................... For working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol....................... ISHP
</TABLE>
The number of shares of common stock outstanding after this offering is based
on shares outstanding as of June 30, 2000.
Investors may request delivery in the form of ordinary shares rather than
ADSs.
4
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following table summarizes the statement of operations and balance sheet
data for our business and our predecessor. The following data should be read in
conjunction with "Selected Consolidated Financial Data," "Management Discussion
and Analysis of Financial Conditions and Results of Operations" and other
financial statements within this prospectus. For convenience only certain euro
figures have been translated into U.S. dollars at the rate of (Euro)1.00 =
$0.95, the noon buying rate in New York City for cable transfers in foreign
currencies certified by the Federal Reserve Bank of New York for customs
purposes on June 30, 2000. All prior year balances have been restated from
Deutsche marks into euros using the exchange rate as of January 1, 1999.
Figures that have been adjusted for the offering have been translated into U.S.
dollars at the rate of (Euro)1.00 = $0.88, the noon buying rate in New York
City for cable transfers in foreign currencies certified by the Federal Reserve
Bank of New York for customs purposes on September 28, 2000. Prior to 1997,
there was no common stock outstanding as we were organized as INTERSHOP
Communications GmbH, which is a limited liability corporation. Accordingly, no
earnings per share have been presented for periods prior to 1997. Financial
data as of and for the years ended December 31, 1995 and 1996 represent
information for INTERSHOP Communications GmbH.
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended December 31, Ended June 30,
---------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 1999 2000 2000
------ ------ ------ ------- ------- ----------- ------- ------- -------
(Euro) (Euro) (Euro) (Euro) (Euro) US$ (Euro) (Euro) US$
(As restated) (As restated)
----------------------------- ------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ 885 471 5,035 17,872 46,266 43,953 16,469 57,541 54,664
Gross profit (loss)..... 217 (97) 2,348 12,364 33,015 31,365 11,818 40,054 38,051
Operating expenses...... 234 2,157 9,165 31,331 53,092 50,438 20,369 38,195 36,285
Operating income
(loss)................. (17) (2,254) (6,817) (18,967) (20,077) (19,073) (8,551) 1,859 1,766
Net income (loss)....... (3) (2,320) (7,015) (17,308) (18,389) (17,470) (7,667) 2,960 2,811
Accretion of redeemable
preferred stock........ (149) (220) -- -- -- -- --
Net income (loss)
attributable to common
shareholders........... (7,164) (17,528) (18,389) (17,470) (7,667) 2,960 2,811
Net income (loss) per AG
Share attributable to
common shareholders:
Basic.................. (0.24) (0.38) (0.23) (0.22) (0.10) 0.04 0.04
Diluted................ (0.24) (0.38) (0.23) (0.22) (0.10) 0.03 0.03
Net income (loss) per
ADS attributable to
common shareholders:
Basic.................. (0.12) (0.19) (0.12) (0.11) (0.05) 0.02 0.02
Diluted................ (0.12) (0.19) (0.12) (0.11) (0.05) 0.01 0.01
Shares used in per AG
share calculations:
Basic.................. 30,170 45,965 79,883 79,883 77,945 82,771 82,771
Diluted................ 30,170 45,965 79,883 79,883 77,945 100,436 100,436
Shares used in per ADS
share calculations:
Basic.................. 60,340 91,930 159,766 159,766 155,890 165,542 165,542
Diluted................ 60,340 91,930 159,766 159,766 155,890 200,872 200,872
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------- As of June 30, Adjusted for
1995 1996 1997 1998 1999 2000 the Offering
------ ------ ------ ------- ------- ---------------- ----------------
(Euro) (Euro) (Euro) (Euro) (Euro) (Euro) US$ (Euro) US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ 57 214 5,058 34,185 12,065 18,054 17,151 130,831 115,014
Working capital......... (56) 224 (82) 31,709 10,020 14,575 13,846 127,352 111,955
Total assets............ 283 1,586 10,731 47,221 53,789 91,792 87,203 204,569 179,837
Long-term liabilities... 3 1,713 6,945 1,978 240 73 69 73 64
Accumulated deficit..... (5) (2,324) (9,489) (27,017) (45,406) (53,618) (50,937) (53,618) (47,136)
Total shareholders'
equity (deficit)....... 47 (2,314) (9,593) 34,225 22,864 32,197 30,588 144,974 127,446
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below as well as other
information included in this prospectus before buying ADSs in this offering.
Risks Related to Our Business
We have incurred net losses in the past and expect to incur them in the
foreseeable future. If we continue to incur net losses for a period longer than
anticipated, we may be unable to continue operations.
While we have had two consecutive quarters of profitability in the first and
second fiscal quarters of 2000, we have incurred net losses the past three
years and expect to experience operating losses in the foreseeable future. We
had an accumulated deficit of (Euro)53.6 million as of June 30, 2000. Factors
that may negatively impact our future profitability include our high levels of
expenditures in sales and marketing to support product launches, potential
decreases in revenues if these product launches are unsuccessful and our high
ongoing levels of research and development expenses. If we fail to sustain
profitability, we may be unable to continue our operations.
The market for our products and services is rapidly changing. If our products
and services do not gain or retain acceptance in this market, we may not
generate sufficient revenues to sustain our business.
The market for products and services that enable businesses to sell over the
Internet is new and evolving. Therefore, demand for and acceptance of recently
introduced products and services like ours is uncertain. We are particularly
susceptible to this risk because our current growth strategy includes
increasing our focus on products designed to serve individual enterprises in
addition to ASPs. In particular, we recently introduced our enfinity product
which is targeted at large enterprises. If this product does not achieve market
acceptance, we may not be able to grow our business. In addition, the market
for our products and services may not develop sufficiently to meet our revenue
goals. Specifically, our products and services may not be perceived as superior
to other products and services, may not meet our customers' needs or may not
prompt recommendations to other potential customers.
Our quarterly financial results are subject to significant fluctuations which
could harm our business and cause the price of our ADSs to fall.
We expect to experience significant fluctuations in our future quarterly
operating results that may be caused by many factors. These factors include:
. the size and the timing of orders in one quarter or from quarter to
quarter and the fact that the majority of our sales in any given quarter
historically occur in the last few weeks of the quarter;
. our ability to implement our software solutions within a given quarter
and the timing of our customers' acceptance of our products;
. the potential for delay or deferral of customer implementations of our
software and changes in customer budgets;
. increases in our operating expenses as we continue to expand our product
line and fund greater levels of research and development;
. our pricing and mix of products and services sold;
. the relatively long sales cycles for some of our products;
. changes in our pricing policies or those of our competitors;
. introduction of new products or product enhancements by our competitors;
6
<PAGE>
. our historic tendency to have larger sales revenues in the fourth
calendar quarter; and
. our large percentage of European sales which are adversely affected in
the third calendar quarter of each year due to reduced business
activities in the summer months.
Our business and, therefore, the market price of our shares and ADSs could be
subject to significant fluctuations in response to quarter-to-quarter
variations in our operating results and other events or factors.
We face intense and increasing competition in the market for electronic
commerce software applications, and our failure to compete successfully could
decrease our revenues.
The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. Since there are relatively low
barriers to entry in the market for electronic commerce applications,
competition from other established and emerging companies may develop in the
future. We expect competition to intensify as current competitors expand their
product offerings and new competitors enter the market. Increased competition
is likely to result in price reductions, lower average sales prices, reduced
margins, longer sales cycles and loss of market share, any of which could harm
our business, operating results or financial condition.
Many of our competitors have, and new potential competitors may have, longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, more experience developing electronic commerce
software, larger technical staffs, larger customer bases, more established
distribution channels, and greater brand recognition than we do. In addition,
many of our competitors have well-established relationships with our current
and potential customers, especially in the United States, and have extensive
knowledge of our industry. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and other incentives
not matched by us. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. As a result,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We also expect that competition
may increase as a result of industry consolidations.
We cannot assure you that we will be able to compete successfully against
current or future competitors, or that competitive pressures will not reduce
our future revenues.
If we fail to introduce new products and enhance existing ones, our competitive
position and future business prospects could be harmed.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our products and services. The
Internet and the market for electronic commerce software are characterized by
rapid technological change, changes in user requirements and preferences,
frequent introductions of new products and services embodying new technologies
and the emergence of new industry standards and practices that could render our
technology and products obsolete. Consequently, we cannot predict the life
cycles of our products. Further, we may be unsuccessful or experience delays in
developing, acquiring or marketing new or enhanced products or services. Our
success will depend, in part, on our ability to both internally develop and
license leading technologies to enhance our existing products and services and
develop new products and services. We must continue to address the increasingly
sophisticated and varied needs of our customers, and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. In addition, as we continue to increase our focus on providing
products and services directly to individual enterprises, as opposed to ASPs,
we will face additional concerns that could hinder our ability to respond in a
timely manner to changes in market demand. These concerns include trying to
accommodate the requirements of a larger pool of customers with more
specialized needs and responding to the dynamics of a different market with
different product cycles. The development of our proprietary technology
involves significant technical and business risks. We may fail to use new
technologies effectively or adapt our
7
<PAGE>
proprietary technology and systems to customer requirements or emerging
industry standards. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, we may not be able to
increase our revenues and expand our business. Any delay or failure in
implementing or marketing new or enhanced products or services could harm our
competitive position and our future business prospects.
Lengthy sales and implementation cycles could cause delays in revenue growth.
The period between our initial contact with a potential customer and the
purchase of our products and services is often long and subject to delays
associated with the lengthy budgeting and approval process of our customers.
Therefore, the historic sales cycle associated with the license and
implementation of many of our products has been lengthy and beyond our control.
As we continue to launch new products and increase our focus on providing
products and services directly to individual enterprises, as opposed to ASPs,
the length of these sales cycles could be increased temporarily or permanently.
These delays may have a negative impact on the timing of our revenues and, if
they occur, may be expected to cause our operating results to vary
significantly from quarter to quarter.
Our future revenues depend on third parties who market, sell and deploy our
products.
We rely on third parties to market and deploy our products. We relied on
third parties to deploy 27% of our products deployed in 1998 and 32% in 1999
and 36% in 2000. In addition, our customers rely on professional services
organizations, such as consulting firms, systems integrators and design firms
to assist with the development, integration and implementation of our products.
If we cannot adequately train a sufficient number of these firms in the use of
our products or if for any reason a large number of them support or promote
competing products or technologies, our business might be seriously harmed.
Many of these relationships are not subject to formal agreements and none of
these firms is under any obligation to provide services to us or our customers.
If we fail to develop and maintain relationships with leading consulting firms,
system integrators, ASPs and design firms, our ability to successfully market,
sell and deploy our products could be reduced.
We have a limited operating history, and our success may be limited by factors
often encountered by companies with a limited operating history.
Our original predecessor company, NetConsult Computersysteme GmbH, was
founded in 1992, and we were incorporated in our current form under German law
on April 23, 1998. Accordingly, we have only a limited operating history.
Factors that may negatively impact our future profitability include our high
levels of expenditures in sales and marketing to support upcoming product
launches, potential decreases in revenues if these product launches are
unsuccessful and our high ongoing levels of research and development expenses.
Each or all of these factors could limit our success.
A breach of our electronic commerce security measures could reduce future
demand for our products and services.
A requirement of the continued growth of electronic commerce and
communications is the secure transmission of confidential information over
public networks. We rely on a combination of a secure socket layer, the most
common encryption standard used on the Internet, and digital encryption
standard, which is commonly used for the encryption of financial information,
to provide the security necessary for the secure transmission of our customers'
data. A third party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any such
compromise or elimination of our security could reduce future demand for our
products and services. In addition, we may be required to expend significant
capital and other resources to protect against such security breaches or to
address problems they may cause. Finally, since our activities involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage our reputation and expose us to a risk
of loss or litigation and possible liability.
8
<PAGE>
Our distribution strategy depends, in part, on ASPs. If they are unable to sell
their services which are based on our products, demand for our products may
decrease.
Our distribution strategy relies primarily upon relationships with ASPs, such
as MindSpring, and value added resellers. ASPs maintain and manage Internet
servers on which they provide electronic commerce sites to merchants who wish
to sell their products or services over the Internet. Sales to ASPs represented
51% of our net revenues in 1998, 36% in 1999 and 28% in 2000. If the ASPs are
unable to sell services which are based on our products to their customers, the
demand for our products by the ASPs could decrease substantially and our
licensing revenues from ASPs could decrease proportionally.
We depend on third parties for licensed technology that we might not be able to
obtain from other sources.
We rely on certain technology that we license from third parties, including
database software from Sybase, Persistence Software and Sun Microsystems and
other software that is integrated with our software to perform key functions.
Our third-party technology licenses may not continue to be available to us on
commercially reasonable terms, or at all. The loss or inability to maintain any
of these technology licenses could prevent use of our products and services
until equivalent technology, if available, is identified, licensed and
integrated. Further, we cannot assure you that we will be able to acquire new
third party licenses that may be necessary for our business.
Losing some or all of our key personnel could harm our ability to manage our
business.
Our business depends substantially on the performance of our executive
officers and key employees, especially our chief executive officer, Mr. Stephan
Schambach. We are dependent upon our ability to retain and motivate high
quality personnel, especially for our management and development teams. Losing
the services of any of our executive officers or other key employees could
seriously harm our business, operating results and financial condition.
Our future success and ability to expand operations also depends upon our
ability to identify, hire, train and retain other highly qualified technical
and managerial personnel. Competition for top personnel is intense as these
personnel are in limited supply, and we might not be able to hire or retain
sufficient numbers of other highly qualified technical and managerial personnel
to support our business.
Currency fluctuations in the various markets in which we do business may
negatively affect our overall operating results, which are reported in euros.
We conduct many of our operations through subsidiaries in several countries,
primarily Germany, the United Kingdom, the United States, France and Sweden.
The operating and financial results of our subsidiaries are reported in the
relevant foreign currencies and then translated into euros at the applicable
foreign currency exchange rates for inclusion in our consolidated financial
statements. The exchange rates between these currencies and the euro may
fluctuate. We have not entered into any hedging or other arrangements for the
purpose of guarding against the risk of currency fluctuations. Therefore, the
translation effect of such fluctuations may have a harmful effect on our
results of operations and financial position as reported in euros. In general,
appreciation of the local currencies relative to another currency has an
adverse effect on revenues and operating income denominated in that currency,
while depreciation of the local currencies has a positive effect on revenues
and operating income denominated in the local currencies.
We have experienced significant growth of our business in recent periods and
failure to manage our continued growth could strain our management and other
resources.
Competing in the markets in which we participate requires effective planning
and management. Our rapid growth could place a significant strain on our
managerial, operational and financial resources. In particular, the
9
<PAGE>
rapid increase in our number of employees, especially in the United States,
could cause our current facilities to become insufficient for our needs. To
manage our growth, we must continue to implement and improve our operational
and financial systems and to expand, train and manage our employee base. The
cost of investment and the continuing maintenance costs for these applications
adds significantly to our general and administrative expenses.
In addition, our systems, procedures and controls might not be adequate to
support our operations. In particular, our rapid growth in the United States
could tax the capabilities of our information systems and our ability to
continue to effectively integrate our worldwide operations. We may not succeed
in achieving the rapid execution necessary to exploit the market for our
products and services. Our future operating results will also depend on our
ability to expand our sales and marketing organizations, establish distribution
channels to penetrate different and broader markets, and expand our support
organization commensurate with the increasing base of our installed products.
If we are unable to manage our growth effectively or fail to acquire resources
or assistance necessary to manage or support our growth, our business might be
harmed.
If we fail to meet the challenges associated with operating internationally, we
may not be able to grow our business.
Our products are currently marketed in over 25 countries in Europe, North
America, South America, Africa and the Asia/Pacific regions. Our future revenue
growth depends upon the successful continued expansion of our sales, marketing,
support and service organizations, through direct or indirect channels, in the
countries in which potential customers are located. This expansion will require
that we establish new offices, hire new personnel and manage operations in
widely disparate geographies, economies, legal systems, languages and cultures.
In pursuing our international strategy, we face several additional risks. These
risks include:
. uncertainty of market acceptance in new regions due to language,
cultural or other factors;
. lower levels of Internet usage and electronic commerce usage in the
countries outside of the United States and Europe;
. unexpected changes and differences in regulatory requirements,
particularly as applied to electronic commerce;
. our inability to manage our international growth, which we began before
we were able to firmly establish our business model or infrastructure in
a single market or a small number of markets;
. difficulty in collecting accounts receivable in some jurisdictions;
. potentially adverse tax consequences; and
. our ability to find and develop relationships with international
companies.
If we are unable to manage the potential effects of any of these risks, we
may not be able to grow our business in the future.
Our customer base is concentrated and our success depends on our ability to
retain certain existing customers.
Deutsche Telekom accounted for approximately 23% of our net sales for the
year ended December 31, 1998, and 9% for the year ended December 31, 1999 and
4% for the six months ended June 30, 2000. Our top ten customers accounted for
approximately 41% of net sales for the year ended December 31, 1998 and 31% of
net sales for the year ended December 31, 1999 and 38% of net sales for the six
months ended June 30, 2000. We expect to continue to derive a significant
portion of our revenues from sales to a limited number of customers. The loss
or a substantial decrease in the volume of orders from Deutsche Telekom or any
of our other top customers may harm our business.
10
<PAGE>
We are subject to numerous taxing authorities which could make tax assessments
against us for prior years.
Since some of our subsidiaries operate outside of the United States, we are
subject to the jurisdiction of numerous foreign tax authorities. These tax
authorities monitor the income generated in their jurisdictions and regulate
various corporate transactions, including intercompany transfers. We cannot
assure you that intercompany transfers and various corporate transactions will
not be challenged by foreign tax authorities or that such challenges will not
harm our business. Except with respect to INTERSHOP Communications, Inc. and
INTERSHOP Communications GmbH, no tax audits have yet been performed on us or
our subsidiaries. The tax audit did not cover our existing corporate group
structure. Accordingly, a subsequent tax assessment may occur.
Taxes on transactions on the Internet being considered by the United States and
other jurisdictions could slow the growth of electronic commerce and,
therefore, harm our business.
Tax authorities on the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
commerce over the Internet. New United States state tax regulations may subject
us to additional state sales, income and other taxes. A recently passed United
States federal law places a temporary moratorium on certain types of taxation
on Internet companies. If sales, income or other types of taxes over the
Internet are imposed, those taxes would likely increase our cost of doing
business.
We may not be able to adequately protect our intellectual property rights.
Our success depends, in part, upon our proprietary technology and other
intellectual property rights. To date, we have relied primarily on a
combination of copyright, trade secret, and trademark laws, and nondisclosure
and other contractual restrictions on copying and distribution to protect our
proprietary technology. We cannot assure you that our means of protecting our
intellectual property rights in the United States or abroad will be adequate or
that others, including our competitors, will not use our proprietary technology
without our consent.
We may face intellectual property infringement claims that are costly to
resolve.
We cannot assure you that third parties will not claim that our current or
future products and services infringe upon their intellectual property rights.
For example, the United States Patent and Trademark Office has granted, and may
continue to grant, patents for inventions that represent traditional methods of
doing business, but adapted for use on the Internet. If a claim of patent
infringement by any company were made against us, we would likely incur
significant expenses in defending against the claim, which could harm our
business. In addition, if a claim of infringement is made against us and we are
not successful in defending against the claim, we could be liable for
substantial damages. We may also be required to make royalty payments, which
could be substantial, to the holder of the patent rights. These events could
harm our business and limit our prospects for growth.
From time to time, other third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies
that are important to us. In addition, third parties may assert claims or
initiate litigation against us or our manufacturers, suppliers or customers
with respect to existing or future products, trademarks or other proprietary
rights.
We are obligated under certain agreements to indemnify other parties and our
customers as a result of claims that we infringe on the proprietary rights of
third parties. If we are required to indemnify parties under these agreements,
our operating results could be harmed.
11
<PAGE>
We may not be able to secure necessary funding in the future or may only be
able to do so at terms disadvantageous to us or our current shareholders.
We require substantial working capital to fund our business. With the
exception of two consecutive quarters of profitability in the six months ended
June 30, 2000, we have had significant operating losses and negative cash flow
from operations since inception and expect that this may continue for the
foreseeable future. We expect to use the net proceeds of this offering
primarily for working capital and general corporate purposes, including to fund
the growth of our business. We believe that these proceeds, together with our
existing capital resources, will be sufficient to meet our capital requirements
for the near term. However, our capital requirements depend on several factors,
including the rate of market acceptance of our products and services, the
ability to expand our customer base, our ability to control costs and other
factors. If capital requirements vary materially from those currently planned,
we may require additional financing sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our shareholders will be reduced, shareholders may experience
additional dilution or such equity securities may have rights, preferences or
privileges senior to those of the holders of our ordinary shares and ADSs.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop new or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures.
Concentration of ownership of our ordinary shares and ADSs may limit your
ability to influence corporate matters.
Mr. Stephan Schambach, our chief executive officer, is not a direct
shareholder of our company. However, both he and Mr. Burgess Jamieson hold
shares in our U.S. subsidiary which may be converted into the ordinary shares
of our company. In the event that all shares in our U.S. subsidiary were
converted into the ordinary shares of our company after the consummation of
this offering, Mr. Schambach would own approximately 12.4% of our capital stock
and Messrs. Schambach and Jamieson together would own approximately 13.6% of
our capital stock. In this event, Messrs. Schambach and Jamieson, along with
other members of our supervisory board, management board and executive
officers, would own approximately 27.7% of our capital stock. As a result, this
group of shareholders will be able to exercise significant influence over all
matters requiring shareholder approval. If some or all of this group of
shareholders choose to act or vote together, they will have the power to
control matters requiring shareholder approval, including supervisory board
elections, amendments to our articles of association and approval of
significant corporate transactions like mergers or sales of all of our assets.
This concentration of ownership may have the effect of discouraging third
parties from making a tender offer or bid to acquire our company at a price per
share that is above the then-current market price.
We could be subject to potential product liability claims and could be forced
to pay damages on those claims.
Software products as complex as ours may contain undetected errors or defects
when first introduced or when new versions are released. Customers or third
parties might detect other errors once they have started using our software.
They might also use our software for purposes for which it was not intended.
Our license agreements with customers and distribution partners often contain
provisions designed to limit our exposure to potential product liability
claims, such as disclaimers of warranties and limitations on liability for
special, consequential and incidental damages. In addition, our contracts often
limit the amounts recoverable by others for damages to the amounts paid to us
by the customer for the product or service which gives rise to the claim.
Although we have been subject to no such claims as of the date of this
prospectus, the continued sale and support of our products may result in our
being subject to those claims. However, customers who bring liability claims
may seek damages beyond the scope of these contracts and subject us to losses
which may not be covered by our product liability insurance. If we were
required to pay those damages, our operating margins would be reduced.
12
<PAGE>
Certain antitakeover provisions under German law and in our articles of
association may discourage acquisitions of us that may be beneficial to you.
We are subject to the Takeover Code of the Exchange Expert Commission of the
German Federal Ministry of Finance. These provisions, along with the provisions
of our articles of association, may have the effect of deterring hostile
takeovers or delaying or preventing changes in our control or management. As a
result, transactions that would award you a premium for your ADSs over the
current market prices may not be completed. In addition, these provisions may
limit your ability to approve transactions that you believe to be in your best
interest.
You may not be able to enforce United States legal judgments against us.
We are a stock corporation (Aktiengesellschaft) organized under the laws of
Germany. Some of the members of our supervisory board (Aufsichtsrat) and
management board (Vorstand) are non-residents of the United States. A
substantial portion of the assets of those persons and of our assets are
located outside of the United States. As a result, it may not be possible to
effect service of process within the United States upon those persons or upon
us or to enforce against them judgments obtained in United States courts based
on the civil liability provisions of the United States securities laws. In
addition, awards of punitive damages in actions brought in the United States or
elsewhere may not be enforceable in Germany.
Risks Related to the Offering
The price of your ADSs may fluctuate dramatically and your investment in our
ADSs could suffer a decline in value.
The worldwide equity markets in recent years, and in particular the market
for Internet stocks, have experienced extreme price and volume fluctuations.
This market volatility affects the market prices of the stock of many high
technology and Internet companies and is often unrelated or disproportionate to
the operating performance of these companies. In addition, negative changes in
financial estimates of our performance by securities analysts could cause
volatility in the price of our ADSs. These fluctuations, as well as general
economic and market conditions, may negatively affect the market price for our
ordinary shares and ADSs without regard to any changes in our results of
operations or financial condition.
You may not be able to resell your ADSs.
Prior to this offering, there has been no public market for the ADSs,
although our ordinary shares trade in Germany on the Neuer Markt of the
Frankfurt Stock Exchange. While our ADSs have been approved for listing on The
Nasdaq Stock Market's National Market, we cannot assure you that an active
trading market for our ADSs will develop or be maintained after listing. If an
active trading market is not developed or maintained, the liquidity and trading
prices of our ADSs could be negatively affected.
We have broad discretion in spending the proceeds of this offering and may do
so in ways with which you disagree.
We intend to use the proceeds for working capital and general corporate
purposes. Since we have no specific allocations for the use of the net proceeds
of this offering, our management will have broad discretion over the ways in
which the proceeds will be used. Because of the number and variability of
factors that determine our use of the net proceeds of this offering, you may
not agree with the uses management chooses or that the proceeds will be
invested in a way that yields a favorable return to you.
Future sales of our shares may cause our ordinary share prices to decline.
If our shareholders sell substantial amounts of our ordinary shares,
including ordinary shares issued upon the exercise of outstanding options and
warrants, in the public market following this offering, the market price of our
ADSs could fall. In addition, these sales could create the perception to the
public of difficulties or
13
<PAGE>
problems with our products and services. As a result, these sales also might
make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem appropriate. See "Shares Eligible
for Future Sale" for additional details on the number of shares which may be
sold in the public market and the timing of sales of our ordinary shares.
You will face substantial and immediate dilution.
The present owners of our issued and outstanding ordinary shares have also
acquired a controlling interest in our company at a cost substantially less
than the price at which the investors in this offering will acquire their ADSs
or shares. In addition, purchasers of our ADSs will experience immediate and
substantial dilution of approximately $31.00 in net tangible book value per ADS
or approximately 98% of the assumed offering price of $32.09 per ADS, based on
an exchange rate of (Euro)1.00 = $0.88, on September 28, 2000, adjusting for
the ratio of 1/2 an ordinary share per ADS. Since voting power is shared among
all outstanding ordinary shares, the issuance of more ordinary shares reduces
the voting powers of each previously outstanding ordinary share.
14
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION
We had previously prepared consolidated financial statements in Deutsche
marks. We now prepare consolidated financial statements in the euro, and we
have restated all historical financial information from DM into the euro. Our
share price is quoted in the euro on the Neuer Markt of the Frankfurt Stock
Exchange. In this prospectus, references to "DM" are to Deutsche marks,
references to "(Euro)" are to the euro, and references to "$" and "U.S.
dollars" are to United States dollars. For convenience only and except where
noted otherwise, certain euro figures have been translated into U.S. dollars at
the rate of (Euro)1.00 = $0.95, the noon buying rate in New York City for cable
transfers in foreign currencies certified by the Federal Reserve Bank of New
York for customs purposes on June 30, 2000. You should not consider these
translations as representations that the euro amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at the rate
indicated. See "Exchange Rate Information" for information concerning the
Deutsche Mark to dollar exchange rate from January 1, 1994 through December 31,
1998 and the euro to dollar exchange rate from January 1, 1999 through June 30,
2000.
The euro to DM exchange rate is a fixed rate of DM 1.95583 = (Euro)1.00.
Our fiscal year ends on December 31, and references in this prospectus to any
specific fiscal year are to the twelve-month period ended December 31 of such
year.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such an "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding
the growth of electronic commerce and related service markets and spending. You
should not place undue reliance on these forward-looking statements, which
apply only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks we face that are described above under the caption
"Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
Our net proceeds from the sale of the shares and ADSs in this offering are
estimated to be $99.1 million, or (Euro)112.8 million, after deducting the
underwriting discount and estimated offering expenses. This is based on the
offering price of $32.09 per ADS, and assumes that the underwriters' option to
purchase additional ADSs to cover over-allotments will not be exercised.
We currently expect to use the net proceeds primarily for working capital and
general corporate purposes. For the fiscal year ending December 31, 2000, we
currently estimate that from the net proceeds product development expenses will
be between $10.0 million and $20.0 million and expenses relating to the
expansion of our sales and marketing organization will be between $30.0 million
and $40.0 million. These projected expenses are estimates and approximations
only and do not represent firm commitments by us. Our actual results have
deviated significantly from our forecasts in the past and are likely to do so
in the future. As a result, investors should not rely on these forecasts when
considering an investment in us. In addition, we expect to use a portion of the
net proceeds for further development of our product lines through acquisitions
of products, technologies and businesses, although we have no present
commitments or agreements to make any major acquisitions. The amount of cash
that we will actually expend for working capital purposes will vary
significantly depending on a number of factors, including future revenue
growth, if any, and the amount of cash we generate from operations. Thus,
management will have significant discretion in applying the net proceeds of
this offering. Pending the uses described above, we will invest the net
proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any dividends. We currently intend to retain
all available earnings generated by our operations for the development and
growth of our business and do not currently anticipate paying any cash
dividends on our ordinary shares or ADSs. If we were to pay any dividends, we
would pay them in Deutsche marks until the euro replaces the Deutsche mark as
legal tender in the Federal Republic of Germany, after June 30, 2002. After
that date, we would pay any dividends in euros.
16
<PAGE>
PRICE RANGE OF ORDINARY SHARES
Currently, the principal trading market for our ordinary shares is the Neuer
Markt of the Frankfurt Stock Exchange.
For June 30, 2000, approximately 50 U.S. holders held our ordinary shares.
These holders held approximately 8,500,000 ordinary shares, representing less
than 10% of our outstanding ordinary shares.
The following tables set forth, for the periods indicated, the reported high
and low quoted closing prices, together with the average daily trading volume,
on the Neuer Markt of the Frankfurt Stock Exchange. Our ordinary shares began
trading on the Neuer Markt of the Frankfurt Stock Exchange on July 16, 1998. On
September 28, 2000, the closing price of our ordinary shares on the Neuer Markt
of the Frankfurt Stock Exchange was (Euro)75.02 per ordinary share, which is
equivalent to $33.01 per ADS.
Frankfurt Stock Exchange
<TABLE>
<CAPTION>
Frankfurt Stock Exchange Average Daily
Price per Share Trading Volume
------------------------ --------------
High Low (in thousands)
------------ -----------
<S> <C> <C> <C>
1998
Third quarter........................ (Euro) 8.25 (Euro) 6.22 36.32
Fourth quarter....................... 8.49 5.28 34.79
1999
First quarter........................ (Euro) 12.10 (Euro) 6.64 44.45
Second quarter....................... 16.53 11.73 72.42
Third quarter........................ 20.90 14.73 88.77
Fourth quarter....................... 61.60 20.10 89.25
2000
First quarter........................ (Euro)134.20 (Euro)48.20 82.67
Second quarter....................... 110.00 73.20 104.32
Third quarter (through September 28,
2000)............................... 104.99 75.02 281.30
</TABLE>
17
<PAGE>
EXCHANGE RATE INFORMATION
For a discussion of the impact of exchange rate fluctuations on our business,
financial condition and results of operations, see "Risk Factors--Currency
Fluctuations May Negatively Affect Our Operating Results" and "Management
Discussion and Analysis of Financial Condition and Results of Operations."
The following table sets forth, for the periods and dates indicated, the
average, high, low and period-end noon buying rates for converting Deutsche
marks to U.S. dollars, expressed in Deutsche marks per U.S. dollar, and
converting euros to U.S. dollars, expressed in euros per U.S. dollar. Effective
January 1, 1999, the euro was introduced in the 11 member states of the
European Union currently participating in the European Monetary Union, known as
the EMU, as a common legal currency among those states for "paperless"
transactions, pending the substitution of euro bank notes and coins for the
national currencies of the participating member states between January 1, 2002
and July 1, 2002. Effective July 1, 2002, the euro will be the official legal
tender for the participating member states, and the national currencies of
those member states will be withdrawn from circulation. The fixed exchange rate
for the euros converted to the Deutsche mark is DM 1.95583 per (Euro)1.00. We
do not represent that the Deutsche mark or euro amounts shown below could be or
could have been converted into U.S. dollars at any particular rate or at all.
The period average is the average of the noon buying rates on the last business
day of each full calendar month during the relevant period.
<TABLE>
<CAPTION>
Period Period
As of December 31, High Low Average End
------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1995............................................ DM 1.57 DM 1.34 DM 1.43 DM 1.43
1996............................................ 1.57 1.43 1.50 1.55
1997............................................ 1.87 1.54 1.73 1.79
1998............................................ 1.86 1.56 1.76 1.68
1999............................................ 1.96 1.64 1.84 1.95
2000 (through September 28, 2000)............... 2.32 1.88 2.08 2.21
</TABLE>
The table below sets forth, for the periods and dates indicated, information
concerning the noon buying rates for the euro quoted by the Federal Reserve
Bank of New York expressed in euro per $1.00. We do not represent that the euro
or U.S. dollar amounts shown below could be or could have been converted into
U.S. dollars at any particular rate or at all. The period average is the
average of the noon buying rates on the last business day of each full calendar
month during the relevant period.
<TABLE>
<CAPTION>
Period
High Low Average Period End
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of September 28, 2000............ (Euro)1.19 (Euro)0.96 (Euro)1.06 (Euro)1.14
</TABLE>
18
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. our actual capitalization as of June 30, 2000; and
. our capitalization as adjusted to give effect to our sale of 3,350,000
ADSs at the public offering price of $32.09 per ADS and deduction of the
underwriting discount and estimated offering expenses payable by us.
Unless we specifically state otherwise, the information in this prospectus
does not take into account the issuance of up to 500,000 ADSs that the
underwriters have the option to purchase solely to cover over-allotments. If
the underwriters exercise their over-allotment option in full, 87,280,940
ordinary shares will be outstanding after this offering based on the shares
outstanding as of June 30, 2000. This table excludes:
. 8,165,000 ordinary shares reserved for issuance under our 1999 Stock
Option Plan as of June 30, 2000;
. 1,082,065 ordinary shares reserved for issuance under our 1997 Equity
Incentive Plan as of June 30, 2000;
. 13,644,500 ordinary shares reserved for issuance to Messrs. Stephan
Schambach and Burgess Jamieson in the event of the conversion of their
shares in INTERSHOP Communications, Inc., our U.S. subsidiary as of
August 30, 2000; and
. 500,000 shares that were privately placed in August 2000.
For convenience only certain euro figures have been translated into U.S.
dollars at the rate of (Euro)1.00 = $0.95, the noon buying rate in New York
City for cable transfers in foreign currencies certified by the Federal Reserve
Bank of New York for customs purposes on June 30, 2000. As adjusted figures
have been translated into U.S. dollars at the rate of (Euro)1.00 = $0.88, the
noon buying rate in New York City for cable transfers in foreign currencies
certified by the Federal Reserve Bank of New York for customs purposes on
September 28, 2000.
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------
Actual As Adjusted
---------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
(Euro) $ (Euro) $
Total long-term borrowings................. 20 19 20 18
Bearer ordinary shares .................... 85,356 81,088 87,031 76,509
Paid-in capital............................ -- -- 111,102 97,669
Deferred compensation...................... (131) (124) (131) (115)
Accumulated deficit........................ (53,618) (50,937) (53,618) (47,136)
Accumulated other comprehensive income..... 590 561 590 519
------- ------- ------- -------
Total shareholders' equity............... 32,197 30,588 144,974 127,446
------- ------- ------- -------
Total capitalization..................... 32,217 30,607 144,994 127,464
======= ======= ======= =======
</TABLE>
19
<PAGE>
DILUTION
Our net tangible book value, as of June 30, 2000, was (Euro)31.7 million
($27.9 million), or approximately (Euro)0.36 per ordinary share ($0.16 per
ADS). Net tangible book value per ordinary share represents the amount of our
total tangible assets, minus the amount of our total liabilities, divided by
the number of shares outstanding. After giving effect to our issuance and sale
of 1,675,000 ordinary shares in this offering at the offering price of
(Euro)73.00 per share ($32.09 per ADS) (after deducting estimated underwriting
discounts, commissions and estimated offering expenses which we will pay), our
pro forma net tangible book value, as of June 30, 2000, would have been
(Euro)144.5 million ($127.0 million) or (Euro)1.66 per ordinary share ($0.73
per ADS). This represents an immediate increase in pro forma net tangible book
value of (Euro)1.30 per share ($0.57 per ADS) to our existing shareholders and
an immediate dilution in net tangible book value of (Euro)71.34 per ordinary
share ($31.36 per ADS) to you for purchasing shares in this offering. Per ADS
U.S. dollar amounts are calculated at a rate of (Euro)1.00 = $0.88, on
September 28, 2000, adjusting for the ratio of 1/2 of an ordinary share per
ADS.
The following table shows this per share dilution:
<TABLE>
<CAPTION>
Per Share Per ADS
----------- -------
<S> <C> <C>
Offering price............................................ (Euro)73.00 $32.09
Net tangible book value at June 30, 2000 before giving
effect to this offering.................................. 0.36 0.16
Increase attributable to this offering.................... 1.30 0.57
Pro forma net tangible book value at June 30, 2000 after
giving effect to this offering........................... 1.66 0.73
----------- ------
Dilution to new investors................................. (Euro)71.34 $31.36
=========== ======
</TABLE>
The following table sets forth, on a pro forma basis, as of June 30, 2000,
the number of shares issued by us, the total consideration paid to us and the
average price paid per ordinary share by existing shareholders and by new
investors purchasing shares in this offering. Per ADS U.S. dollar amounts are
calculated at a rate of (Euro)1.00 = $0.88, on September 28, 2000, adjusting
for the ratio of 1/2 of an ordinary share per ADS.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
---------------- ----------------------- -------------------
Number % Amount % Per Share Per ADS
---------- ----- ----------------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders... 85,355,940 100.0 (Euro) 74,488,000 37.9 (Euro) 0.86 $ 0.38
New investors........... 1,675,000 -- 122,275,000 62.1 73.00 32.09
---------- ----- ----------------- -----
Total................. 87,030,940 100.0 (Euro)196,763,000 100.0 (Euro) 2.26 $ 0.99
========== ===== ================= =====
</TABLE>
This table includes:
. 1,675,000 shares reserved for offering in connection with the Nasdaq
listing.
This table excludes:
. 8,165,000 ordinary shares reserved for issuance under our 1999 Stock
Option Plan as of June 30, 2000;
. 1,082,065 ordinary shares reserved for issuance under our 1997 Equity
Incentive Plan as of June 30, 2000;
. 13,644,500 ordinary shares reserved for issuance to Messrs. Stephen
Schambach and Burgess Jamieson in the event of the conversion of their
shares in INTERSHOP Communications, Inc., our U.S. subsidiary as of
August 30, 2000; and
. 500,000 shares that were privately placed in August 2000.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The consolidated statements of operations for the six months ended June 30,
1999 and 2000 and the consolidated balance sheet data at June 30, 2000 are
derived from our consolidated financial statements, which are unaudited. The
consolidated statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the consolidated balance sheet data at December 31,
1998 and 1999 are derived from our consolidated financial statements, which
have been audited by Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH, independent public accountants, and are
included elsewhere in this prospectus. The consolidated statement of operations
data for the years ended December 31, 1995 and 1996 and the consolidated
balance sheet data at December 31, 1995 and 1996 are derived from our
consolidated financial statements, audited by Arthur Andersen
Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH, not included
in this prospectus. All prior year balances have been restated from Deutsche
marks into euros using the exchange rate as of January 1, 1999. Prior to 1997,
there was no common stock outstanding as we were organized as INTERSHOP
Communications GmbH, which is a limited liability corporation. Accordingly, no
earnings per share have been presented for periods prior to 1997. Financial
data as of and for the years ended December 31, 1995 and 1996 represent
information for INTERSHOP Communications GmbH.
When you read this selected consolidated financial data, it is important that
you also read the historical consolidated financial statements and related
notes included in this prospectus, as well as the section in this prospectus
entitled "Management Discussion and Analysis of Financial Condition and Results
of Operations." For convenience only certain euro figures have been translated
into U.S. dollars at the rate of (Euro)1.00 = $0.95, the noon buying rate in
New York City for cable transfers in foreign currencies certified by the
Federal Reserve Bank of New York for customs purposes on June 30, 2000.
21
<PAGE>
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended December 31, Ended June 30,
---------------------------------------------------- ----------------------------
1995 1996 1997 1998 1999 1999 1999 2000 2000
------ ------ ------ ------- ------- ----------- ------- ----------- -------
(Euro) (Euro) (Euro) (Euro) (Euro) US$ (Euro) (Euro) US$
(As restated) (As restated)
----------------------------- ----------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Licenses............................. 43 25 2,947 11,295 29,534 28,057 10,515 39,950 37,952
Services, maintenance and other
revenues............................ 842 446 2,088 6,577 16,732 15,896 5,954 17,591 16,712
--- ------ ------ ------- ------- ------- ------- ------- -------
Total revenues....................... 885 471 5,035 17,872 46,266 43,953 16,469 57,541 54,664
--- ------ ------ ------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses............................. 120 85 442 1,742 4,786 4,547 1,346 3,280 3,116
Services, maintenance and other
revenues............................ 548 483 2,245 3,766 8,465 8,041 3,305 14,207 13,497
--- ------ ------ ------- ------- ------- ------- ------- -------
Total cost of revenues............... 668 568 2,687 5,508 13,251 12,588 4,651 17,487 16,613
--- ------ ------ ------- ------- ------- ------- ------- -------
Gross profit (loss)................... 217 (97) 2,348 12,364 33,015 31,365 11,818 40,054 38,051
--- ------ ------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............. 30 298 1,006 4,368 7,115 6,759 2,979 3,534 3,358
Sales and marketing.................. 78 1,069 4,705 18,368 34,771 33,032 12,447 25,318 24,052
General and administrative........... 126 790 3,454 6,729 11,206 10,647 4,943 9,343 8,875
Legal settlement costs............... -- -- -- 1,866 -- -- -- -- --
--- ------ ------ ------- ------- ------- ------- ------- -------
Total operating expenses............. 234 2,157 9,165 31,331 53,092 50,438 20,369 38,195 36,285
--- ------ ------ ------- ------- ------- ------- ------- -------
Operating income (loss)............... (17) (2,254) (6,817) (18,967) (20,077) (19,073) (8,551) 1,859 1,766
Other income (expense), net........... 14 (66) (198) 1,659 1,688 1,603 884 1,101 1,045
--- ------ ------ ------- ------- ------- ------- ------- -------
Net income (loss) .................... (3) (2,320) (7,015) (17,308) (18,389) (17,470) (7,667) 2,960 2,811
=== ======
Accretion of redeemable preferred
stock................................ (149) (220) -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
Net income (loss) attributable to
common shareholders.................. (7,164) (17,528) (18,389) (17,470) (7,667) 2,960 2,811
====== ======= ======= ======= ======= ======= =======
Net income (loss) per AG Share
attributable to common shareholders:
Basic................................ (0.24) (0.38) (0.23) (0.22) (0.10) 0.04 0.04
====== ======= ======= ======= ======= ======= =======
Diluted.............................. (0.24) (0.38) (0.23) (0.22) (0.10) 0.03 0.03
====== ======= ======= ======= ======= ======= =======
Net income (loss) per ADS attributable
to common shareholders:
Basic................................ (0.12) (0.19) (0.12) (0.11) (0.05) 0.02 0.02
====== ======= ======= ======= ======= ======= =======
Diluted.............................. (0.12) (0.19) (0.12) (0.11) (0.05) 0.01 0.01
====== ======= ======= ======= ======= ======= =======
Shares used in per AG share
calculations:
Basic................................ 30,170 45,965 79,883 79,883 77,945 82,771 82,771
====== ======= ======= ======= ======= ======= =======
Diluted.............................. 30,170 45,965 79,883 79,883 77,945 100,436 100,436
====== ======= ======= ======= ======= ======= =======
Shares used in per ADS share
calculations:
Basic................................ 60,340 91,930 159,766 159,766 155,890 165,542 165,542
====== ======= ======= ======= ======= ======= =======
Diluted.............................. 60,340 91,930 159,766 159,766 155,890 200,872 200,872
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------- As of June 30,
1995 1996 1997 1998 1999 2000
------ ------ ------ ------- ------- ----------------
(Euro) (Euro) (Euro) (Euro) (Euro) (Euro) US$
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... 57 214 5,058 34,185 12,065 18,054 17,151
Working capital................................. (56) 224 (82) 31,709 10,020 14,575 13,846
Total assets.................................... 283 1,586 10,731 47,221 53,789 91,792 87,203
Long-term liabilities........................... 3 1,713 6,945 1,978 240 73 69
Accumulated deficit............................. (5) (2,324) (9,489) (27,017) (45,406) (53,618) (50,937)
Total shareholders' equity (deficit)............ 47 (2,314) (9,593) 34,225 22,864 32,197 30,588
</TABLE>
22
<PAGE>
From inception to December 31, 1996 the Company reported its consolidated
financial statements in Deutsche marks (DM). In 1997, the Company reported in
U.S. dollars as INTERSHOP Communication, Inc., a U.S. entity, was the parent
company in that year. These financial statements were then restated and
presented in DM after the Company acquired the majority of the outstanding
shares of INTERSHOP Communications, Inc. during 1998. With the introduction of
the euro ((Euro)) on January 1, 1999, the Company has elected to present the
accompanying consolidated financial statements in euro. Accordingly, the
Deutsche mark consolidated financial statements for each period presented have
been restated into euro using the Deutsche mark/euro exchange rate as of
January 1, 1999 of (Euro)1 = DM 1.95583. The Company's restated financial
statements in euro depict the same trends as would have been presented if it
had continued to present its consolidated financial statements in Deutsche
marks. The consolidated financial statements will, however, not be comparable
to financial statements for periods prior to January 1, 1999 in euro of other
companies that previously reported their financial information in a currency
other than Deutsche marks. See disclosure of the above reporting currency
information in Note 1 of Notes to Consolidated Financial Statements.
23
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of the financial
condition and results of operations in conjunction with "Selected Consolidated
Financial Data" and the consolidated financial statements and related notes.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this prospectus.
Overview
We are a global provider of electronic commerce software applications that
enable businesses to sell their products and services over the Internet. Our
products can be integrated with existing business systems to allow our
customers to sell goods and services over the Internet without replacing their
existing business systems. The merchandising capabilities of our products, such
as customer profiling and cross-selling, help our customers to increase sales
revenues. We also provide professional services for our customers to assist in
the installation and ongoing maintenance of our software applications. We began
marketing electronic commerce software in 1992 in Jena, Germany and were a
development stage company until 1997. We introduced our current product line in
March 1998 and derive most of our revenue through licensing of our software
products.
We have previously prepared and reported our consolidated financial
statements in Deutsche marks. With the introduction of the euro on January 1,
1999, we elected to present the accompanying consolidated financial statements
in euro. Accordingly, the Deutsche mark consolidated financial statements for
each period presented have been restated into euro using the Deutsche mark/euro
exchange rate as of January 1, 1999 of (Euro)1 = DM 1.95583. Our restated euro
financial statements depict the same trends as would have been presented if we
had continued to present our consolidated financial statements in Deutsche
marks. The consolidated financial statements will, however, not be comparable
to the euro financial statements of other companies that previously reported
their financial information in currency other than Deutsche marks.
The financial information expressed in U.S. dollars is presented for the
convenience of the reader and is translated from euro at the noon buying rate
in New York City for cable transfers in euro as certified for custom purposes
by the Federal Reserve Bank of New York on June 30, 2000 which was (Euro)1.00
to US$0.95. The translated amounts should not be construed as a representation
that the local currency has been, could have been, or could be in the future,
converted into U.S. dollars at this or any other rate of exchange.
Source of Revenues and Revenue Recognition Policy
To date, we have generated revenues principally from the sale of licenses of
our software products and by providing related professional services including
consulting, implementation, technical support, maintenance and training. We
generally license our products to customers on a "right to use" basis pursuant
to a perpetual license. Our license agreements are generally in the same
standard form, although each license may be individually negotiated and may
contain variations. Our licenses are generally non-transferable or, if
transferable, any transfer is subject to our reasonable approval. The standard
end-user license agreement provides for an initial license fee based on the
number and types of electronic commerce sites or computers involved. Additional
license fees are charged when the number of electronic commerce sites or
servers exceeds the number covered by the initial license fee.
We recognize product license revenues when all of the following conditions
are met:
. we have a non-cancelable license agreement with the customer;
. we have delivered the software product to the customer;
. the amount of fees to be paid by the customer is fixed or determinable;
and
. the collection of these fees is probable.
24
<PAGE>
In instances where we provide services which significantly alter the features
and functionality of our software, we recognize the license and related service
revenues based on the percentage of completion as work progresses.
Our remaining revenues are primarily attributable to service revenues, which
include consulting, customer support and training revenue. Customers may
purchase implementation services from us, but we expect to rely increasingly on
third-party consulting organizations to deliver these services directly to our
customers.
We bill professional services either on a time and materials basis or on a
fixed-price basis. We recognize professional services fees billed on a time and
materials basis as the services are performed. We recognize professional
services fees on fixed-price arrangements as the work progresses, based on our
estimate of the work completed.
We also enter into support agreements with customers in which we agree to
provide technical support and software updates. We recognize revenues from
these agreements as service revenues over the term of the agreement, which is
typically one year.
The costs associated with our license revenues include royalty payments to
third parties for integrated technology, the cost of manuals and product
documentation, production media used to deliver our products and shipping
costs, including the costs associated with the electronic transmission of
software to new customers. Our cost of maintenance and service revenues
includes salaries and related expenses for our customer support, implementation
and training services organizations, costs of third parties contracted to
provide consulting services to customers and an allocation of our facilities,
communications and depreciation expenses.
Our operating expenses are classified according to the nature of the
expenditure. The three general categories are: research and development, sales
and marketing and general and administrative. Costs for overhead and facilities
are allocated to each category that use the overhead and facilities services
based on their headcount.
In connection with stock option grants to our employees, our balance of
deferred stock-based compensation totaled approximately (Euro)0.1 million as of
June 30, 2000. This amount represents the difference between the exercise price
and the deemed fair market value of our common stock for accounting purposes on
the date we granted these stock options. This amount is included as a component
of stockholders' equity and is being amortized on a straight-line basis by
charges to operations over the vesting period of the options. For fiscal 1998
and 1999, we recorded approximately (Euro)0.2 million and (Euro)0.3 million of
stock-based compensation amortization expense, respectively. For the six-month
period ended June 30, 1999 and 2000, we recorded approximately (Euro)0.2
million and (Euro)0.1 million of stock-based compensation amortization expense,
respectively. The amortization of the remaining deferred stock-based
compensation will result in additional charges to operations through 2001.
Although revenues increased in each of the past three years, we incurred
significant costs to develop our technology and products and to recruit and
train personnel for our engineering, sales, marketing, professional services
and administrative departments. As a result, we incurred significant losses for
the past four years with the exception of the first fiscal two quarters of 2000
and as of June 30, 2000, had an accumulated deficit of (Euro)53.6 million. We
intend to continue to invest heavily in sales, marketing and research and
development. We therefore expect to incur operating losses for the foreseeable
future.
Our limited operating history makes predicting future operating results very
difficult. We believe that period-to-period comparisons of operating results
should not be relied upon as predictive of future performance. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by companies at an early state of development, particularly companies in new
and rapidly evolving markets. We may not be successful in addressing these
risks and difficulties. Although we have experienced significant percentage
growth in revenues in recent periods, we do not believe that prior growth rates
are sustainable or indicative of future operating results.
25
<PAGE>
We had 765 full-time employees as of June 30, 2000 and intend to hire a
significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage this
rapid growth and increased demand, we will need to invest in and implement
scalable operational systems, procedures and controls. We must also be able to
recruit qualified candidates to manage our expanding operations. We expect
future expansion to continue to challenge our ability to hire, train, manage
and retain our employees.
Years Ended December 31, 1997, 1998 and 1999
Revenues
Licenses. License revenues were (Euro)2.9 million for 1997, (Euro)11.3
million for 1998 and (Euro)29.5 million in 1999, representing increases of 290%
from 1997 to 1998 and 161% from 1998 to 1999. The increase in license revenues
from 1997 to 1998 is attributable to increased sales to new customers resulting
from increased headcount in our sales force. The increase in license revenues
from 1998 to 1999 is attributable to increased sales to new customers.
Approximately 50% of this increase is attributable to increased headcount in
our sales force, approximately 30% is attributable to the release of our ePages
and enfinity product lines and approximately 20% is attributable to our
geographic expansion to other European countries. Total headcount in our sales
department was 34 people at December 31, 1997, 72 at December 31, 1998 and 101
at December 31, 1999.
Service, maintenance and other revenues. Service, maintenance and other
revenues were (Euro)2.1 million for 1997, (Euro)6.6 million for 1998 and
(Euro)16.7 million for 1999, representing increases of 214% from 1997 to 1998
and 153% from 1998 to 1999. Service revenues from professional services
consulting fees were (Euro)1.2 million for 1997, (Euro)5.6 million for 1998 and
(Euro)11.3 million for 1999. Service revenues from software maintenance and
support agreements were (Euro)0.3 million for 1997, (Euro)0.7 million for 1998
and (Euro)4.0 million for 1999. Other revenues were (Euro)0.6 million for 1997,
(Euro)0.3 million for 1998 and (Euro)1.4 million for 1999. The increase in
service, maintenance and other revenues is primarily attributable to the
increased licensing activity described above, which has resulted in increased
revenues from customer implementations and maintenance contracts.
Cost of Revenues
Licenses. Cost of revenues includes product license costs which include
royalties to third party software vendors for software embedded in our product
suite, as well as documentation and other informational media associated with
our products. Cost of license revenues was (Euro)0.4 million for 1997,
(Euro)1.7 million for 1998 and (Euro)4.8 million for 1999. The increase is
attributable to the increase in royalties paid to third parties from the
increase in license revenues. Royalties paid to third parties were (Euro)0.3
million for 1997, (Euro)1.0 million for 1998 and (Euro)2.9 million for 1999.
Service, maintenance and other revenues. Cost of service, maintenance and
other revenues includes salary and other related costs for our professional
services and support staff, as well as third party contractor expenses. Cost of
service, maintenance and other revenues was (Euro)2.2 million for 1997,
(Euro)3.8 million for 1998 and (Euro)8.5 million for 1999. The increase is
attributable to the increase in the number of employees providing
implementation, training and technical support services. Total headcount in our
professional services, training and support departments was 63 people at
December 31, 1997, 104 at December 31, 1998 and 175 at December 31, 1999.
Gross Profit
Gross profit was (Euro)2.3 million for 1997, (Euro)12.4 million for 1998 and
(Euro)33.0 million for 1999. The increase is attributable to the growth in our
customer base as well as the increase in license sales as a percentage of total
sales. Our customer base was approximately 130 at December 31, 1997,
approximately 600 at December 31, 1998 and approximately 3,100 at December 31,
1999. Management believes that this trend will continue in the foreseeable
future.
26
<PAGE>
Gross margins on service, maintenance and other revenues was negative 8%, 43%
and 49% in 1997, 1998 and 1999, respectively. The negative margin in 1997 was
primarily due to the start-up costs associated with establishing a professional
services division, in particular the costs associated with hiring software
developers and engineers. Gross margin percentages are impacted by product mix
and variable labor costs. Fixed costs and variable material costs have a
minimal impact on gross margin.
Operating Expenses
Research and Development. Research and development expenses were (Euro)1.0
million for 1997, (Euro)4.4 million for 1998 and (Euro)7.1 million for 1999.
The increase is attributable to increases in the number of research and
development personnel. Total headcount in our research and development
department was 32 people at December 31, 1997, 51 at December 31, 1998 and 112
at December 31, 1999. To date, all software development costs have been
expensed in the period incurred. We believe that continued investment in
research and development is critical to attaining our strategic objectives,
and, as a result, we expect research and development expenses to increase
significantly in future periods.
Sales and Marketing. Sales and marketing expenses were (Euro)4.7 million for
1997, (Euro)18.4 million for 1998 and (Euro)34.8 million for 1999. The increase
in the total amount of sales and marketing expenses is attributable to the
increased number of sales and marketing employees and the increase in marketing
program expenses. Total headcount in our marketing department was 27 people at
December 31, 1997, 44 at December 31, 1998 and 78 at December 31, 1999.
Marketing program expenses were (Euro)1.0 million for 1997, (Euro)3.8 million
for 1998 and (Euro)13.2 million for 1999. We believe that continued investment
in sales and marketing is critical to attaining our strategic objectives, and,
as a result, we expect sales and marketing expenses to increase in future
periods.
General and Administrative. General and administrative expenses were
(Euro)3.5 million for 1997, (Euro)6.7 million for 1998 and (Euro)11.2 million
for 1999. The increase is primarily attributable to the increase in the number
of administrative personnel. The number of administrative personnel was 24
people at December 31, 1997, 49 at December 31, 1998 and 78 at December 31,
1999. We believe that general and administrative costs will further increase as
we expect to continue adding personnel to support our expanding operations and
incurring additional costs related to the growth of our business.
Other Income (Expense), Net
Other income (expense), net consists of interest income, interest expense and
other non-operating expenses. Other income, net was (Euro)(0.2) million for
1997, (Euro)1.7 million for 1998 and (Euro)1.7 million for 1999. The increase
from 1997 to 1998 is due to interest income generated from the remaining
proceeds from our initial public offering in Germany in July 1998. Included in
other income (expense), net is employment-related government subsidies in
Germany. We are under no obligation to repay any amounts subsidized by the
German government for employment related expenses and we do not expect ever to
repay such subsidies. After receiving no subsidies in 1997, we received
(Euro)1.3 million in 1998 and (Euro)0.9 million in 1999.
Six Months Ended June 30, 1999 and 2000
Revenues
Licenses. License revenues increased from (Euro)10.5 million for the six
months ended June 30, 1999 to (Euro)40.0 million for the six months ended June
30, 2000. The increase is attributable to an increase in sales to new customers
resulting from increased numbers of employees in our sales force and an
increase attributable to the introduction of the enfinity product released in
fourth quarter of 1999. Total headcount in our sales department increased from
93 on June 30, 1999 to 173 on June 30, 2000.
27
<PAGE>
Service, maintenance and other revenues. Service, maintenance and other
revenues were (Euro)6.0 million for the six months ended June 30, 1999 and
(Euro)17.6 million for the six months ended June 30, 2000, representing a 193%
increase. Service revenues from professional services consulting fees increased
from (Euro)4.7 million for the six months ended June 30, 1999 to (Euro)12.0
million for the six months ended June 30, 2000. Service revenues from software
maintenance, support agreements, and customer training increased from
(Euro)0.9 million for the six months ended June 30, 1999 to (Euro)5.3 million
for the six months ended June 30, 2000. Other revenues were (Euro)0.4 million
for the six months ended June 30, 1999 and (Euro)0.3 million for the six months
ended June 30, 2000. The increase in service, maintenance and other revenue is
attributable to the increased licensing activity described above, which has
resulted in increased revenues from customer implementations and maintenance
contracts.
Cost of Revenues
Licenses. Cost of revenues includes royalties paid to third-party software
vendors for software embedded in our product suite, as well as documentation
and other informational media associated with our products. Cost of license
revenues increased from (Euro)1.3 million for the six months ended June 30,
1999 to (Euro)3.3 million for the six months ended June 30, 2000. The increase
is attributable to the increase in royalties paid to third parties from the
increase in license revenues. Royalties paid to third parties were (Euro)1.1
million for the six months ended June 30, 1999 and (Euro)2.8 million for the
six months ended June 30, 2000.
Service, maintenance and other revenues. Cost of revenues includes salary and
other related costs for our professional services and support staff, as well as
third party contractor expenses. Cost of service, maintenance and other
revenues increased from (Euro)3.3 million for the six months ended June 30,
1999 to (Euro)14.2 million for the six months ended June 30, 2000. This
increase is attributable to the increase in the number of employees providing
implementation, training and technical support services. The total number of
employees in our professional services, training and support departments was
135 people at June 30, 1999 and 276 people at June 30, 2000.
Gross Profit
Gross profit increased from (Euro)11.8 million for the six months ended June
30, 1999 to (Euro)40.1 million for the six months ended June 30, 2000. The
increase is attributable to the growth in our customer base, which contributed
to increased revenues from software licenses, implementation and maintenance
services.
Operating Expenses
Research and Development. Research and development expenses increased from
(Euro)3.0 million for the six months ended June 30, 1999 to (Euro)3.5 million
for the six months ended June 30, 2000. The total number of employees in our
research and development department was 89 at June 30, 1999 and 115 at June 30,
2000. This increase is attributable to the increased number of research and
development personnel. To date, all software development costs have been
expensed in the period incurred. We believe that continued investment in
research and development is critical to attaining our strategic objectives,
and, as a result, we expect research and development expenses to increase
significantly in future periods.
Sales and Marketing. Sales and marketing expenses increased from (Euro)12.4
million for the six months ended June 30, 1999 to (Euro)25.3 million for the
six months ended June 30, 2000. The total number of employees in our sales and
marketing department was 146 at June 30, 1999 and 267 at June 30, 2000. This
increase is attributable to both the increased number of sales and marketing
personnel and a general increase in marketing program spending. We believe that
continued investment in sales and marketing is critical to attaining our
strategic objectives, and, as a result, we expect sales and marketing expenses
to increase in future periods.
General and Administrative. General and administrative expenses increased
from (Euro)4.9 million for the six months ended June 30, 1999 to (Euro)9.3
million for the six months June 30, 2000. The total number of
28
<PAGE>
employees in our general and administrative department was 71 at June 30, 1999
and 107 at June 30, 2000. This increase is primarily attributable to the
increased number of administrative personnel. We believe that general and
administrative costs will further increase as we expect to continue adding
personnel to support our expanding operations and incurring additional costs
related to the growth of our business.
Other Income, Net
Other income, net consists of interest income, interest expense and other
non-operating expenses. Other income, net increased from (Euro)0.9 million for
the six months ended June 30, 1999 to (Euro)1.1 million for the six months
ended June 30, 2000. Included in other income, net are employment-related
government subsidies in Germany. We are under no obligation to repay any
amounts subsidized by the German government for employment expenses and we do
not expect ever to repay such subsidies.
Provision for Income Taxes
From inception through December 31, 1999, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit.
Given our losses incurred through December 31, 1999, our losses projected for
fiscal 2000 and the difficulty in accurately forecasting our future results,
management does not believe that the realization of the related deferred income
tax asset meets the criteria required by generally accepted accounting
principles. Therefore, we have recorded a 100% valuation allowance against the
deferred income tax asset. See Note 10 of Notes to Intershop's Financial
Statements for the components of the deferred income tax asset.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth consolidated statement of operations data for
each of the ten consecutive quarters ending June 2000, as well as the
percentage of our total revenues represented by each item. We believe that this
information has been prepared substantially on the same basis as the audited
and unaudited consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. Amounts in U.S. dollars are
unaudited and translated at (Euro)1.00 to $0.95, the noon buying rate on
June 30, 2000. For recent exchange rates between the euro and the U.S. dollar,
please see "Exchange Rate Information." You should read this information in
conjunction with our annual audited consolidated financial statements and
related notes appearing elsewhere in this prospectus. The operating results for
any quarter are not indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Jun. 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) US$
(in thousands)
Revenues: (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Licenses.......... 2,397 2,284 2,295 4,319 4,489 6,026 5,690 13,329 17,411 22,539 21,412
Services,
maintenance and
other revenues... 1,060 1,305 2,269 1,943 2,483 3,471 4,812 5,966 7,561 10,030 9,529
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues.... 3,457 3,589 4,564 6,262 6,972 9,497 10,502 19,295 24,972 32,569 30,941
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Licenses.......... 303 384 399 656 561 785 1,191 2,249 1,699 1,581 1,502
Services,
maintenance and
other revenues... 791 654 1,101 1,220 1,564 1,741 1,764 3,396 5,547 8,660 8,227
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues......... 1,094 1,038 1,500 1,876 2,125 2,526 2,955 5,645 7,246 10,241 9,729
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit...... 2,363 2,551 3,064 4,386 4,847 6,971 7,547 13,650 17,726 22,328 21,212
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
expenses:
Research and
Development...... 882 765 1,347 1,374 1,461 1,518 2,149 1,987 1,607 1,927 1,831
Sales and
marketing........ 4,594 3,782 4,279 5,713 5,244 7,203 6,321 16,003 11,094 14,224 13,513
General and
administrative... 1,661 3,710 1,495 1,729 2,220 2,723 2,561 3,702 3,935 5,408 5,137
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses......... 7,137 8,257 7,121 8,816 8,925 11,444 11,031 21,692 16,636 21,559 20,481
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)........... (4,774) (5,706) (4,057) (4,430) (4,078) (4,473) (3,484) (8,042) 1,090 769 731
Other income
(expense), net... 322 (150) 831 656 597 287 134 670 525 576 547
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss)........... (4,452) (5,856) (3,226) (3,774) (3,481) (4,186) (3,350) (7,372) 1,615 1,345 1,278
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
As a Percentage of Total Revenues
------------------------------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Jun. 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) US$
Revenues: (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Licenses.......... 69.3 % 63.6 % 50.3 % 69.0 % 64.4 % 63.5 % 54.2 % 69.1 % 69.7 % 69.2 % 69.2 %
Services and
maintenance...... 30.7 % 36.4 % 49.7 % 31.0 % 35.6 % 36.5 % 45.8 % 30.9 % 30.3 % 30.8 % 30.8 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues.... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Licenses.......... 8.8 % 10.7 % 8.8 % 10.5 % 8.0 % 8.3 % 11.3 % 11.7 % 6.8 % 4.9 % 4.9 %
Services,
maintenance and
other revenues... 22.8 % 18.2 % 24.1 % 19.5 % 22.5 % 18.3 % 16.8 % 17.6 % 22.2 % 26.6 % 26.6 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues......... 31.6 % 28.9 % 32.9 % 30.0 % 30.5 % 26.6 % 28.1 % 29.3 % 29.0 % 31.5 % 31.5 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit...... 68.4 % 71.1 % 67.1 % 70.0 % 69.5 % 73.4 % 71.9 % 70.7 % 71.0 % 68.5 % 68.5 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
expenses:
Research and
Development...... 25.5 % 21.3 % 29.4 % 21.9 % 21.0 % 16.0 % 20.3 % 10.3 % 6.4 % 5.9 % 5.9 %
Sales and
marketing........ 132.9 % 105.4 % 93.8 % 91.3 % 75.2 % 75.8 % 60.2 % 82.9 % 44.4 % 43.7 % 43.7 %
General and
administrative... 48.1 % 103.4 % 32.8 % 27.6 % 31.8 % 28.7 % 24.4 % 19.2 % 15.8 % 16.6 % 16.6 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses......... 206.5 % 230.1 % 156.0 % 140.8 % 128.0 % 120.5 % 105.1 % 112.4 % 66.6 % 66.2 % 66.2 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)........... (138.1)% (159.0)% (88.9)% (70.8)% (58.5)% (47.1)% (33.2)% (41.7)% 4.4 % 2.3 % 2.3 %
Other income
(expense), net... 9.3 % (4.2)% 18.2 % 10.5 % 8.6 % 3.0 % 1.3 % 3.5 % 2.1 % 1.8 % 1.8 %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss)........... (128.8)% (163.2)% (70.7)% (60.3)% (49.9)% (44.1)% (31.9)% (38.2)% 6.5 % 4.1 % 4.1 %
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
30
<PAGE>
Our quarterly revenue increased throughout the periods presented primarily as
a result of the introduction of our INTERSHOP 3, INTERSHOP 4 and our INTERSHOP
enfinity products and the substantial growth of our sales force. The strong
increases in revenues from the quarter ended September 30, 1999 to the quarter
ended June 30, 2000 are primarily attributable to the release of our enfinity
product line as well as new customer purchases of INTERSHOP 4. Cost of revenues
has increased in each quarter as a result of the hiring of employees. Total
operating expenses has generally increased in each quarter primarily due to
increased expenses associated with building a sales and marketing
infrastructure including the development of a direct sales force, increased
spending on research and development to support new product introductions and
an increase in general and administrative expenses to manage our expanding
operations. From the quarter ended September 30, 1999 to the quarter ended
December 31, 1999, sales and marketing expenses increased 153% primarily due to
our hosting and sponsorship of our first trade show in October, 1999.
License and service revenues as a percentage of total revenues have varied
from quarter to quarter due to the timing of the release of new products. The
relative amount of license revenues as compared to service revenues has varied
based on the volume of license fees for software solutions compared to the
volume of license fees for additional sites, which generally do not require
services. In addition, the amount of services we provide for a software
solution can depend in large part on the solution which has been licensed, the
complexity of the customers' information technology environment, the resources
directed by customers to their implementation projects, the number of users
licensed and the extent to which consulting organizations provide services
directly to customers.
Our operating expenses as a percentage of total revenue have generally
decreased from quarter to quarter due to our historical rapid revenue growth.
Our revenues and operating results can vary, sometimes substantially, from
quarter to quarter, causing significant variations in operating results during
certain quarters. Our revenues, particularly our license revenues, are
difficult for us to forecast for several reasons. These include:
. market acceptance of and demand for our current and new products and
enhancements;
. our ability to fulfill orders received within a given quarter and the
timing of our customers' acceptance of our products;
. the potential for delay or deferral of customer implementations of our
software and changes in customer budgets;
. increases in our sales and marketing expenses as we begin production of
upgrades to our product line and continue to fund greater levels of
research and development;
. our pricing and mix of products and services sold;
. the relatively long sales cycles for some of our products;
. the size and the timing of orders in one quarter or from quarter to
quarter and the fact that the majority of our sales in any given quarter
historically occur in the last few weeks of the quarter;
. changes in pricing policies and introduction of new products or product
enhancements by our competitors; and
. announcements of technological innovations or new products or services
by us or our competitors.
Included in these quarterly results is a contract with a third party under
which we are to be paid, in total, (Euro)11.4 million. We recognized income
under this contract ratably each quarter and will continue to do so until the
expiration of the contract in June 2000.
Historically, our business, as is common in the software industry, has
experienced its highest revenues in the fourth quarter of each year, due
primarily to year-end capital purchases by customers. Because our operating
expenses are based upon anticipated revenue levels and because a high
percentage of our expenses are relatively fixed in the near term, any shortfall
in anticipated revenue or delay in recognition of revenue
31
<PAGE>
could result in significant variations in our operating results from quarter to
quarter. In addition, we may not be able to confirm any shortfalls until late
in the quarter or following the end of the quarter because license agreements
are often executed late in a quarter. In addition, our business has experienced
a lack of sales growth in license revenue during the third quarter.
Liquidity and Capital Resources
Since our inception, we have financed our operations through private
placements of preferred stock and bridge loans from investors as well as funds
raised from an initial public offering in Germany in July 1998. As of June 30,
2000, we had (Euro)18.1 million in cash, cash equivalents and short-term
investments, and (Euro)14.6 million in working capital.
Net cash provided by operating activities was (Euro)2.6 million in 1997. Net
cash used in operating activities was (Euro)21.0 million in 1998 and (Euro)24.4
million in 1999. Net cash provided in 1997 was primarily due to the receipt of
a significant prepayment for an extended contract from a major customer. Net
cash flows used in operating activities in 1998 and in 1999 reflect net losses
and, to a lesser extent, the increase in accounts receivable from increased
revenues. Net cash used in operating activities was (Euro)13.7 million and
(Euro)10.2 million for the six months ended 1999 and 2000, respectively. Net
cash flows used in operating activities for the six months ended June 30, 1999
reflect net losses and an increase in accounts receivables. Net cash flows used
in operating activities for the six months ended June 30, 2000 are a result of
increases in accounts receivable and prepaid expenses netted with increases of
accrued expenses, accounts payable and deferred revenues.
Net cash used in investing activities was (Euro)2.0 million in 1997,
(Euro)3.8 million in 1998 and (Euro)7.5 million in 1999. Net cash used in
investing activities was (Euro)3.1 million and (Euro)9.9 million for the six
months ended June 30, 1999 and 2000, respectively. Cash used in investing
activities primarily reflects purchases of property and equipment in each
period.
Net cash provided by financing activities was (Euro)4.1 million in 1997,
(Euro)52.7 million in 1998 and (Euro)9.8 million in 1999. These cash flows
reflect primarily proceeds from private sales of preferred stock of
(Euro)5.3 million between 1997 and April 1998 and the proceeds from the public
sale of common stock of (Euro)52.1 million in July 1998. In 1999, financing
cash flows were primarily proceeds from a loan from a shareholder for
(Euro)7.0 million.
Net cash provided by financing activities was (Euro)1.6 million and
(Euro)25.7 million for the six months ended June 30, 1999 and 2000,
respectively. In the six months ended June 30, 1999, financing cash flows were
primarily proceeds from exercises of employee stock options. In the six months
ended June 30, 2000, financing cash flows were primarily proceeds from a loan
from a shareholder for (Euro)10.8 million and (Euro)12.5 million from the
purchase of stock by the Company's chairman of the supervisory board.
Capital expenditures, net of capital leases, were (Euro)1.9 million in 1997,
(Euro)3.3 million in 1998 and (Euro)3.6 million in 1999. Capital expenditures,
net of capital leases, for the six months ended June 30, 1999 and 2000, were
(Euro)1.7 million and (Euro)9.9 million, respectively. Our capital expenditures
consisted of purchases of resources to manage our operations, including
computer hardware and software, office furniture and equipment and leasehold
improvements. In the first six months of 2000, the Company's U.S. operations
moved into a new office space resulting in capital expenditures of
approximately (Euro)5.0 million of the (Euro)9.9 million. We expect that our
capital expenditures will continue to increase in the future. Since our
inception, we have generally funded capital expenditures either through the use
of working capital or with capital leases.
During 1999, we experienced a significant growth in our operating expenses,
in particular an increase of (Euro)2.7 million from 1998 to 1999 in research
and development and an increase of (Euro)16.4 million from 1998 to 1999 in
sales and marketing expenses. As a result, we anticipate that operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or
product lines. We believe that the net proceeds from this offering along with
our current resources will be sufficient to meet our near-term working capital
and operating resource expenditure requirements.
32
<PAGE>
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
INTERSHOP will adopt SAB 101 as required in the fourth quarter of fiscal 2000
and is evaluating the effect that such adoption may have on its consolidated
results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to record derivative financial instruments on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statements No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (or January 1, 2001
for INTERSHOP). In June 2000, the FASB issued Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities--an Amendment
of FASB Statement No. 133." SFAS 138 amends SFAS 133 to (a) exclude from the
scope of SFAS No. 133 nonfinancial assets that will be delivered in quantities
expected to be used or sold by a company over a reasonable period in the normal
course of business and for which physical delivery is probable, (b) permit
hedging of a benchmark interest rate, (c) allow hedging of foreign-currency-
denominated assets and liabilities and (d) allow for limited hedging of net
foreign currency exposures. INTERSHOP has no derivative financial and commodity
instruments, forward contracts or hedging arrangements in cash and cash
equivalents. These statements should not have a material impact on the current
financial condition or results of our operations.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. These statements will not have a material impact on the financial
condition or results of our operations.
Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the Risk Factors section.
Interest Rate Risk
As of June 30, 2000, we had cash and cash equivalents of approximately
(Euro)18.1 million which consist of cash and highly liquid short-term
investments with original maturities of three months or less at the date of
purchase. These investments may be subject to interest rate risk and will
decrease in value if market interest rates increase. A hypothetical increase or
decrease in market interest rates by 10% from the market interest rates at June
30, 2000 would cause the fair value of these short-term investments to change
by an immaterial amount. Declines in interest rates over time will, however,
reduce our interest income.
Foreign Currency Exchange Rate Risk
A significant portion of our business is conducted in currencies other than
the euro. Our international sales are primarily made through our subsidiaries
in their respective regions and are generally denominated in the
33
<PAGE>
local currency. Expenses incurred by their subsidiaries are also denominated in
the local currency. Accordingly, the functional currency of these subsidiaries
is the local currency. Of our consolidated revenues in 1997, 1998 and 1999 and
the six months ended June 30, 2000, approximately 23%, 43%, 63% and 62%,
respectively, were attributable to non-EMU denominated operations and
translated into euro. As a consequence, period-to-period changes in the average
exchange rate in a particular currency can significantly affect revenues and
operating income denominated in that currency. In general, appreciation of the
euro relative to another currency in which we earn revenue has an adverse
effect on euro-denominated revenues and operating income, while depreciation of
the euro against such other currency has a positive effect on euro-denominated
revenues and operating income. The principal non-euro currencies in which our
subsidiaries conduct business and are subject to the risks described above are
the U.S. dollar and the British pound sterling.
Equity Price Risk
We do not own any significant equity investments. Therefore, we are not
currently exposed to any direct equity price risk.
34
<PAGE>
BUSINESS
We are a global provider of electronic commerce software applications that
enable businesses to sell their products and services over the Internet. Our
products are targeted toward large businesses, both those that sell their own
products and services online and those that assist other businesses in selling
their products and services online. We target our software applications and
professional services to large businesses that have the ability to manage their
own electronic commerce sites. We also target our products and services to ASPs
that use our software applications to manage electronic commerce sites for the
growing number of small- and medium-sized businesses seeking an Internet
presence and to online marketplaces who provide an online forum for sellers by
bringing buyers and sellers together online. Furthermore, our products can be
used to address simpler, entry-level electronic commerce business models, as
well as more advanced electronic commerce business models. By offering products
that provide solutions to a range of distinct business models, we can meet the
needs of our customers as they evolve from entry-level to more sophisticated
electronic commerce operations while remaining on our software platform.
We have operations in the United States and Europe and a worldwide network of
over 600 channel partners, including PricewaterhouseCoopers, Deutsche Telekom,
Unisys, Intel, Nortel Networks, and PSI Net. Our global presence allows us work
closely with large businesses and ASPs that operate internationally. By June
30, 2000, approximately 300,000 electronic commerce sites had been licensed to
be deployed on our products worldwide.
Industry Background
The Growth and Evolution of the Internet and Electronic Commerce
The Internet is a rapidly growing and increasingly accepted medium for
commerce. IDC estimates that the Internet commerce market is expected to grow
from $111 billion in 1999 to $1.3 trillion by 2003. As the Internet and online
business has proliferated, there has been increasing demand for technologies
that allow companies to leverage the Internet. The foremost among these is
electronic commerce software. The electronic commerce software market consists
of technologies that support a wide range of critical online business
functions, from enabling transactions to providing marketing data about
customers. According to IDC, the market for Internet commerce applications is
expected to grow from $1.7 billion in 1999 to $13.2 billion by 2003.
The rapid growth and acceptance of the Internet as a medium for commerce is
compelling mainstream businesses to participate in electronic commerce and
creating demand for pre-packaged electronic commerce software applications. As
recently as a few years ago, electronic commerce was dominated by a small
number of companies that used the Internet as their primary sales channel. Many
of these electronic commerce pioneers established their presence on the Web
using internally developed solutions that took a long time to deploy, were
costly to install and maintain and did not integrate well with existing
financial and operational software systems. As electronic commerce activity
continues to expand rapidly, a growing number of businesses have been compelled
to adopt the Internet as a medium of commerce in order to remain competitive.
At the same time, businesses are finding that speed is a key factor in
successfully establishing an electronic commerce presence. As a result,
businesses are seeking pre-packaged software applications that support
sophisticated electronic commerce sites while reducing the lengthy development
and implementation times and costly maintenance requirements of custom-
developed solutions.
In conjunction with the growth and acceptance of the Internet as a compelling
medium for commerce for traditional businesses, there has been a proliferation
of ASPs that rely on pre-packaged software applications. ASPs make it easier
for traditional businesses--particularly small- to medium-sized businesses--to
sell products and services over the Internet by maintaining and managing
servers on which they provide outsourced hosting of electronic commerce sites.
ASPs demand electronic commerce solutions that deploy rapidly, require little
installation and maintenance, integrate well with existing billing and customer
care systems and allow the ASP to offer their customers varying levels of
functionality priced according to customer needs.
35
<PAGE>
Recently, a large and growing number of online marketplaces has emerged.
These new online marketplaces include those that address business-to-consumer
needs and those focusing on vertical and horizontal business-to-business
electronic commerce in a wide variety of industries. Online marketplaces bring
buyers and sellers together in a single online environment, giving sellers an
additional channel through which to access customers online. This provides
online sellers an effective alternative to establishing their own destination
sites and taking on the expensive and difficult task of attracting customers to
come directly to their site.
Challenges for Electronic Commerce Solutions
While many existing electronic commerce software solutions successfully
process orders and perform other basic functions, few combine basic
functionality, intelligent merchandising capabilities, integration with
existing business systems and rapid deployment. Even fewer are built upon the
new and emerging standards that will support not only today's business models,
but also the new business models that will redefine how businesses exploit the
opportunities offered by electronic commerce. Businesses developing an online
presence are seeking a software solution that should:
. Provide intelligent merchandising capabilities. Intelligent
merchandising allows a business to capture information about its
customers and their purchasing behavior. By engaging in intelligent
merchandising a business can give its online shopper an improved
customer experience and better target offers to that customer's needs,
resulting in higher sales per customer visit and increased customer
loyalty.
. Integrate with existing business systems. As electronic commerce assumes
a more critical role in business strategy, it becomes imperative for
companies to integrate their electronic commerce sites directly into
existing business systems. Online storefronts should effectively be an
extension of these systems to improve operational flow, reduce costs and
increase customer satisfaction.
. Provide a packaged solution. Businesses that are entering the online
market often are initially unwilling or unable to make large
expenditures in the most advanced software and will eventually want to
upgrade to higher levels of functionality without incurring substantial
costs. A packaged solution reduces the time and expense of implementing
and deploying an electronic commerce solution.
. Serve as complete electronic commerce engines that enable a myriad of
transactions between suppliers, distributors and customers. New online
marketplaces and trading communities are emerging, allowing businesses
to trade more efficiently. These new business models require complete
electronic commerce engines that can serve as the foundation for a
variety of different business functions and enable a full range of
transactions between suppliers, distributors and customers.
. Support the new and emerging standards that will enable new and emerging
electronic commerce business models. In order to enable some of the
newer and more revolutionary emerging electronic commerce business
models a number of new standards and technologies are emerging, such as
XML and Enterprise Java Beans. We believe that only those businesses
whose electronic commerce applications are built on these new
technologies and standards will be able to effectively take advantage of
emerging business models in electronic commerce, such as selling through
online marketplaces.
The INTERSHOP Solution
We offer electronic commerce software applications that enable businesses to
sell goods and services over the Internet. We target both businesses who sell
their own products and services online and businesses, such as ASPs and online
marketplaces, who help companies sell their products and services online. Our
software provides both basic electronic commerce functionality and advanced
features, such as intelligent merchandising capabilities, and it also allows
customers to customize and extend the functionality of their electronic
commerce sites through product enhancements developed by our independent
software vendor partners. Our
36
<PAGE>
products are designed to support a wide range of business models, including
basic business-to-consumer and business-to-business functionality that many
businesses need today, as well as more advanced business models including
enabling online marketplaces, electronic commerce enabling the value chain and
supporting online electronic commerce communities, so that they serve not only
our customers' electronic commerce needs today, but will also provide a
seamless upgrade path to allow them to engage in emerging electronic commerce
business models tomorrow. In addition, our software works in conjunction with a
company's existing technology infrastructure, integrates with existing business
systems and supports an array of emerging online business models in enabling
transactions between suppliers, distributors and customers.
Our software applications offer our customers the following features and
benefits:
Core Electronic Commerce Engine
We offer electronic commerce software applications that serve as core
electronic commerce engines for businesses selling goods and services over the
Internet. Our software provides both basic electronic commerce functionality
and advanced features like intelligent merchandising capabilities and it also
allows customers to customize and extend the functionality of their electronic
commerce sites through product enhancements developed by our independent
software vendor partners. Our software works in conjunction with a company's
existing technology infrastructure, integrates with existing business systems
like enterprise resource planning and supply chain management software and
serves as the intermediary between a business and its trading partners by
integrating emerging online business systems like electronic commerce software.
Our applications provide the electronic commerce functionality that a
business requires to sell goods and services online. This functionality
includes:
. the ability to display goods and services online;
. search and catalog capabilities;
. electronic shopping carts;
. integration with existing business systems; and
. support for online transactions.
Intelligent Merchandising Capabilities
Our software applications contain built-in advanced intelligent merchandising
capabilities such as profiling, shopping lists, cross-selling, promotions and
advanced reporting. These capabilities allow our customers to deepen their
relationships with their customers, increase the average revenue per customer
visit, encourage an increased number of customer visits and increase word-of-
mouth referrals, letting them better market to their customers. In addition,
lessons learned from marketing to their customers online can be leveraged
throughout their brick-and-mortar business, allowing them to use their
electronic commerce site as a testing ground to improve the way they market
their products and services to their customers across all channels.
Faster Deployment than Existing Solutions
While supporting a complete range of electronic commerce functionality, our
products are packaged software applications which allow them to be easily and
quickly installed and provide a comprehensive maintenance and upgrade path.
Electronic commerce sites using our software applications are usually deployed
within 60 days on average. We believe this is more than 30 days faster than
most companies developing electronic commerce solutions. In addition, many of
our customers have deployed their electronic commerce sites in less than 30
days.
Integration with Existing Business Systems
Our products include software modules that support integration with existing
business systems, such as financial, customer relationship management and
enterprise resource planning software and other critical
37
<PAGE>
business systems. This integration allows our enterprise customers to build
electronic commerce sites that leverage existing business systems to perform
inventory control, accounts receivable management and other basic functions.
For ASPs, our products similarly integrate with existing billing, customer
care, registration and authentication systems.
Our Platform Supports Major Emerging Online Business Models
Our software applications support more than basic business-to-consumer or
business-to-business electronic storefronts. Our products are powerful core
electronic commerce engines that connect trading partners and enable
transactions between suppliers, distributors and customers. Our software
permits our customers to engage in a variety of activities associated with
established electronic commerce business models focusing not only on the common
electronic commerce business models used today, but also those that will allow
a business to expand and enhance the ways it exploits electronic commerce in
the future. These business models can be grouped according to whether our
customer sells its own products and services online or whether it enables
others to sell online, as well as the level of sophistication of the business
model. As shown in the figure below, the four basic categorizations include
direct selling, indirect selling, enabling merchants and enabling marketplaces.
38
<PAGE>
The business models included in each category and a brief description follow:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
Category Business Model Description
-------------------------------------------------------------------------------
<C> <C> <S>
Sell direct Sell direct to consumers Selling products and services
to consumers via online
storefront
Sell direct to businesses Selling products and services
to other businesses via online
electronic commerce site
-------------------------------------------------------------------------------
Sell indirect Affiliate selling Supporting the ability to
seamlessly and automatically
sell via portals and affiliate
sites
Electronic commerce Sponsor an online community of
enabled channel electronic commerce sites for
brick-and-mortar distribution
channel partners, enabling them
to engage in electronic
commerce while reducing channel
conflict with existing channel
Selling on marketplaces Supporting the ability to
seamlessly and automatically
sell via online marketplaces
and business-to-business
portals
-------------------------------------------------------------------------------
Enable merchants Store hosting Supporting the hosting of a
large number of electronic
commerce sites all at one
central location
Application hosting Supporting high-end electronic
commerce outsourcing
functionality, including
integration with sophisticated
business systems such as
electronic resource planning
and enterprise financials
-------------------------------------------------------------------------------
Enable marketplaces Aggregation Supporting an online
marketplace by aggregating
products from a large number of
sellers onto a single online
site
Auction Supporting an online
marketplace with auction
pricing functionality
Procurement Supporting an online
marketplace with functionality
specific to procurement, such
as organizational approvals
Exchange Supporting an online
marketplace with bid/ask
pricing functionality
Commerce community Supporting the hosting of a
community of related electronic
commerce sites at one central
location with community
features such as shared
shopping baskets
</TABLE>
--------------------------------------------------------------------------------
Strategy
Our objective is to become the leading provider of electronic commerce
software applications. Our strategy is to provide superior products and related
services to a wide range of electronic commerce businesses. The key elements to
our strategy are:
Extend leadership in electronic commerce software. We have been providing
electronic commerce software applications since 1994 and have developed
significant expertise in this developing field. We intend to maintain our
leadership in this area by continuing investments in research and development
to further refine our line of industry-leading products, by branding and
awareness advertising to further establish our brand recognition, by building
partnerships with best-in-class companies who supplement our electronic
commerce solution sale and by exerting our thought leadership through focus on
providing solutions for a complete set of new and emerging business models.
39
<PAGE>
Expand our leadership position in providing software to ASPs. We license our
software to ASPs for companies that want a third party to host their electronic
commerce software solutions. We believe that the ASP option is particularly
attractive to small- and mid-size companies that typically have limited
internal information technology resources. To date, we have established
relationships with many of the leading ASPs, including Concentric, MindSpring,
Northern Telecom, PSINet and US West. In the future, we intend to leverage
these relationships to establish partnerships with additional ASPs.
Continue to expand our presence in the enterprise market by increasing our
sales and marketing capabilities. In the fourth quarter of 1999, we introduced
our enfinity product line which is targeted at servicing the complicated needs
of large businesses. We intend to increase enfinity's market presence through a
variety of sales and marketing programs designed to generate market awareness
and to help establish enfinity as the leading electronic commerce software
solution for large businesses. In addition, we plan to leverage our
relationships with ASPs and systems integrators to help promote and sell the
enfinity product.
Continue to provide solutions for a wide range of electronic commerce
business models. Our product line provides effective solutions for companies
looking not only to take advantage of today's electronic commerce business
models but also more sophisticated, emerging business models. We will continue
to pioneer products that address emerging business models through our focus on
leading electronic commerce-enabling technologies, such as XML, Enterprise Java
Beans, Java Server Pages, ICE and LDAP.
Strengthen our network of sales and technology partners. We have established
relationships with a number of systems integrators and other professional
services providers that market, sell and support our products. We intend to
strengthen our existing relationships and continue to develop top-tier partners
to facilitate the distribution of new products and entry into new markets. We
also plan to expand strategic alliances with leading hardware and software
vendors to ensure the interoperability of our products.
Leverage our global presence. We combine extensive operations in North and
South America, Europe and Asia with a worldwide network of partners to provide
dedicated service to businesses in over 25 countries. We have recently opened a
fully functional office in Hong Kong. In addition, we intend to leverage this
global presence to capitalize on the rapid worldwide growth of the electronic
commerce market. We will also continue to build relationships with leading
independent software vendors in order to extend the functionality of our
products.
Products and Services
We provide a comprehensive array of software products and related services
that allows businesses to engage in electronic commerce. Our products enable
businesses who sell their own products and services online to run their own
electronic commerce sites and to sell in new and innovative ways such as
through marketplaces and online portals. Further, our products also allow ASPs
and online marketplaces to facilitate online selling by hosting sites for other
businesses and by providing online marketplaces which bring buyers and sellers
together in a virtual environment. We supplement our products with professional
and customer services to provide our customers with implementation and ongoing
maintenance of our products.
40
<PAGE>
Products
Our products are designed to work individually or in conjunction with one
another in order to mix and match to address the customer's particular need and
address the customer's particular business model. In December 1999, we launched
our INTERSHOP enfinity product which is targeted primarily at supporting our
customers in direct selling, is used in conjunction with other products to
support indirect selling and also supports online marketplaces. The remainder
of our product line--INTERSHOP ePages, INTERSHOP Hosting and INTERSHOP
Merchant--is targeted primarily toward ASPs and the enabling merchants business
model, as well as working in conjunction with enfinity to support indirect
selling. For additional detail on our products, see the table below:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Product Description Business models supported Target customer
--------------------------------------------------------------------------------------
<C> <S> <C> <C>
enfinity Highly sophisticated . Sell direct Large enterprises,
sites for large . Sell indirect "dot.com" companies and
businesses that need . Enable marketplaces online marketplaces
high performance and
complete integration
--------------------------------------------------------------------------------------
Merchant Sophisticated sites for . Enable merchants ASPs
small- to medium-sized . Sell indirect
businesses hosted on
their own individual
server
--------------------------------------------------------------------------------------
Hosting Sophisticated sites for . Enable merchants ASPs
small- to medium-sized . Sell indirect
businesses that share a
single server
--------------------------------------------------------------------------------------
ePages Entry-level storefronts . Enable merchants ASPs
for small businesses . Sell indirect
--------------------------------------------------------------------------------------
</TABLE>
We include several different types of software from various software vendors
which are included in our products. These include database software,
application servers and search engines. In most cases, the software supplier
has the right to terminate its supplier agreement in the event we materially
breach the license agreement.
Services
We support our software products with a full set of services, including
professional services, customer support and training. We provide these services
through our in-house services organization and through our network of over 600
affiliated service providers and systems integrators. Our services include the
following:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Service Principal Attributes
-------------------------------------------------------------------------------
<C> <S>
Technical support Variety of technical support packages such as "per
packages incident" and annual support contracts which include
free upgrades and no limits on inquiries
-------------------------------------------------------------------------------
Training and product Comprehensive series of classes to provide the knowledge
education and skills to successfully deploy, use and maintain our
products and solutions
-------------------------------------------------------------------------------
Consulting services Assessment of electronic commerce business models,
marketing plans and technical needs
-------------------------------------------------------------------------------
Software development Deployment of technology into customer systems and
integration into existing enterprise resource planning
and infrastructure systems
-------------------------------------------------------------------------------
Outsourced project Evaluation, execution, testing and roll-out of projects
management
-------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
Customers
Our customers consist mainly of two types: ASPs and marketplace operators who
use our products to host Internet sites for on-line merchants and run online
marketplaces and enterprises who sell these products directly and indirectly
over the Internet. By June 30, 2000, approximately 300,000 electronic commerce
sites had been licensed on our software products worldwide. The following is a
list of customers from which we have received over (Euro)350,000 in sales since
the beginning of 1998:
<TABLE>
<S> <C>
Businesses Who Sell Direct Businesses Who Enable Merchants
and Sell Indirect and Enable Marketplaces
. Allago . Alto Digital
. Apdex.com . Bell Emergis (Bell Canada)
. Bertelsmann . Cobalt
. Bosch . Concentric Network
. BusinessMart . Deutsche Telekom
. Camdens . eWeb Asia
. Coram Healthcare . First World Communications
. Deutsche Bank . Freecom
. efoodmanager . Go2Net
. Electronic Arts . Intel
. Glomedix . Nextron
. Gutenberg Communications . Northern Telecom
. H.B. Fuller . NTL
. Hewlett-Packard . Orbit Commerce
. JBA Deutschland . PSINet
. Modus Media . Terra Networks
. MyToys.de . Unisys
. NSE Software . U S West
. Shell . Via Networks
. Time Warner . Zucchetti
. VRC NetShopping
. WWW Workwear.com
</TABLE>
42
<PAGE>
Customer Case Studies
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Business model
Customer category Application
-------------------------------------------------------------------------------
<C> <C> <S>
Compaq Sell indirect Compaq Germany has been working to make its
personal computer products available online
supporting, rather than competing with its
existing channel partners. We, along with
Deutsche Telecom, provided Compaq with a
solution allowing its current channel partners
to run and manage their own online stores,
pre-populated by Compaq with the newest
catalog data and leveraging the customer
traffic that comes to Compaq's main website.
Within three months of the scoping exercise,
the first sites were up and running,
generating increased demand and positive
feedback from the channel partners.
-------------------------------------------------------------------------------
Cicada Music Sell direct Cicada Music is dedicated to delivering a
revolutionary experience in online music
shopping, providing a music service to the
customer with the goal of delivering music
wherever its customer is, whether that is on
their desktop, in their car, or even to a
customer's cell phone in real time. In order
to achieve this goal, PricewaterhouseCoopers
worked with us to build an electronic commerce
enabled portal for users to listen to live
streaming audio, create custom compact discs
and download MP3 music files. Using our
enfinity product, we were able to build a
fully funtional pilot website,
www.cicadamusic.com, in six weeks.
-------------------------------------------------------------------------------
Cardinal Health Sell indirect Cardinal Health, one of the largest providers
of health care products with sales through six
of the top 10 pharmaceutical chains nationwide
and annual revenues of over $24 billion, asked
us to fortify its existing retail channel
against the increasing competition of virtual
pharmacies. Based on our Hosting and ePages
products, Cardinal sponsors multi-tiered
electronic commerce solutions for its channel
partners, allowing them to compete with online
pharmacies and improving channel efficiency.
-------------------------------------------------------------------------------
MindSpring Enable MindSpring Enterprises, now owned by
merchants Earthlink, Inc., based in Atlanta, GA, serves
over 1.3 million subscribers and over 60,000
web hosting accounts, or 2.9 million
subscribers and close to 100,000 hosting
accounts when combined with EarthLink, and has
chosen our products with which to offer
electronic commerce hosting to its customers.
With our help, MindSpring offers customers an
easy-to-use storefront offering customized to
MindSpring's look and feel. By offering a
variety of classes of service based on several
of our hosting products, ePages and Hosting,
MindSpring offers a seamless upgrade path from
simple template-driven storefronts with
limited functionality all the way up to
feature-rich storefronts that include an
unlimited number of products and multiple
payment systems, giving MindSpring's customers
a smooth upgrade path.
</TABLE>
--------------------------------------------------------------------------------
43
<PAGE>
Sales and Marketing
Sales
We sell our products through 25 worldwide sales and distribution network of
offices located in North America, Europe, Asia, South America and Australia. We
sell directly through a force of over 93 sales professionals. We also sell
indirectly through a network of over 600 channel partners worldwide. Our
partners participate in programs offering a mix of training, technical support,
marketing support, access to special information on our website and a
developer's license. The majority of our software license sales are indirect,
delivered by one of these channel partners. We intend to continue to increase
our direct and indirect sales channels.
Marketing
Our marketing efforts support our strategy to become the leading provider of
software applications used by businesses to build electronic commerce sites
that enable businesses to sell their products and services over the Internet.
We support this strategy in a variety of ways, including identification of the
most appropriate target customers for our products, building the right sales
and distribution channels to get our products to those customers, promoting and
advertising our products in order to create brand awareness among those
customers and pricing our products so that they are consistent with customer
expectations.
Target Customers. Within the enterprise market, we target the key business
decision makers, including the chief executive officer, vice-president of
marketing, chief information officer, chief financial officer and directors of
electronic commerce. Within the ASP market, we target product managers and
product line managers responsible for the electronic commerce line of business.
Promotion. We support an ongoing, multi-pronged approach to promoting our
services and generating awareness in our target customers. This includes a mix
of television, print advertising, trade shows, direct marketing and
communications on our web site. We design promotional activities to position
ourselves as the leading enterprise-class vendor in electronic commerce, to
increase awareness for our products with our target customers and to generate
sales leads for the sales channel. Trade shows and direct marketing are
conducted on an ongoing, year-round basis and are designed to increase
awareness and create sales leads. We conduct high-profile advertising campaigns
several times per year to support new product launches. In October of each
year, we conduct a show called INTERSHOP Open. It is targeted toward our
customers, partners and developers and provides an annual forum for the open
exchange of information and provides us with a platform to launch new products
and make other major announcements.
44
<PAGE>
Strategic Alliances
To ensure that we deliver a comprehensive solution to our customers, we have
established strategic relationships with system integrators, independent
software vendors and vendors of hardware and database platforms. The following
chart outlines the value of each category to our business and representative
companies in each category:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Category Value to Our Business Representative Companies
-----------------------------------------------------------------------------------------
<C> <S> <C>
System integrators System integrators . Andersen Consulting
and Internet implement our products . Cambridge Technology Partners
professional and generate sales leads . Computer Sciences Corporation
service providers . debis (a division of Daimler-Chrysler)
. EDS
. Grant Thornton LLP
. Keane
. KPMG
. marchFIRST
. PricewaterhouseCoopers
. PSI Net
. Unisys
-----------------------------------------------------------------------------------------
Hardware/database Our relationship with . Compaq
platforms vendors of hardware . Hewlett-Packard
platforms helps us . IBM
ensure the reliability, . Intel
scalability and . Oracle
performance of our . Silicon Graphics
software applications . Sun Microsystems
. Sybase
-----------------------------------------------------------------------------------------
Independent Third parties provide . Allaire
software and solutions that allow our . Cognos
service vendors customers to customize . CyberSource
and extend the . CyberCash
functionality of our . CommerceOne
software applications . FedEx
. Great Plains
. Interwoven
. NetPerceptions
. Persistence
. SAP
. Symantec
. Talisma
. UPS
-----------------------------------------------------------------------------------------
</TABLE>
Competition
The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. Increased competition is likely to
result in price reductions, lower average sales prices, reduced margins, longer
sales cycles and loss of market share, any of which could harm our business,
operating results or financial condition. Our primary source of direct
competition comes from electronic commerce
45
<PAGE>
software companies, platform vendors and online services. In addition, we may
encounter future competition from enterprise software companies and software
vendors in related technology.
Our current direct competitors break into the following categories:
. Other electronic commerce software companies: We compete with software
application vendors including Open Market, BroadVision, Interworld, Art
Technology Group, and Blue Martini.
. Large integrated software technology companies: We also compete against
companies such as Microsoft, IBM, BEA Systems, Netscape (a subsidiary of
America Online) and Oracle which each offer electronic commerce software
and may try to increase their share of this market.
Our current indirect competitors include:
. Electronic commerce online services: This category is comprised of
Yahoo! Stores, iMall and others. These online services focus on hosting
small business sites and compete directly with our ASP customers in the
low-end merchant market.
Our potential future competitors could also include:
. Enterprise software companies: Large vendors of enterprise software,
such as Baan, SAP, i2 Technologies, JD Edwards and Siebel, may enter the
electronic commerce market.
. Other software vendors: This group includes electronic commerce vendors
such as Commerce One and Ariba plus Internet content management and
personalization firms such as Vignette and Net Perceptions.
We believe that the principal competitive factors for electronic commerce
software applications and solutions are breadth and scope of solution, depth of
supplier content, the ability to operate with existing information technology
systems, scalability, functionality, ease-of-use, ease-of-implementation, total
cost of ownership and installed base of referenceable customers. We believe we
currently compete favorably with our competitors in these areas.
Many of our competitors have, and new potential competitors may have, longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, more experience developing electronic commerce
software, larger technical staffs, larger customer bases, more established
distribution channels, greater brand recognition and greater financial,
marketing and other resources than we do. In addition, many of our competitors
have well-established relationships with our current and potential customers,
especially in the United States and have extensive knowledge of our industry.
In the past, we have lost potential customers to competitors for various
reasons, including lower prices and other incentives not matched by us. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address customer needs. As a result, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We also expect that competition may
increase as a result of industry consolidations.
Research and Development
Our research and development organization has eight teams that include our
existing products, advanced development, backbone technology, payment and other
types of cartridges, quality assurance, UNIX, versions and development of
localized versions. Each of the eight teams shares information in order to more
efficiently resolve a similar problem and provide comprehensive solutions. Our
product development activities are conducted in large part through our
operations in Jena, Germany, but are coordinated closely with our product
management resources located in San Francisco, California.
We believe our research and development team and core technologies represent
a significant competitive advantage. The software and Internet applications
development teams include a number of key employees who have developed Internet
applications and services and have extensive experience with Java programming.
Our
46
<PAGE>
research and development team is working with the leading technologies and
standards, including XML, Enterprise Java Beans, Java Server Pages and LDAP, to
help ensure our software applications are compatible with the newest electronic
commerce technology. Furthermore, we believe that having our research and
development team based in Jena, Germany is a competitive advantage because we
have lower labor costs and higher retention levels than comparable software
companies with research and development teams based in the United States.
In developing updates of its standard software that meet our customers'
needs, we take into account experience gathered in our support to our existing
customers. In addition, the research and development groups in Jena focus on
the continuous development of the existing products and the preparing the next
software generation by anticipating the upcoming demands for electronic
commerce software. In addition, enhancements to the existing products and the
next generation products are tested by a separate group of programmers with
expertise and experience in locating defects and "bugs."
We expect that most of our enhancements to existing and future products will
be developed internally. However, we currently license certain externally-
developed technologies and will continue to evaluate externally-developed
technologies to integrate with our solutions. These externally developed
technologies, if suffering from defects, quality issues or the lack of product
functionality required to make our solutions successful in the marketplace, may
seriously impact and harm our business.
Intellectual Property and Other Rights
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets and patent, copyright and trademark laws.
We license rather than sell our products and require our customers to enter
into license agreements, which impose restrictions on their ability to utilize
the software. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including but not limited to, requiring those
persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. We currently
have no U.S. or EEC patent applications pending.
"INTERSHOP" is a registered trademark of our company in the United States and
Germany. We also hold trademarks in several other jurisdictions. In addition,
"INTERSHOP" and the INTERSHOP logo are registered as trademarks in other
foreign countries. We also have filed applications to register these trademarks
in several countries. We have filed trademark applications in the United States
for "Creating the Digital Economy." The above mentioned trademark applications
are subject to review by the applicable governmental authority, may be opposed
by private parties and may not issue.
In 1998, we entered into a settlement agreement with the Swiss company
INTERSHOP Holding AG which limits our use of the name "INTERSHOP" as part of
our business name and of our various trademarks and product names. We do not
consider these restrictions to have a material adverse effect on our present
and future business activities. The restrictions are designed to avoid
confusion of the Swiss company with our company. In particular, we may not set
up operations or go public in Switzerland using "INTERSHOP" as a business name
or as part of a business name, nor use "INTERSHOP" as formal business name
without an addition such as "Communications."
Employees
As of June 30, 2000, we had a total of 765 employees, including 115 in
research and development, 267 in sales and marketing, 276 in customer support,
professional services and training and 107 in administration and finance. Of
these employees, 202 were located in the United States and 563 were located
outside the United States. None of our employees is represented by a collective
bargaining agreement, nor have we experienced any work stoppages. We consider
our relations with our employees to be good.
47
<PAGE>
Facilities
All of our facilities in the United States and Europe are leased from third
parties. Our principal U.S. sales, marketing, customer service and
administrative office occupies approximately 39,522 square feet in
San Francisco, California. Our principal European sales, marketing and
administrative office occupies approximately 11,366 square feet in Hamburg,
Germany and our principal research, development and European customer support
offices occupy approximately 12,873 square feet in Jena, Germany. We also
maintain professional services operations which occupy approximately 3,400
square feet in Stuttgart, Germany and 5,800 square feet on Long Island, New
York.
In addition, we also lease sales and support offices in the metropolitan
areas of Atlanta, Boston, Charlotte, Chicago, Denver, Hong Kong, Los Angeles,
London, Melbourne, New York, Paris, Sao Paulo, Seattle, Stockholm, Sydney,
Toronto and Washington, D.C.
Legal Proceedings
We are not party to any material legal proceedings.
Governmental Regulation
The laws governing Internet transactions remain largely unsettled. The
adoption or modification of laws or regulations relating to the Internet could
harm our business, operating results and financial condition by increasing our
costs and administrative burdens. It may take years to determine whether and
how existing laws such as those governing intellectual property, privacy,
libel, consumer protection and taxation apply to the Internet. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. We must comply with new regulations in both Europe
and the United States, as well as any regulations adopted by other countries
where we do business. The growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, as well as new laws governing the taxation of
electronic commerce.
Our software products are sold by our United States subsidiary and by its
subsidiaries. The software products currently sold and distributed by our
United States subsidiary do not contain any encryption technology which is
subject to United States, German or European Union export controls. However,
this may change in the future. Export controls, either in their current form or
as may be subsequently enacted, may delay the introduction of new products or
limit our ability to distribute products outside of the United States or
electronically. While we intend to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to
effectively control the distribution of our products. In addition, governmental
legislation or regulation may further limit levels of encryption or
authentication technology. Further, various countries regulate the import of
certain encryption technology and have adopted laws relating to personal
privacy issues which could limit our ability to distribute products in those
countries.
Structure of Our Company
We are a holding company that directly and indirectly owns seven subsidiaries
that conduct all of our business worldwide. We were incorporated in our current
form under German law on April 23, 1998. Our company was founded in 1992 as
NetConsult Computersysteme GmbH, which is now one of our subsidiaries.
48
<PAGE>
MANAGEMENT
Management Board
We established our management board in April 1998. Our management board is
responsible for the management of our company, the exercise of our business
activities and the supervision of our property. The following table lists the
current members of the management board:
<TABLE>
<CAPTION>
Member
Name Age since Position
---- --- ------ --------
<C> <C> <C> <S>
Stephan Schambach....... 30 1998 Chairman of the management board, Chief
Executive Officer (Vorstandsvorsitzender)
and Founder
Wilfried Beeck.......... 41 1998 Member of the management board, Chief
Financial Officer (Finanzvorstand) and
Founder
</TABLE>
Stephan Schambach. Mr. Schambach has served as the Chairman of the management
board since 1998. Stephan Schambach is the founder of our company and director
of the management board. In 1990, at the age of 19, he terminated his physics
studies at the University of Jena to implement his idea for the commercial use
of the Internet in his own firm. In 1992 he established NetConsult
Computersysteme GmbH to provide consulting services to German companies. In
1996, he established INTERSHOP Communications, Inc. and has since managed the
enterprise as both chairman of the board and chief executive officer and as a
member of the board of management for our company.
Wilfried Beeck. Mr. Beeck has served as a member of the management board
since 1998. He was appointed as chief financial officer of our company in June
1998. Wilfried Beeck is a co-founder of NetConsult Computersysteme GmbH 1992
and INTERSHOP Communications, Inc. He studied mathematics and computer science
at the University of Kiel before entering the computer industry in the early
1980s. Before co-founding INTERSHOP Communications, Inc. in 1996, he founded
Dart Software GmbH, a vendor of object-oriented software tools and business
applications.
Under our articles of association, our supervisory board may adjust the
number of members of the management board at any time. Currently, there are two
members serving on the management board. The members of the management board
are appointed by the supervisory board for a term of no more than five years.
The current management board was elected for a term of five years that expires
on June 22, 2003. A member of the management board can only be terminated for
significant cause based upon a decision by the supervisory board.
In addition to the management board, we employ the following executive
officers. Messrs. Costello, Demetros, Harding, Oreste and Callan are employed
on an at-will basis. None of the other executive officers listed below is party
to employment agreements with us.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Karsten Schneider....... 39 Senior Vice President of Business Development and
Founder
Steen Sjobeck........... 42 Chief Information Officer
Frank Gessner........... 31 Vice President of Engineering
Bernhard Marbach........ 41 President for Europe
Dirk Reiche............. 36 Vice President of Finance for Europe and Asia
Dieter Neujahr.......... 40 Vice President of Operations for Europe
Keith C. Costello....... 34 President for the Americas
James Demetros.......... 38 Vice President of Sales for the Americas
Craig W. Harding........ 42 General Counsel and Secretary for the Americas
Philip L. Oreste........ 33 Vice President of Finance for the Americas
Edward J. Callan........ 34 Vice President of Marketing
</TABLE>
49
<PAGE>
Karsten Schneider, Senior Vice President of Business Development. Mr.
Schneider oversees strategic alliances, business and market development and the
independent software vendor partner program worldwide. He founded the company
in 1992. Prior to 1992, Mr. Schneider worked at Carl Zeiss, an optics
engineering company headquartered in Jena, Germany, where he was a development
engineer. He received a degree in Mechanical & Electrical engineering in Sofia,
Bulgaria with honors.
Steen Sjobeck, Chief Information Officer. Mr. Sjobeck is responsible for
information technology worldwide. He was born in Denmark, and holds a degree in
Computing and an MBA. Prior to joining our company in May 2000, he held senior
IT management positions for 10 years in the UK, Australia and most recently in
Paris, France where he was the IT Director for Southern Europe for Oracle
Corporation.
Frank Gessner, Vice President of Engineering. Mr. Gessner joined us in 1995.
As Vice President of Engineering, Mr. Gessner manages research and development
activities for us. Prior to that time, he studied computer science at the
Bolton University in England and at the University of Leipzig, where he
received a degree with honors.
Bernhard Marbach, President of Europe. Mr. Marbach directs sales and
operations in Europe and Asia for us. Prior to joining our company in 1997, Mr.
Marbach was at PINK software GmbH in Hamburg, where he was vice president for
worldwide sales. In addition, Mr. Marbach was Director of Sales for Central
Europe for NeXT Software. Mr. Marbach studied marketing and management and
computer science at the University of Hamburg.
Dirk Reiche, Vice President of Finance for Europe and Asia. Mr. Reiche leads
the financial group within our European organization. He studied business
administration at the University of Hamburg. He began his career as a manager
in the Gruner & Jahre publishing house. Before he joined us in 1997, he worked
for a new media start-up company and a telecommunications provider in Berlin-
Brandenburg.
Dieter Neujahr, Vice President of Operations for Europe. Mr. Neujahr, who
joined us in 1999, is responsible for operations in Europe. Previously he
served as founder and managing director of the European headquarters of Intuit
in Munich and managed the first foreign language development and release of
programs such as Quicken and QuickBooks. Mr. Neujahr also worked at Intuit's
worldwide headquarters in Palo Alto, California, where he led the introduction
of various service marketing programs in the U.S. market. Mr. Neujahr studied
economic science and economical informatics at Nurnberg und Wurzberg.
Keith C. Costello, President for the Americas. Mr. Costello, who joined us in
January 2000, is primarily responsible for our business activities in the
Americas. Immediately prior to joining us, Mr. Costello was with Oracle
Corporation, where he was Vice President for Oracle Consulting. Prior to that,
Mr. Costello held management positions at Booz, Allen & Hamilton and Price
Waterhouse. He holds a Bachelor of Arts from the University of California,
Berkeley.
James Demetros, Vice President of Sales for the Americas. Mr. Demetros is
responsible for all markets in the sales for the United States, Canada and
Latin America. Prior to joining Intershop in 1999, Mr. Demetros was Director of
Apple's Enterprise Software Division (formerly NeXT Software). Prior to Apple's
acquisition of NeXT Software, Mr. Demetros held positions as Senior Director of
U.S. Sales Operations, Director of Eastern Regional Operations and Director,
Northeast Regional Operations. Mr. Demetros began his career in computer
technology at Wang Laboratories where he held a variety of sales and sales
management positions. He is a graduate of the University of Connecticut.
50
<PAGE>
Craig W. Harding, General Counsel and Secretary for the Americas. Mr.
Harding, who joined us in 1997, is the senior legal officer for North America.
Previously, he was General Counsel and Secretary at Actra Business Systems,
LLC, which is a joint venture of Netscape Communication Corporation and GE
Information Services. Mr. Harding also served as General Counsel at Kaleida
Labs, a joint venture of IBM and Apple Computer, and as General Counsel at
Sierra On-Line. He holds degrees in mathematics from Duke University and law
from Vanderbilt University School of Law.
Philip L. Oreste, Vice President of Finance for the Americas. As Vice
President of Finance for the Americas, Mr. Oreste manages investor relations,
accounting and controlling. He was formerly Controller of Pacific Bell Internet
Services, the Internet service provider and subsidiary of Pacific Bell. He has
also held the position of Vice President of Finance for Shakey's. Mr. Oreste
earned a Bachelor of Science degree in Accounting from the University of San
Francisco and is a licensed Certified Public Accountant in the State of
California.
Edward J. Callan, Vice President, Marketing. Mr. Callan, who joined us in
1998, guides our worldwide marketing organization, including product
management, marketing communications, public relations, Web marketing, channel
marketing, technical training and documentation. He was formerly Vice President
of Consumer and Small Business Marketing for SBC Internet, where he managed
marketing strategy for both Pacific Bell Internet and Southwestern Bell
Internet brands. Prior to that, Mr. Callan spent three years with Dataquest as
a Senior Consultant and developed marketing strategies for clients in the
Internet, telecommunications and software industries. Mr. Callan has an MBA
from the Wharton School of the University of Pennsylvania, and a Bachelor's
degree in Electrical Engineering and Computer Science from the University of
California at Berkeley.
Supervisory Board
Our supervisory board oversees the leadership of the management board. The
following table lists the current members of the supervisory board:
<TABLE>
<CAPTION>
Member
Name Age since Principal Occupation
---- --- ------ --------------------
<C> <C> <C> <S>
Eckhard Pfeiffer, Chairman........ 58 1999 Consultant
Theodore J. Smith, Vice Chairman.. 70 1998 Chairman, FileNet Corporation
Joerg Menno Harms................. 60 1998 Managing Director, Hewlett-
Packard GmbH
Lorenzo Pelliciolo................ 48 1999 Chief Executive Officer of Seat
Regine Gialle
Knut Fockler, PhD................. 50 1999 Director of Multimedia, Deutsche
Telekom AG
Hartmut Esslinger, PhD............ 55 1999 Founder of frogdesign, an
integrated design company
</TABLE>
Under our articles of association, the supervisory board has six members. In
general, the members of the supervisory board are appointed for the year terms
ending on the adjournment of the general shareholders' meeting for the fourth
fiscal year after the beginning of their term of service, unless the general
shareholders' meeting determines a shorter period of service at the time of
their election. A supervisory board member's term will end on the appointment
of his successor unless he resigns or is dismissed earlier. In general, each
member of the supervisory board can be dismissed at any time by a three-fourths
majority of the general shareholders' meeting.
Compensation
Compensation of the Executive Officers and the Management Board. We paid
aggregate compensation of (Euro)861,120 to the executive officers and the
members of the management board in fiscal year 1999 and (Euro)1,080,014 for the
six months ended June 30, 2000. Of such amount, none was paid in respect of
pension or other similar benefits. There are no pension reserves for the
executive officers and members of the management board.
51
<PAGE>
Between 10% and 20% of the total remuneration paid to the executive officers
and the members of the management board depends on their achievement of
performance targets, which are defined by certain qualitative criteria, as well
as our sales and profit. These targets are set by the supervisory board, in
accordance with German law, on an annual basis. In addition, they are entitled
to participate in the 1999 Stock Option Plan (for a description of this plan,
please see "Management--Equity Incentive Plans").
Compensation of the Management Board. As of December 31, 1999, there were no
pension reserves for members of the management board. Members of the management
board are entitled to participate in the 1999 Stock Option Plan (for a
description of this plan, see "Management--Equity Incentive Plans"). As of June
30, 2000, members of the management board collectively hold 19,500,000 shares,
which includes 12,500,000 shares issuable to Mr. Stephan Schambach.
Compensation of the Supervisory Board. We reimburse members of the
supervisory board for their out-of-pocket expenses related to their service on
the supervisory board. However, we do not otherwise compensate members of the
supervisory board.
Equity Incentive Plans
Effective as of June 21, 1999, we adopted a unified stock option plan, which
we refer to as the 1999 Plan. The 1999 Plan provides for grants of options to
purchase shares of our company to board members, executive officers and
employees of our company and our affiliates. Options granted under the 1999
Plan are intended to attract, commit and motivate these individuals. We have
granted options under the 1999 Plan to nearly all new employees who have joined
us on or after June 21, 1999. These are usually granted as of the hiring date
of each employee.
We also maintain the INTERSHOP Communications, Inc. 1997 Equity Incentive
Plan, which we refer to as the 1997 Plan, pursuant to which selected employees,
officers, directors and consultants of our subsidiaries were granted stock
options. The details of the 1999 Plan and the 1997 Plan are as follows:
The 1999 Stock Option Plan. At the shareholders' meeting on June 21, 1999,
our shareholders adopted the 1999 Plan, which became effective on July 1, 1999,
and authorized the grant of stock options (Bezugsrechte), which we refer to as
AG Options, to employees, officers and directors of our company and our
affiliates, including members of the management board. There are two pools of
shares authorized under the 1999 Plan. There are 665,000 shares for grants of
stock options to members of the management board and general managers of our
subsidiaries and 7,500,000 shares for grants of stock options to all other
employees.
The management board is authorized to determine which eligible employees will
receive AG Options and to set the terms and conditions of the AG Options. In
the case of AG Options granted to members of the management board, the
supervisory board determines the terms of the awards. The supervisory board can
also determine additional performance targets that must be met prior to the
grant of an AG Option to any participant.
Each AG Option is exercisable for one share. The vesting schedules of the AG
Options will be four years from the date of the grant; however, pursuant to
German law, no AG Options will be exercisable, even though a portion is vested,
prior to the second anniversary of the date of grant. The exercise price of the
AG Options is equal to 120% of the fair market value of the AG Shares on the
date of grant, where the fair market value is determined to be the average
closing sales price as quoted on the Neuer Markt for the 10 trading days prior
to the date of the grant. The exercise price can be reduced by a shareholders'
resolution if, at any time, we issue shares or securities convertible into
shares at a price lower than the exercise price of an outstanding AG Option.
The AG Options granted under the 1999 Plan are not transferable except by
will or the laws of descent and distribution.
52
<PAGE>
The 1997 Equity Incentive Plan. Prior to our shareholder's meeting on June
21, 1999, INTERSHOP Communications, Inc., our U.S. subsidiary, maintained the
1997 Plan pursuant to which selected employees, officers, directors and
consultants of all of our subsidiaries who joined us prior to June 21, 1999,
were granted stock options, which we refer to as U.S. Options. Effective as of
June 21, 1999, we no longer grant options to new employees under the 1997 Plan.
The U.S. Options are exercisable for AG Shares at a ratio of 1:3.
The U.S. Options granted under the 1997 Plan include both incentive stock
options within the meaning of Section 422 of the United States Internal Revenue
Code of 1986, as amended, and non-incentive stock options, which we refer to as
non-statutory stock options. Incentive stock options may only be granted to
employees and must have an exercise price equal to or greater than the fair
market value of the shares on the date of grant. The non-statutory stock
options may be granted to employees, consultants or directors and cannot have
an exercise price less than 85% of the fair market value of the shares on the
date of grant.
The 1997 Plan is administered by the management board, which has the full
authority to amend and interpret the plan and the options granted under the
1997 Plan. The vesting schedules of the options granted under the 1997 Plan
vary from grant to grant; however, a minimum of 20% of the total number of
shares subject to an option must vest each year. Generally, the U.S. Options
vest with respect to 17% of the shares on the six-month anniversary of the date
of grant and in 30 monthly installments with respect to the remaining 83% of
the shares. Vested options may be exercised at any time following their vesting
date and prior to the tenth anniversary of the date of grant; however, an
individual optionholder may not exercise stock options more than four times in
any calendar year.
Upon the termination of an optionholder's status as an employee, director, or
consultant for any reason other than death or disability, the unvested portion
of the option will be forfeited and the vested portion will remain exercisable
for a maximum of three months. The options granted under the 1997 Plan are not
transferable, except by will or by the laws of descent and distribution.
2000 Shareholder Resolutions. On June 27, 2000 the shareholders adopted
resolutions authorizing us to grant stock options from authorized capital.
Following the date the Commercial Register approves the use of authorized
capital for issuance upon the exercise of stock options, we may elect to
establish a 2000 stock option plan, or, alternatively, to amend the 1999 Plan
to provide for issuance of options under terms approved by the shareholders in
June, 2000.
Outstanding Options
As of June 30, 2000, there were 3,372,185 outstanding options to purchase
ordinary shares (including 1,101,755 outstanding options held by our executive
officers). As of June 30, 2000, the weighted average exercise price of all our
outstanding options was (Euro)67.52 per share. The options outstanding as of
June 30, 2000 will expire at various times prior to December 2009. Of these
options, none are held by the members of the supervisory board and the
management board.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, INTERSHOP Communications, Inc. acquired 100% of the shares
of INTERSHOP Communications GmbH pursuant to a share exchange agreement,
entered into in December 1996, between INTERSHOP Communications, Inc. and the
shareholders of INTERSHOP Communications GmbH. The outstanding capital stock
and debt of INTERSHOP Communications GmbH were converted into common and
preferred stock, respectively, in INTERSHOP Communications, Inc. INTERSHOP
Communications, Inc. thus became the parent company of INTERSHOP Communications
GmbH and its subsidiaries.
As part of the restructuring activities that occurred in May and June 1998,
prior to our initial public offering in Germany, INTERSHOP Communications GmbH
acquired 100% of the shares of a dormant company, that was since renamed
"INTERSHOP Communications AG," from its founders Dr. Robert Rottger and Ms.
Jutta Niedrich for approximately (Euro)51,129. The purpose of this transaction
was to establish a German stock corporation as the parent company for the group
prior to our initial public offering in Germany. Since it often takes several
weeks to form a new Aktiengesellschaft, German companies that intend to
reorganize as a Aktiengesellschaft often acquire a dormant company in lieu of
forming a new one.
The then existing stockholders of INTERSHOP Communications, Inc. exchanged
their shares in INTERSHOP Communications, Inc. for shares of our company. The
holders of 79.3% of the shares of INTERSHOP Communications, Inc. received
61,729,050 shares of our company. As a result of this transaction, we became
the parent company of INTERSHOP Communications, Inc. and its subsidiaries. Due
to certain tax consequences, our founder Mr. Schambach, and a private investor,
Mr. Jamieson, did not contribute all of their shares of INTERSHOP
Communications, Inc. and currently still hold 16.2% and 1.5%, respectively, of
that company's capital stock. Other than us, Messrs. Schambach and Jamieson are
the only other current stockholders of INTERSHOP Communications, Inc., and each
is entitled to exchange his shares in that company for shares in our company at
a ratio of 1:3, using conditional capital specifically approved for this
purpose at our stockholders' meeting on June 23, 1998. As of June 30, 2000,
Messrs. Schambach and Jamieson may exchange their 4,166,667 and 381,500 shares,
respectively, in INTERSHOP Communications, Inc., into 12,500,000 and 1,144,500
shares, respectively, of our company.
The post-formation and share contribution agreement (Nachgrundungs- und
Einbringungsvertrag) was executed on June 22, 1998 by our management board and
also by several holders of ordinary and preferred shares of INTERSHOP
Communications, Inc. These shareholders include Messrs. Stephan Schambach and
Wilfried Beeck, both of whom are members of our management board. The record of
the execution of the post-formation and share contribution agreement indicates
that Mr. Beeck acted both on our behalf and as a shareholder of INTERSHOP
Communications, Inc. Our shareholders approved the post-formation and share
contribution agreement at the shareholders' meeting held on June 23, 1998 in
accordance with Section 52 of the German Stock Corporation Act, or the AktG.
Section 112 of the AktG provides that, in connection with any transaction
between members of the management board and a corporation, the corporation must
be legally represented by its supervisory board. The agreement was approved by
our supervisory board on June 21, 1999. There is some question under German law
as to whether Section 112 applies to the execution of an agreement which is to
be approved by the shareholder's meeting in accordance with Section 52 and,
further, whether a supervisory board could retroactively approve an agreement
that was entered into in violation of Section 112, if applicable. We, however,
believe that Section 112 does not apply to the agreement and that the agreement
is valid. In a situation where an agreement needs to be approved by a
shareholder's meeting according to Section 52, which was the case here, Section
112 does not apply, and, consequently, no requirement for the supervisory board
to represent a company when entering into the agreement. After having reviewed
the legal background, although there are no precedent court decisions, we are
of the opinion that Section 112 does not apply to the agreement. If our
conclusion on the non-application of Section 112 were incorrect, we believe,
nevertheless, that the agreement would have been provisionally invalid when
executed, but could subsequently be ratified, and would have become valid
retroactively, by the approval of the supervisory board as of June 21, 1999.
Although two dated German regional court decisions held, that such an approval
would not be sufficient, our view that a violation of Section 112 would be
cured by a subsequent supervisory board's approval is
54
<PAGE>
supported by more recent decisions of the German Supreme Court. In the event
that the German Supreme Court held the agreement to be invalid, all or a
portion of the ordinary and preferred shares of INTERSHOP Communications, Inc.
would not have been transferred to us effectively. Consequently, share issued
by us in order to fulfill our obligations under the agreement would not carry
any voting rights. Furthermore, any alleged invalidity of the agreement could
possibly affect the validity of future resolutions passed at any of our
shareholders' meetings, provided that an action to set aside the resolutions
were brought forward within one month after adoption of the resolution. If the
German Supreme Court were to determine that we had violated Section 112, we
would take appropriate steps to re-execute the agreement and to re-consummate
the transaction with the approval of all parties to the agreement. We believe
the parties would be obliged to give approval under the German good-faith-
principle. There is a slim possibility that the re-execution may not be
possible by an attachment of the shares by creditors of the other parties to
the agreement or by the insolvency of these other parties.
In May 1998, we entered into a legal settlement that obligated us to pay
(Euro)1.9 million. Private Equity Bridge Invest Ltd., or PEBI, an affiliate of
one of the underwriters from our initial public offering in Germany, paid this
amount on our behalf in exchange for shares of preferred stock of INTERSHOP
Communications, Inc. No shares of preferred stock of INTERSHOP Communications,
Inc. were issued to PEBI. At various times between June and December 1998, PEBI
purchased a total of 600,450 shares of our company from us and purchased
300,000 shares of our company from INTERSHOP Communications GmbH for a total
cash consideration of (Euro)4.0 million, whereas the total market value was
(Euro)5.9 million.
Also at our stockholders' meeting on June 23, 1998, at which the sole
stockholder was INTERSHOP Communications GmbH, resolutions were passed that
increased our capital stock, or, in other words, authorized additional shares.
On June 23, 1998, the Vice Chairman of the Supervisory Board, Mr. Theodore J.
Smith, subscribed to 250,005 newly issued no-par value shares at an issue price
of (Euro)2.56 per share, resulting in an aggregate payment of (Euro)639,118.
This subscription agreement was entered into in connection with the
cancellation of a convertible promissory note that was entered into between Mr.
Smith and INTERSHOP Communications, Inc. in April 1998. The promissory note had
been in the amount of $500,000 and bore interest at the rate of 7% per annum.
The proceeds of the issuance of the promissory note were used for the Company's
general working capital needs during the period prior to its initial public
offering in Germany.
In January 1998, INTERSHOP Communications, Inc. granted Mr. Beeck a put
right to sell his interests in a limited liability company for $250,000. In
exchange, the company transferred to INTERSHOP Communications, Inc. management
and technical employees as well as limited intellectual property. The purpose
of this transaction was to transfer these assets from the limited liability
company to us in a cash-efficient manner. The limited liability company still
exists but has no ongoing business operations. Mr. Beeck has not exercised this
put right and we are not aware of any intentions on his part to do so.
In July 1997, Deutsche Telekom, one of our most significant customers and
also a strategic partner, acquired a license to use our software for a period
of three years. On December 31, 1997, Deutsche Telekom, through its venture
capital subsidiary T-Telematik Venture Holding GmbH, purchased approximately
7.8% of the then outstanding capital stock of INTERSHOP Communications, Inc.
for $3,830,000 and then subsequently exchanged this capital stock for shares of
our company pursuant to an agreement dated June 23, 1998.
In 1999, two of our shareholders, Mr. Stephan Schambach and Mr. Wilfried
Beeck, both of whom are members of our management board, have agreed to loan to
us in the amount of $10,000,000, and (Euro)7,000,000, respectively, in the form
of an overdraft credits for our working capital credit (Betriebsmitteldredit),
each of which bears interest at the rate of approximately 6% per annum. The
loans are callable with three months notice beginning December 31, 2000. There
are prepayment penalties for each loan of twelve months interest if the loans
are paid down prior to December 31, 2000. As of June 30, 2000, we had
outstanding (Euro)6,000,000 of the loan from Mr. Beeck, and (Euro)10,759,000
from Mr. Schambach.
55
<PAGE>
During 1996, we entered into a series of unsecured loans with some of our
shareholders. Interest is payable quarterly at 10%. The loans may be repaid at
any time, but no later than February 2004. Accumulated interest of (Euro)50,618
was paid on December 31, 1998 and the remaining outstanding principal balance
at that same date was (Euro)179,000.
We believe that all the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties.
56
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of June 30, 2000 and as adjusted
to reflect the sale of the shares in this offering by:
. each person, or group of affiliated persons, who is known by us to own
beneficially more than 10% of our ordinary shares;
. each member of the management board;
. each member of the supervisory board; and
. members of the management board and the supervisory board as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investment power with respect to all the ordinary shares owned by
them. The following tables assumes no exercise of the over-allotment by the
underwriters. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and generally includes voting power
or investment power with respect to securities. Ordinary shares subject to
options currently exercisable or exercisable within 60 days of the date of this
prospectus are deemed outstanding for the purpose of computing the percentage
beneficially owned by the person holding such options but are not deemed
outstanding for the purpose of computing the percentage beneficially owned by
any other person. Percentage of beneficial ownership is based upon 100,675,440
shares outstanding prior to and following this offering. This figure assumes
that Mr. Schambach has exchanged his shares of our U.S. subsidiary, INTERSHOP
Communications, Inc., for our shares, and the latter figure assumes no exercise
of the over-allotment option by the underwriters. We believe that the persons
named in this table, based on information provided by such persons, have sole
voting and investment power with respect to the ordinary shares indicated.
<TABLE>
<CAPTION>
Percentage Owned
-----------------
Ordinary Before After
Name of Beneficial Owner Shares Offering Offering
------------------------ ---------- -------- --------
<S> <C> <C> <C>
Stephan Schambach.............................. 12,500,000** 12.3 12.3
Wilfried Beeck................................. 7,000,000 6.9 6.9
Eckhard Pfeiffer............................... 400,000 * *
Theodore J. Smith.............................. 132,290 * *
Joerg Menno Harms.............................. 1,500 * *
Lorenzo Pelliciolo............................. 0 * *
Knut Fockler................................... 0 * *
Hartmut Esslinger.............................. 0 * *
Members of the management board and the
supervisory board and executive officers as a
group......................................... 26,408,235 27.1 26.5
</TABLE>
--------
* Represents less than 1% of our outstanding shares.
** Mr. Schambach holds 16.2% of the shares of our U.S. subsidiary INTERSHOP
Communications, Inc. which he may exchange at any time for our ordinary
shares at a ratio of 1:3.
The total number of outstanding shares used to calculate the percentages in
the above table does not include the exercise of the over-allotment option. If
the over-allotment option is exercised, the underwriters will have an option to
purchase from us an additional 500,000 ADSs.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary is based upon our articles of association (Satzung) and
the German Stock Corporation Act (Aktiengesetz, AktG), each as in effect on the
date of this prospectus. This summary is intended to contain all material
information in relation to our capital stock and the rights attaching to the
shares, but does not purport to be complete. It is qualified in its entirety by
reference to the articles of association and German law in effect on the date
of this prospectus.
Capital Increases and Decreases
Following this offering, our issued and outstanding capital stock
(Grundkapital) will be (Euro)87,030,940, divided into 87,030,940 bearer
ordinary shares of no par value (Stuckaktien). These shares have a calculated
value (rechnerischer Wert) of (Euro)1.00 each.
Under the German Stock Corporation Act, our capital may be increased by a
resolution passed by a majority of the shareholders of at least three-quarters
of our outstanding capital stock present at the shareholders' meeting.
Alternatively, the shareholders may, by a resolution approved by a majority
of the shareholders holding at least three-quarters of our outstanding capital
stock represented at the shareholders' meeting, empower the management board to
issue with the approval of the supervisory board, within a period not exceeding
five years, shares in a specified amount, thus creating authorized capital
(genehmigtes Kapital). Finally, the shareholders may create, by a resolution
requiring the same majority, conditional capital (bedingtes Kapital) for the
purposes of issuing shares to optionees or for the purpose of a contemplated
merger.
The nominal amount of each authorized capital and conditional capital may not
exceed 50% of our capital stock outstanding at the time the resolution to
create that capital is adopted, provided that in the case of conditional
capital created for the purpose of granting stock options to employees, this
limit is 10% of the capital stock outstanding at the time of the resolution.
Any decrease in our share capital requires the approval of a majority of the
shareholders holding at least three-quarters of our outstanding share capital
represented at the shareholders' meeting.
Bearer Ordinary Shares
We were incorporated in Germany on April 23, 1998 with a capital stock of
(Euro)51,129, divided into 300,000 bearer ordinary shares with a calculated
value of (Euro)0.17 each. We were registered with the commercial register of
Hamburg, Germany on May 20, 1998.
In accordance with the Law on Introduction of Shares with no par value
(Stuckaktiengesetz), enacted on April 1, 1998, the then existing shares were
converted into shares of no par value (Stuckaktien) at the general meeting of
May 26, 1998.
In the context of a restructuring, our capital stock was increased from
(Euro)51,129 to (Euro)153,464 by means of a (Euro)102,335 cash contribution by
PEBI in exchange for the issuance of 600,450 new shares. Subsequently, our
capital stock was increased by way of contributions-in-kind of (Euro)10,528,190
from (Euro)153,464 to (Euro)10,681,654 through the issuance of 61,729,050 new
shares. The contribution-in-kind consisted of the contribution of 20,591,348
shares of INTERSHOP Communications, Inc. The shares of approximately 200
employees and advisors of INTERSHOP Communications, Inc. which were contributed
to us in the course of that contribution-in-kind, had been previously
transferred to a trustee.
In addition, at our special meeting on June 23, 1998, we resolved that our
capital be increased from (Euro)10,681,654 to (Euro)10,724,263 by means of a
(Euro)42,609 cash contribution in exchange for the issuance of 250,005 new
shares to Mr. Theodore J. Smith. Subsequently, INTERSHOP Communications GmbH,
our former sole shareholder, transferred its 300,000 shares to PEBI.
58
<PAGE>
After the foregoing transactions, 62,924,505 shares, with a calculated value
of (Euro)0.17 per share, were issued and outstanding. On July 9, 1998,
15,000,000 shares with a calculated value of (Euro)0.17 were issued in
connection with our initial public offering. Additionally, 3,135,810 shares and
739,335 shares were issued on January 15, 1999 and on April 23, 1999,
respectively, to Mr. Christof K. Leiste from conditional capital II, following
his exercise of exchange rights pursuant to the 1997 Plan. Similarly, 1,783,500
shares were issued to Mr. Burgess Jamieson from conditional capital III,
following the exercise of his exchange rights.
After these share issuances, our share capital amounted to (Euro)14,117,306
divided into 82,833,150 shares with a calculated value of (Euro)0.17 per share.
Our shareholders' meeting held on June 21, 1999 resolved the conversion of the
share capital from DM into euro. Following that conversion the share capital
amounted to (Euro)14,117,305.70. The shareholders' meeting resolved a capital
increase from (Euro)14,117,305.70 by (Euro)2,449,324.30 to (Euro)16,566,630 by
converting amounts available in a capital reserve (Kapitalrucklage). The
capital increase was carried out without issuing new shares. Furthermore, the
shareholders' meeting resolved a 3:1 stock split, and all share amounts and
calculated values have been restated in this prospectus to reflect this stock
split. All shares have full dividend rights for the fiscal year from January 1,
1999 to December 31, 1999.
After the June 21, 1999 meeting, we issued an additional 357,370 shares and
1,200,000 shares in 1999 out of conditional capital II and III, respectively.
In 2000, as of March 15, 2000, we issued an additional 350,540 and 280,000
shares out of conditional capital II and III, respectively.
Our shareholders' meeting held on June 27, 2000 resolved a 5:1 stock split,
and all share and per share amounts have been restated in this prospectus to
reflect this stock split. Calculated value has been restated for this stock
split as of June 30, 2000. See "Resolutions of the Meeting of Shareholders" on
page 60 for further details on this shareholders' meeting.
Unless otherwise regulated by law, one share grants one vote in all matters
subject to a shareholders' vote, including the election of the members of the
supervisory board. Neither our certificate of incorporation nor our articles of
association provide for cumulative exercise of voting rights for the election
of board members. The holders of common shares are entitled to receive fixed
dividends, approved by the annual shareholders' meeting and funded by means
available for this purpose under the applicable rules and regulations. In case
of liquidation, any liquidation proceeds remaining after paying off all of our
liabilities would be distributed among shareholders in proportion to the total
number of the shares held by each shareholder. Common shareholders are not
subject to contribution and have no rights to conversion, reimbursement or
preferential rights for the purchase of additional shares, regardless of share
class. Shares outstanding have been paid in full and are not contributory.
Preferred Stock
At this time, we have not authorized any shares of preferred stock. Our
articles of association do not permit the issuance of such preferred stock
without the approval of the majority of the shareholders. If our shareholders
wish to enable us to issue preferred stock at a certain time in the future,
they would need to consent to the amendment of the articles of association,
which requires a majority of three-quarters of the capital stock present at a
shareholders' meeting.
Stock Option Plans
1999 Stock Option Plan. We currently maintain a stock option plan that became
effective on June 21, 1999. This plan provides for grants of options to
purchase AG Shares to board members, executive officers and employees of our
company and our affiliates. The options granted under this plan are intended to
attract, commit and motivate these key individuals. Each option granted under
the 1999 Plan is exercisable for one AG Share. As of December 31, 1999, 790,000
options had been granted under the 1999 Plan. For a more detailed description
of the 1999 Plan, see "Management--Equity Incentive Plans."
59
<PAGE>
1997 Equity Incentive Plan. The INTERSHOP Communications, Inc. 1997 Equity
Incentive Plan provides options to certain employees, officers, directors and
consultants of our subsidiaries. Each option granted under the 1997 Plan is
exercisable for AG Shares at a ratio of 1:3. We no longer grant options under
this plan; however, there were 1,575,000 options outstanding under this plan as
of December 31, 1999. For a more detailed description of the 1997 Plan, see
"Management--Equity Incentive Plans."
Number of Shares Available for Allocation Under the Stock Option Plan
Our shareholders' meeting on June 23, 1998 resolved conditional capital
increases for the issuance of shares to employees holding options exercisable
for our shares. Some employees were granted options exercisable for shares of
INTERSHOP Communications, Inc. under the 1997 Plan. Those employees have
entered into agreements allowing them to exercise their options of INTERSHOP
Communications, Inc. for our shares. Our shareholders' meeting on June 21, 1999
has amended the conditional capital increases. The following conditional pools
of shares are available for issuance to holders of options or subscription
rights (Bezugsrechte):
. Our share capital is conditionally increased by our first pool of
conditional capital to (Euro)1,633,000 for the issuance of 7,500,000
shares to our employees and their affiliates and 665,000 shares to
members of our management board and our affiliates. The conditional
capital increase is made to grant subscription rights (Bezugsrechte) to
the aforementioned persons. The subscription rights can be exercised
between two and five years of the date of grant.
. Our share capital is conditionally increased by our second pool of
conditional capital by (Euro)424,971 for the issuance of 2,124,855
shares. The conditional capital increase is made to grant exchange
rights to all holders of options of INTERSHOP Communications, Inc. known
to us for an exchange ratio of five option rights to receive one
INTERSHOP Communications, Inc. share to three option rights to receive
five shares of our company.
The respective number of shares available for issuance can be adjusted at the
shareholders' meeting within the 50% limitation of (S) 192 para. 3, German
Stock Corporation Act (Aktiengesetz, AktG), or, if the conditional capital is
created in order to grant stock options to employees, within a limit of 10% of
the outstanding share capital at the time the resolution upon the additional
capital is adopted. As of December 31, 1999, 525,664 options exercisable for
shares of INTERSHOP Communications, Inc. were outstanding. Based on the
conversion of options to purchase INTERSHOP Communications, Inc. shares into
options to purchase our shares, 2,124,855 options have been granted. Additional
options were granted, in particular, to European employees prior to our initial
public offering in Germany in 1998.
Resolutions of the Meeting of Shareholders
At our shareholders' meeting held on June 21, 1999, the following
resolutions, in particular, were duly adopted:
Resolutions in connection with the conversion of the share capital from DM
into euro:
. Conversion of the share capital from DM 27,611,050 into
(Euro)14,117,305.70.
. Increase of the share capital from (Euro)14,117,305.70 to
(Euro)16,566,630 by (Euro)2,449,324.30 by converting amounts available
in a capital reserve (Kapitalrucklage). The capital increase was carried
out without issuing new shares.
. Stock split of 3:1, the 5,522,210 shares split into 16,566,630 shares.
. Conversion of the authorized capital I from DM 2,500,000 into
(Euro)1,278,229.70 and increase by (Euro)221,770.30 to (Euro)1,500,000.
. Conversion of the authorized capital II from DM 1,500,000 into
(Euro)766,937.82 and increase by (Euro)133,062.18 to (Euro)900,000.
60
<PAGE>
. Conversion of the conditional capital I from DM 2,500,000 into
(Euro)1,278,229.70 and increase by (Euro)221,770.30 to (Euro)1,500,000.
. Conversion of the remaining conditional capital II from DM 708,285 into
(Euro)362,140.37 and increase by (Euro)62,830.63 to (Euro)424,971.
. Conversion of the remaining conditional capital III from DM 5,041,500
into (Euro)2,577,678.02 and increase by (Euro)447,221.98 to
(Euro)3,024,900.
Further resolutions:
. Conditional increase of the capital stock up to a maximum of
(Euro)1,633,000 through the issuance of up to 7,500,000 new bearer
ordinary shares to our employees and the employees of our affiliated
companies and up to 665,000 new bearer ordinary shares to the members of
our management board and of our affiliated companies, which represented
the creation of a new conditional capital I for the issuance of options
to employees and members of the management board.
. Authorization for the management board (Vorstand) to increase the share
capital within a period of five years after registration of this
resolution into the commercial register by up to (Euro)5,883,000 through
the issuance of up to 29,415,000 new bearer ordinary shares against
contribution in cash or in kind, which represented the creation of a new
authorized capital III.
. Authorization until December 20, 2000 to purchase and sell our shares
for a price not to be higher or lower than 10% of the average exchange
quotation on the Neuer Markt of the Frankfurt Stock Exchange of the
preceding 10 exchange days.
At our shareholders' meeting held on June 27, 2000, the following
resolutions, in particular, were duly adopted:
. Increase of the share capital from (Euro)17,506,188 (which includes
100,000 shares that were privately placed and 335,000 shares reserved
for offering in connection with Nasdaq listing) to (Euro)87,530,940 as a
result of a stock split whereby four shares are given to each
shareholder of one share.
. Authorization for the management board to increase the share capital
within a period of five years after registration of this resolution into
the commercial register of up to (Euro)35,012,376 through the issuance
of up to 35,012,376 new bearer ordinary shares against contribution in
cash or in kind, which represented the revision of the authorized
capital I.
. Authorization for the management board, subject to approval by the
supervisory board, to increase share capital with exclusion of
shareholders' subscription rights within a period of five years after
registration of this resolution into the commercial register of up to
(Euro)8,753,094 by issuing up to 8,753,094 no-par bearer shares against
contribution in cash, which represented the revision of the authorized
capital II.
. Abolishment of authorized capital III of (Euro)5,883,000 through the
abolishment of 5,883,000 new bearer ordinary shares.
. Authorization until November 30, 2001 to purchase and sell our shares,
amount not to exceed 10% of capital stock, for a price not to be higher
than 10% of the closing quotation in the XETRA-System on the Neuer Markt
of the Frankfurt Stock Exchange on the last trading day prior to the
transaction.
. Authorization for the management board, subject to approval by the
supervisory board, to dispose of our shares by:
(a) transferring shares to a third party for the purchase of a company
or investment in a company or as compensation for goods and
services at a price not significantly less than the average
exchange quotation on the XETRA-System on the Neuer Markt of the
Frankfurt Stock Exchange of the preceding five exchange days.
61
<PAGE>
(b) selling shares to institutional investors at a price not
significantly less than the average exchange quotation on the
XETRA-System on the Neuer Markt of the Frankfurt Stock Exchange of
the preceding five exchange days.
(c) offering shares to persons who are or were employed by the Company
or an affiliated company at a price in accordance with the Employee
Stock Participation Program.
(d) offering shares to consultants or external advisors to the Company
or an affiliated company at a price in accordance with the Equity
Incentive Program.
Under Section 193(2) of the German Stock Corporation Act, or the AktG, a
shareholders' resolution effecting a conditional capital increase needs to set
forth, among other things, the issue price for the new shares, or,
alternatively, the basis on which the issue price is to be determined. We
believe that the resolution on our conditional capital II, as resolved at our
shareholders' meeting held on June 23, 1998, complies with the requirements of
Section 193(2) and, therefore, was validly adopted. Due to the somewhat unclear
wording of the actual resolution, a third party could assert that the
resolution did not comply with the requirement that the issue price or the
basis on which the issue price is to be determined must be set forth in the
resolution. Non-compliance with this requirement, other than a complete
omission of both the issue price and the basis on which it is to be determined,
would not render the resolution void but would merely give rise to an action to
set aside the resolution under Section 246. To be actionable, such an action
would need to be initiated within one month after the adoption of the
resolution. Since this time period has lapsed, the resolution could not be set
aside in this manner. Although we are of the opinion that it would be highly
unlikely, we cannot completely dismiss the possibility that the German Supreme
Court could render a final nullity judgment if a third party were instead to
bring an action for declaration of nullity of the resolution regarding
conditional capital II. To our knowledge, there is no binding legal authority
supporting such a declaration. However, German stock corporation law has also
been interpreted to the effect that, in the case of a nullity judgment, the
shares issued out of our conditional capital II would be deemed invalid.
Consequently, the holders of those shares would not be entitled to vote at our
shareholders' meetings. If the holders of invalid shares attended a
shareholders' meeting in the future, any resolutions passed at that meeting
could potentially be set aside if, excluding the invalid votes, the resolution
would not have been passed by the requisite vote. In addition, any receipt of
any distributions or dividends by the holders of invalid shares would be deemed
unjust, and this could give rise to claims against us in the amount of any
unjust distribution or dividends. We consider the likelihood any such claims
being raised to be low.
If both valid and invalid shares were traded, all of our shares would
eventually become indistinguishably commingled so that it would become
impossible to distinguish if and to what extent a particular shareholder holds
valid or invalid shares. As a consequence, after some time, all or
substantially all of our shareholders would hold both valid and invalid shares.
Although we cannot deny the possibility that certain shareholders could assert
damage claims against us, we do not believe that this would cause damage to any
of our shareholders because the proportionate stake of each shareholder would
not be affected. Regardless of this, we are of the opinion that, even if the
underlying resolution regarding conditional capital II were declared void by
the German Supreme Court, the shares issued out of that capital would,
regardless of the invalidity of the underlying resolution, have to be treated
as validly issued in accordance with the German legal principles of de facto
companies (faktische Gesellschaft). In addition, we intend to take all
appropriate steps to cure the potential invalidity. These steps could include
making an offer to all holders of invalid shares to exchange their invalid
shares for valid ones issued out of a properly authorized capital. In any
event, an action for declaration of nullity of the resolution regarding our
conditional capital II would be time barred if brought after the lapse of the
relevant statute of limitations, which statute will lapse within less than 18
months. Less than 8.0% of our current outstanding shares have been issued out
of our conditional capital II.
Shares
All shares issued by us have been issued in, or transformed into, bearer
ordinary shares. The shares are freely transferable. Ownership of the shares
will pass at the earliest upon delivery or, if such shares are deposited with a
clearing system, in accordance with the rules of the relevant clearing system.
The shares may
62
<PAGE>
be deposited with, and held through, Deutsche Borse Clearing AG, or DBC, the
German clearing system based in Frankfurt am Main, Germany.
Notification Requirements
Under the German Stock Corporation Act, any enterprise owning shares in a
German stock corporation must promptly notify that corporation in writing if
the aggregate number of shares held by it exceeds, or declines to, a threshold
of 25 or 50 percent of the corporation's capital. For the purpose of this
notice requirement, shares owned by an enterprise include shares owned by an
enterprise it controls, directly or indirectly, as well as shares held by a
person on behalf of any of such entities. If a shareholder fails to give this
notice, and if such failure continues, that shareholder may not exercise any
rights as a shareholder and is not entitled to receive dividends on such
shares.
Shareholders' Meetings
At our annual general shareholders' meeting, our shareholders resolve the
allocation and distribution of profit, approve or disapprove the actions of the
members of the management board and the supervisory board and appoint our
auditors. The meeting takes place within the first eight months of our fiscal
year, which runs from January 1 to December 31, and is called by the management
board. Our shareholders also periodically elect the members of the supervisory
board. Shareholder approval is required for important corporate measures, which
include:
. capital increases and decreases;
. approval of stock options;
. issuance of bonds convertible into shares;
. bonds with warrants to purchase shares;
. profit participating bonds and profit participating rights;
. amendments to the articles of association; and
. mergers and similar transactions and the dissolution of our company.
Special meetings may be called by the management board or the supervisory
board or upon request of shareholders holding, individually or collectively, at
least 5 percent of the nominal value of our capital stock. Shareholders holding
in total at least 5 percent of our capital stock or shares in total nominal
amount of at least DM 1,000,000 or (Euro)500,000 may require that modified or
additional resolutions be proposed at the shareholders' meeting and that those
resolutions be published prior to the meeting. Notices of shareholders'
meetings are announced in the German Federal Gazette (Bundesanzeiger) one month
prior to the meeting. The notice consists of the publication of the time and
place of the meeting, the agenda and the conditions for participation of
shareholders.
The right to attend and vote at a shareholders' meeting is only accorded to
those shareholders who deposit their shares or certificates of deposit of a
bank serving as a depositary for such securities at least four working days,
excluding Saturdays, with us, a German notary, a bank serving as a depositary
for such securities (Wertpapiersammelbank) or at any other place of deposit
specified in the notice of the meeting. Shares are also deemed to have been
deposited if, with the consent of one of the depositees listed above, they are
held for such depositee in a bank account and are blocked until the end of the
shareholders' meeting. In order to exercise the right to attend and vote at the
meeting, shareholders must provide us with appropriate documentation which
evidences the deposit of their shares as described above at the meeting.
Following a deposit of shares or the blocking of the account in which they are
held, a holder of shares may still sell or otherwise dispose of his shares. In
that event, any voting instructions a shareholder may have given with respect
to such shares will be ignored. Shareholders may appoint proxies to represent
them at shareholders' meetings.
For information on the voting rights of holders of ADRs, please see
"Description of American Depositary Shares."
63
<PAGE>
Voting Rights
Each share entitles its holder to one vote. Generally, shareholders are
entitled to vote at shareholders' meetings in proportion to the number of
shares held, and a simple majority of votes cast is sufficient to approve a
measure unless a higher majority is required by German law or by the articles
of association. The German Stock Corporation Act requires that certain
significant resolutions be passed by a majority of at least three-quarters of
the capital stock present or represented at the meeting at which the vote is
taken. According to our articles of association, a simple majority of votes
cast at the shareholders' meeting is sufficient to pass a shareholder
resolution unless mandatory provisions of the German Stock Corporation Act
provide otherwise. The mandatory provisions, according to which a resolution
can only be passed by a majority of at least three quarters of the capital
stock present or represented, are the following:
. share capital increases that exclude shareholders' preemptive rights;
. the creation of authorized or conditional capital;
. changes to the articles of association modifying corporate purpose;
. any decrease of capital;
. mergers and similar transactions;
. dissolution; and
. company agreements (Unternehmensvertrage) like denomination or profit
transfer agreements.
The articles of association do not require higher majorities for any
additional resolutions.
Dividends
We have not declared or paid any cash dividends on our capital stock and do
not intend to pay any cash dividends in the foreseeable future but plan to
retain all earnings to finance our operations and expansion of our business.
Future dividends may be proposed by the supervisory board and the management
board in the general meeting of stockholders. Resolutions on the use of
earnings are considered at the annual general meeting of stockholders taking
place in the following fiscal year.
For information concerning the receipt of dividends by holders of ADSs,
please see "Description of American Depositary Shares."
Preemptive Rights
Under the German Stock Corporation Act, a shareholder in a stock corporation
has a preferential or preemptive right to subscribe for shares, debt
instruments convertible into shares, or involving a profit participation, and
to participation rights issued by the corporation in proportion to the shares
held by that shareholder. Under the German Stock Corporation Act, this
preferential right can be denied or limited only through a shareholders'
resolution approved by a majority of three-quarters of the capital stock
represented at a shareholders' meeting in person or by proxy. The resolution
must specifically approve both the capital stock increase and the denial or
limitation of the shareholders' preemption rights. Even with a three-quarters
majority, the denial or limitation of preemptive rights is permissible only
under limited circumstances, including when:
. the capital increase involves a contribution in cash
(Barkapitalerhohung);
. the capital increase does not exceed 10% of the corporation's capital
(Grundkapital); and
. the issue price does not fall significantly below the price of the
corporation's shares on a stock exchange on which its shares are listed.
64
<PAGE>
Preemptive rights may be transferred by agreement and delivery of the coupon
evidencing these rights. If the shares to which the preemptive rights relate
are held in a clearing system, the rights may be transferred in accordance with
the rules of such clearing system. Exercisable preemptive rights attaching to
the shares would generally be traded on the Neuer Markt of the Frankfurt Stock
Exchange for a limited number of days.
Due to the restrictions on the offer and sale of securities in the United
States under U.S. securities laws and regulations, we cannot assure you that
any offer of new shares to existing shareholders on the basis of their
preemptive rights will be made to U.S. holders of ADSs or shares. See
"Description of American Depositary Shares."
No Stockholder Action by Written Consent and Special Meetings
Any action requiring the approval of our shareholders may only be taken at a
duly called ordinary or special meeting, and may not be effected by a written
consent in lieu of such a meeting. This provision may have the effect of
delaying votes on a shareholder proposal until the next general meeting, unless
a special meeting is called by shareholders holding at least 5% of the nominal
value of our capital stock.
Liquidation
Apart from liquidation as a result of bankruptcy proceedings, our company may
be liquidated only with a majority of four-fifths of the votes cast and three-
quarters of the capital stock present or represented at a shareholders' meeting
at which the vote is taken. In accordance with the German Stock Corporation
Act, upon our liquidation, any liquidation proceeds remaining after paying off
all of our liabilities would be distributed among shareholders in proportion to
the total number of the shares held by each shareholder.
Purchase by Our Company of Our Own Shares
Under the German Stock Corporation Act, a corporation may not purchase its
own shares, subject to certain limited exceptions. The aggregate number of such
shares repurchased by a German corporation may not in general exceed ten
percent of its capital stock. At the shareholders' meeting held on June 27,
2000, we were authorized, until November 30, 2001, to purchase our own shares
up to a maximum of 10% of our capital stock. We will publish details of
relevant dealings in our own equity securities each year in our annual report.
Antitakeover Provisions
To comply with the admission regulations of the Neuer Markt of the Frankfurt
Stock Exchange, we have adopted the Takeover Code recommended by the Stock
Exchange Expert Commission (Borsensachverstandigenkommission) at the German
Federal Ministry of Finance. This Takeover Code, while not having the force of
law, is nevertheless in practice complied with by all relevant market
participants. These provisions, and the provisions of our articles of
association, may have the effect of deterring hostile takeovers or delaying or
preventing changes in our control or management, including transactions in
which shareholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
shareholders to approve transactions that they may deem to be in their best
interests. See "Risk Factors--Certain antitakeover provisions under German law
and in our articles of association may discourage takeover attempts."
Amendment of Articles of Association
Resolutions seeking to amend the articles of association may be proposed
either jointly by the supervisory board and the management board or by
shareholders holding a total of at least 5% of our capital stock or shares in
total nominal amount of at least DM 1 million or (Euro)500,000. Any such
resolution must be passed by a majority of at least three-quarters of the
nominal capital stock present or represented at the meeting at which the vote
is taken.
65
<PAGE>
Deliverability and Clearing
The shares and ADSs being offered hereunder will initially be represented by
one or more global share certificates deposited with Clearstream Banking AG.
Several shares may be represented by one certificate. The form and content of
the share certificates, the dividend coupons and the renewal coupons will be
determined by the management board with the consent of the supervisory board.
On October 2, 2000, the global share certificates representing the shares
will be deposited with Clearstream Banking AG, as share depositary. The shares
are expected to be accepted for clearance through Clearstream Banking AG, the
Euroclear System and Clearstream Banking, societe anonyme. The shares may be
credited at the option of investors either to a German bank's Clearstream
Banking AG account or to the accounts of participants with Euroclear or
Clearstream Banking, societe anonyme. Our ADSs will be eligible for clearance
through the facilities of The Depository Trust Company.
The German securities identification number (WKN) of the shares is 622 700.
The international securities identification number (ISIN) of the shares is DE
000 622 7002 and the ISIN of our ADSs is US 46069W 10 09. The common code of
the shares is 008885109. The CUSIP number of our ADSs is 46069W 10 0.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Following this offering, we will have 87,030,940 ordinary shares outstanding,
assuming no exercise of the over-allotment option and no exercise of
outstanding options to purchase shares based on the shares outstanding as of
June 30, 2000. The 3,350,000 ADSs sold in this offering, representing 1,675,000
shares, are freely tradable without restriction or further registration under
the Securities Act of 1933, except that any shares held by our "affiliates", as
that term is defined in Rule 144 under the Securities Act, may generally only
be sold in compliance with the limitations of Rule 144 described below.
The remaining 85,855,940 ordinary shares are deemed "restricted securities"
as defined under Rule 144. Restricted securities may be sold in the public
market in the United States only if they become registered or if they qualify
for an exemption from registration under Rule 144, Rule 701 or Rule 904 under
the Securities Act, which are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 701 and 904,
87,280,940 shares will be eligible for sale from time to time after the date of
this prospectus.
Prior to this offering, including our executive officers and members of our
supervisory board and management board, holders of a total of approximately
26,408,235 shares entered into lock-up agreements generally providing that they
will not, subject to limited exceptions, offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction, including any derivative
transaction, having an economic effect similar to that of a sale of, any of our
shares or any other of our securities which are substantially similar to our
shares or which are convertible into or exchangeable for, or represent the
right to receive, our shares or securities which are substantially similar to
our shares for a period of 90 days after the date of this prospectus without
the prior written consent of Credit Suisse First Boston Corporation. As a
result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provision of Rules 144, 144(k), 701 and 904,
shares subject to lock-up agreements will not be eligible for sale until these
lock-up agreements expire or are waived by Credit Suisse First Boston
Corporation. See "Underwriting."
In general, under Rule 144, a person, or persons whose shares are aggregated,
including an affiliate, who has beneficially owned shares for at least one year
is entitled to sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
. one percent of the then outstanding shares (approximately 865,655 shares
immediately after this offering); or
. the average weekly trading volume in the shares during the four calendar
weeks preceding the date on which notice of such sale is filed, subject
to certain restrictions.
In addition, a person who is not deemed to have been an affiliate of ours 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, would be entitled to
sell such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of ours, an
acquiror's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
Rule 701 under the Securities Act provides that shares acquired pursuant to
written plans, such as our equity incentive plans, may be resold by persons
other than affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period.
Rule 904 of Regulation S under the Securities Act provides that shares owned
by any person, other than persons deemed to be affiliates by virtue of their
significant shareholdings in our company may be sold without registration
outside the United States, provided the sale is accomplished in an offshore
transaction, as that term is defined in Regulation S, and no directed selling
efforts, as that term is defined in Regulation S, are made, subject to certain
other conditions. In general, this means that the shares, including
"restricted" shares and
67
<PAGE>
shares held by our directors and officers who do not own a significant
percentage of the shares, may be sold without registration on the Neuer Markt
of the Frankfurt Stock Exchange or otherwise outside the United States.
Prior to this offering, our shares have been listed on the Neuer Markt of the
Frankfurt Stock Exchange. No prediction can be made as to the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of shares in the public market, especially by affiliates,
could adversely affect the market price of our shares and ADSs and could impair
our future ability to raise capital through the sale of our equity securities.
We have agreed, to the extent permitted by law, not to issue, sell or
otherwise dispose of any shares during the 90-day period following the date of
this prospectus and have agreed to neither announce nor effect any increase in
capital during such period without the prior written consent of the global
coordinator of this offering, except that we may issue shares and grant options
under our equity incentive plans. See "Risk Factors--Future sale of shares of
our shares may cause our share prices to decline."
68
<PAGE>
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Citibank, N.A. will act as the depositary bank for our ADSs. Citibank's
depositary offices are located at 111 Wall Street, New York, New York 10005.
ADSs represent ownership interests in securities that are on deposit with the
depositary bank. ADSs are normally represented by certificates that are
commonly known as American Depositary Receipts or ADRs. The depositary bank
typically appoints a custodian to safekeep the securities on deposit. In this
case, the custodian is Citibank AG, located at Neue Mainzer Strabe 75,
60311 Frankfurt am Main, Germany 4189211.
We have appointed Citibank as depositary bank pursuant to a deposit
agreement. A copy of the deposit agreement is on file with the Securities and
Exchange Commission under cover of a registration statement on Form F-6. You
may obtain a copy of the deposit agreement from the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please refer to registration number 333-11642 when retrieving your copy.
We are providing you with a summary description of our ADSs and your rights
as an owner of ADSs. Please remember that summaries by their nature lack the
precision of the information summarized and that a holder's rights and
obligations as an owner of ADSs will be determined by the deposit agreement and
not by this summary. We urge you to review the deposit agreement in its
entirety as well as the form of ADR attached to the deposit agreement.
Each ADS represents 1/2 of a share of INTERSHOP Communications AG on deposit
with the custodian bank. An ADS will also represent any other property received
by the depositary bank or the custodian on behalf of the owner of the ADS but
that has not been distributed to the owners of ADSs because of legal
restrictions or practical considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound to its terms and to the terms of the ADR
that represents your ADSs. The deposit agreement and the ADR specify our rights
and obligations as well as your rights and obligations as an owner of ADSs and
those rights and obligations of the depositary bank. As an ADS holder, you
appoint the depositary bank to act on your behalf in certain circumstances. The
deposit agreement is governed by New York law. However, our obligations to the
holders of ordinary shares will continue to be governed by the laws of Germany,
which may be different from the laws in the United States.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name or through a brokerage or safekeeping account. If you
decide to hold your ADSs through your brokerage or safekeeping account, you
must rely on the procedures of your broker or bank to assert your rights as an
ADS owner. Please consult with your broker or bank to determine what those
procedures are. This summary description assumes you have opted to own ADSs
directly by means of an ADR registered in your name and, as such, we will refer
to you as the "holder."
Dividends and Distributions
As a holder, you generally have the right to receive the distributions we
make on the securities deposited with the custodian bank. Your receipt of these
distributions may be limited, however, by practical considerations and legal
limitations. Holders will receive distributions under the terms of the deposit
agreement in proportion to the number of ADSs held as of a specified record
date.
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with the
custodian, we will notify the depositary bank. Upon receipt of our notice, the
depositary bank will arrange for the funds to be converted into U.S. dollars
and for the distribution of the U.S. dollars to the holders.
69
<PAGE>
The conversion into U.S. dollars will take place only if practicable. The
amounts distributed to holders will be net of the fees, expenses, taxes and
governmental charges payable by holders under the terms of the deposit
agreement. The depositary will apply the same method for distributing the
proceeds of the sale of any property, such as undistributed rights, held by the
custodian in respect to securities on deposit.
Distributions of Ordinary Shares
Whenever we make a distribution of ordinary shares for the securities on
deposit with the custodian, we will notify the depositary bank. Upon receipt of
such notice, the depositary bank will either distribute to holders new ADSs
representing the ordinary shares deposited or modify the ADS-to-share ratio, in
which case each ADS you hold will represent rights and interests in the
additional ordinary shares so deposited. Only whole new ADSs will be
distributed. Fractional entitlements will be sold and the proceeds of such sale
will be distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-share ratio
upon a distribution of ordinary shares will be made net of the fees, expenses,
taxes and governmental charges payable by holders under the terms of the
deposit agreement. In order to pay such taxes or governmental charges, the
depositary bank may sell all or a portion of the new ordinary shares so
distributed.
No distribution of new ADSs will be made if it would violate a law, such as
the U.S. securities laws, or if it is not reasonably practicable. If the
depositary bank does not distribute new ADSs as described above, it will use
its best efforts to sell the ordinary shares received and will distribute the
proceeds of the sale as in the case of a distribution of cash.
Distributions of Rights
Whenever we intend to distribute rights to purchase additional ordinary
shares, we will give prior notice to the depositary bank and we will assist the
depositary bank in determining whether it is lawful and reasonably practicable
to distribute rights to purchase additional ADSs to holders.
The depositary bank will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable holders to exercise those
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs, and if we provide all of the documentation contemplated in
the deposit agreement, such as opinions to address the lawfulness of the
transaction. You may have to pay fees, expenses, taxes and other governmental
charges to subscribe for the new ADSs upon the exercise of your rights. The
depositary bank is not obligated to establish procedures to facilitate the
distribution and exercise by holders of rights to purchase new ordinary shares
directly rather than new ADSs.
The depositary bank will not distribute the rights to you if:
. we do not request that the rights be distributed to you or we ask that
the rights not be distributed to you;
. we fail to deliver satisfactory documents to the depositary bank; or
. it is not reasonably practicable to distribute the rights.
The depositary bank will sell the rights that are not exercised or not
distributed if such sale is lawful and reasonably practicable. The proceeds of
that sale will be distributed to holders as in the case of a cash distribution.
If the depositary bank is unable to sell the rights, it will allow the rights
to lapse, and you will realize no benefit from them.
Elective Distributions
Whenever we intend to distribute a dividend payable at the election of
shareholders either in cash or in additional ordinary shares, we will give
prior notice to the depositary bank and will indicate whether we wish
70
<PAGE>
the elective distribution to be made available to you. In such case, we will
assist the depositary bank in determining whether such distribution is lawful
and reasonably practical.
The depositary bank will make the election available to you only if it is
reasonably practical and if we have provided the documentation contemplated in
the deposit agreement. In such case, the depositary bank will establish
procedures to enable you to elect to receive either cash or additional ADSs, in
each case as described in the deposit agreement.
If the election is not made available to you, you will receive either cash or
additional ADSs, depending on what a shareholder in Germany would receive for
failing to make an election, as is more fully described in the deposit
agreement.
Other Distributions
Whenever we intend to distribute property other than cash, ordinary shares or
rights to purchase additional ordinary shares, we will notify the depositary
bank in advance and will indicate whether we wish that distribution to be made
to you. If so, we will assist the depositary bank in determining whether a
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute that property to you and if we
provide the documentation contemplated in the deposit agreement, the depositary
bank will distribute the property to the holders in a manner the bank
reasonably deems practicable.
The distribution will be made net of fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement. In order
to pay any taxes and governmental charges, the depositary bank may sell all or
a portion of the property received.
The depositary bank will not distribute the property to you and will sell the
property if:
. we do not request that the property be distributed to you or if we ask
that the property not be distributed to you;
. we do not deliver satisfactory documents to the depositary bank; or
. the depositary bank determines that all or a portion of the distribution
to you is not reasonably practicable.
The proceeds of this type of sale will be distributed to holders as in the
case of a cash distribution.
Redemption
Whenever we decide to redeem any of the securities on deposit with the
custodian, we will notify the depositary bank. If it is reasonably practicable
and if we provide the documentation contemplated in the deposit agreement, the
depositary bank will mail notice of the redemption to the holders.
The custodian will be instructed to surrender the ordinary shares being
redeemed against payment of the applicable redemption price. The depositary
bank will convert the redemption funds received into U.S. dollars upon the
terms of the deposit agreement and will establish procedures to enable holders
to receive the net proceeds from the redemption upon surrender of their ADRs to
the depositary bank. You may have to pay fees, expenses, taxes and other
governmental charges upon the redemption of your ADSs. If less than all ADSs
are being redeemed, the ADSs to be retired will be selected by lot or on a pro
rata basis, as we and the depositary bank may determine.
Changes Affecting Ordinary Shares
The ordinary shares held on deposit for your ADSs may change from time to
time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or classification of the ordinary shares or a
recapitalization, reorganization, merger, consolidation or sale of assets.
71
<PAGE>
If any such change were to occur, your ADSs would, to the extent permitted by
law, represent the right to receive the property received or exchanged in
respect of the ordinary shares held on deposit. The depositary bank may in
those circumstances deliver new ADSs to you or call for the exchange of your
existing ADSs for new ADSs. If the depositary bank may not lawfully distribute
that property to you, the depositary bank may sell that property and distribute
the net proceeds to you as in the case of a cash distribution.
Issuance of ADSs upon Deposit of Ordinary Shares
The depositary bank may create ADSs on your behalf if you or your broker
deposit ordinary shares with the custodian. The depositary bank will deliver
these ADSs to the person you indicate only after you pay any applicable
issuance fees and any charges and taxes payable for the transfer of the
ordinary shares to the custodian.
The issuance of ADSs may be delayed until the depositary bank or the
custodian receives confirmation that all required approvals have been given and
that the ordinary shares have been duly transferred to the custodian. The
depositary bank will only issue ADSs in whole numbers.
When you make a deposit of ordinary shares, you will be responsible for
transferring good and valid title to the depositary bank. As such, you will be
deemed to represent and warrant that:
. the ordinary shares are duly authorized, validly issued, fully paid,
nonassessable and legally obtained;
. all preemptive and similar rights, if any, with respect to such shares
have been validly waived or exercised;
. you are duly authorized to deposit the ordinary shares;
. the ordinary shares presented for deposit are free and clear of any
lien, encumbrance, security interest, charge, mortgage or adverse claim,
and are not, and the ADSs issuable upon such deposit will not be
"restricted securities," as defined in the deposit agreement; and
. the ordinary shares presented for deposit have not been stripped of any
rights or entitlements.
If any of the representations or warranties are incorrect in any way, we and
the depositary bank may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
Withdrawal of Ordinary Shares upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary bank
for cancellation and then receive the underlying ordinary shares at the
custodian's offices. In order to withdraw the ordinary shares represented by
your ADSs, you will be required to pay to the depositary the fees for
cancellation of ADSs and any charges and taxes payable upon the transfer of the
ordinary shares being withdrawn. You assume the risk for delivery of all funds
and securities upon withdrawal. Once canceled, ADSs will not have any rights
under the deposit agreement.
If you hold an ADR registered in your name, the depositary bank may ask you
to provide proof of identity and genuineness of any signature and certain other
documents as the depositary bank may deem appropriate before it will cancel
your ADSs. The withdrawal of the ordinary shares represented by your ADSs may
be delayed until the depositary bank receives satisfactory evidence of
compliance with all applicable laws and regulations. Please keep in mind that
the depositary bank will only accept ADSs for cancellation that represent a
whole number of securities on deposit.
You will have the right to withdraw the securities represented by your ADSs
at any time except for:
. temporary delays that may arise because the transfer books for the
ordinary shares or ADSs are closed or ordinary shares are immobilized on
account of a shareholders' meeting or a payment of dividends;
72
<PAGE>
. obligations to pay fees, taxes and similar charges; or
. restrictions imposed because of laws or regulations applicable to ADSs
or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw
the securities represented by your ADSs except to comply with mandatory
provisions of law.
Voting Rights
As a holder, you generally have the right under the deposit agreement to
instruct the depositary bank to exercise the voting rights for the ordinary
shares represented by your ADSs. The voting rights of holders of ordinary
shares are described in "Description of Capital Stock--Voting Rights."
At our request, the depositary bank will mail to you any notice of
shareholders' meeting received from us together with information explaining how
to instruct the depositary bank to exercise the voting rights of the securities
represented by ADSs.
If the depositary bank timely receives voting instructions from a holder of
ADSs, it will endeavor to vote the securities represented by the holder's ADSs
in accordance with such voting instructions.
Please note that the ability of the depositary bank to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the securities on deposit. We cannot assure you that you will receive voting
materials in time to enable you to return voting instructions to the depositary
bank in a timely manner. Securities for which no voting instructions have been
received will not be voted.
Fees and Charges
As an ADS holder, you will be required to pay the following service fees to
the depositary bank:
<TABLE>
<CAPTION>
Service Fees
------- ----
<S> <C>
Issuance of ADSs.................................................. Up to 5c per ADS issued
Cancellation of ADSs.............................................. Up to 5c per ADS issued
Exercise of rights to purchase additional ADSs.................... Up to 5c per ADS canceled
Distribution of cash dividend or ADSs pursuant to stock
dividends (or other fee distribution of stock)................... Up to 2c per ADS held
Distribution of cash upon sale of rights and other entitlements... Up to 2c per ADS held
</TABLE>
As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary bank and certain taxes and governmental
charges such as:
. fees for the transfer and registration of ordinary shares, such as upon
deposit and withdrawal of ordinary shares;
. expenses incurred for converting foreign currency into U.S. dollars;
. expenses for cable, telex and fax transmissions and for delivery of
securities; and
. taxes and duties upon the transfer of securities, such as when shares
are deposited or withdrawn from deposit.
We have agreed to pay certain other charges and expenses of the depositary
bank. Note that the fees and charges you may be required to pay may vary over
time and may be changed by us and by the depositary bank. You will receive
prior notice of those changes.
73
<PAGE>
Amendments and Termination
We may agree with the depositary bank to modify the deposit agreement at any
time without your consent. We undertake to give holders 30 days prior notice of
any modifications that would prejudice any of their substantial rights under
the deposit agreement, except in very limited circumstances enumerated in the
deposit agreement.
You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs after the modifications to the deposit agreement
become effective. The deposit agreement cannot be amended to prevent you from
withdrawing the ordinary shares represented by your ADSs, except as permitted
by law.
We have the right to direct the depositary bank to terminate the deposit
agreement. Similarly, the depositary bank may in certain circumstances on its
own initiative terminate the deposit agreement. In either case, the depositary
bank must give notice to holders at least 30 days before termination.
Upon termination, the following will occur under the deposit agreement:
. For a period of six months after termination, you will be able to
request the cancellation of your ADSs and the withdrawal of the ordinary
shares represented by your ADSs and the delivery of all other property
held by the depositary bank in respect of those ordinary shares on the
same terms as prior to the termination. During this six months period
the depositary bank will continue to collect all distributions or
dividends received on the ordinary shares on deposit but will not
distribute any property to you until you request the cancellation of
your ADSs.
. After the expiration of such six months period, the depositary bank may
sell the securities held on deposit. The depositary bank will hold the
proceeds from that sale and any other funds then held for holders of
ADSs in a non-interest bearing account. At that point, the depositary
bank will have no further obligations to holders other than to account
for the funds then held for holders of ADSs still outstanding.
Books of Depositary
The depositary bank will maintain ADS holder records at its depositary
office. You may inspect those records at its office during regular business
hours but solely for the purpose of communicating with other holders in the
interest of business matters relating to ADSs and the deposit agreement.
The depositary bank will maintain records in New York facilities to record
and process the issuance, cancellation, combination, split-up and transfer of
ADRs. These facilities may be closed from time to time, to the extent not
prohibited by law.
Limitations on Obligations and Liabilities
The deposit agreement limits our obligations and the depositary bank's
obligations to you. Please note the following:
. We and the depositary bank are obligated only to take the actions
specifically stated in the depositary agreement without negligence or
bad faith.
. The depositary bank disclaims any liability for any failure to carry out
voting instructions, for any manner in which a vote is cast or for the
effect of any vote, provided it acts in good faith and in accordance
with the terms of the deposit agreement.
. The depositary bank disclaims any liability for any failure to determine
the lawfulness or practicality of any action, for the content of any
document forwarded to you on our behalf or for the accuracy of any
translation of such a document, for the investment risks associated with
investing in ordinary shares, for the validity or value of the ordinary
shares, for any tax consequences that result from the
74
<PAGE>
ownership of ADSs, for the credit worthiness of any third party, for
allowing any rights to lapse under the terms of the deposit agreement,
for the timeliness of any of our notices or for our failure to give
notice, provided we act without negligence or bad faith.
. We and the depositary bank will not be obligated to perform any act that
is inconsistent with the terms of the deposit agreement.
. We and the depositary bank disclaim any liability if we are prevented or
forbidden from acting on account of any law or regulation, any provision
of our articles of association, any provision of any securities on
deposit or by reason of any act of God or war or other circumstances
beyond our control.
. We and the depositary bank disclaim any liability by reason of any
exercise of, or failure to exercise, any discretion provided for the
deposit agreement or in our articles of association or in any provisions
of securities on deposit.
. We and the depositary bank further disclaim any liability for any action
or inaction in reliance on the advice or information received from legal
counsel, accountants, any person presenting ordinary shares for deposit,
any holder of ADSs or authorized representative thereof, or any other
person believed by either of us in good faith to be competent to give
such advice or information.
. We and the depositary bank also disclaim liability for the inability by
a holder to benefit from any distribution, offering, right or other
benefit which is made available to holders of ordinary shares but is
not, under the terms of the deposit agreement, made available to you.
. We and the depositary bank may rely without any liability upon any
written notice, request or other document believed to be genuine and to
have been signed or presented by the proper parties.
Pre-Release Transactions
The depositary bank may, in certain circumstances, issue ADSs before
receiving a deposit of ordinary shares or release ordinary shares before
receiving ADSs. These transactions are commonly referred to as "pre-release
transactions." The deposit agreement limits the total size of pre-release
transactions and imposes a number of conditions on such transactions, such as
the need to receive collateral, the type of collateral required and the
representations required from brokers. The depositary bank may retain any
compensation earned as a result of engaging in the pre-release transactions.
Taxes
You will be responsible for the taxes and other governmental charges payable
on ADSs and the securities represented by ADSs. We, the depositary bank and the
custodian may deduct from any distribution the taxes and governmental charges
payable by holders and may sell any and all property on deposit to pay the
taxes and governmental charges payable by holders. You will be liable for any
deficiency if the sale proceeds do not cover the taxes that are due.
The depositary bank may refuse to issue ADSs, to deliver, transfer, split and
combine ADRs or to release securities on deposit until all taxes and charges
are paid by the applicable holder. The depositary bank and the custodian may
take reasonable administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you may be required
to provide to the depositary bank and to the custodian proof of taxpayer status
and residence and such other information as the depositary bank and the
custodian may require to fulfill legal obligations. You are required to
indemnify us, the depositary bank and the custodian for any claims with respect
to taxes based on any tax benefit obtained for you.
Also see "German Taxation" and "Taxation of U.S. Investors."
75
<PAGE>
Foreign Currency Conversion
The depositary bank will arrange for the conversion of all foreign currency
received into U.S. dollars if such conversion is practical, and it will
distribute the U.S. dollars in accordance with the terms of the deposit
agreement. You may have to pay fees and expenses incurred in converting foreign
currency, such as fees and expenses incurred in complying with currency
exchange controls and other governmental requirements.
If the conversion of foreign currency is not practical or lawful, or if any
required approvals are denied or not obtainable at a reasonable cost or within
a reasonable period, the depositary bank may take the following actions in its
discretion:
. convert the foreign currency to the extent practical and lawful and
distribute the U.S. dollars to the holders for whom the conversion and
distribution is lawful and practical;
. distribute the foreign currency to holders for whom the distribution is
lawful and practical; and
. hold the foreign currency, without liability for interest, for the
applicable holders.
76
<PAGE>
THE GERMAN EQUITY MARKET
The Frankfurt Stock Exchange and the Neuer Markt
The Frankfurt Stock Exchange is the most significant of the eight German
stock exchanges, handling 17,022 securities in 1998. In Germany, total turnover
in equities grew by more than 40% in 1997, to DM 1.4 trillion, of which DM 1.2
trillion were attributed to the Frankfurt Stock Exchange. The Frankfurt Stock
Exchange has become the second largest stock exchange in Europe and the fourth
largest stock exchange in the world in terms of turnover, ranked after the New
York Stock Exchange, The Nasdaq Stock Market's National Market and the London
Stock Exchange.
The Neuer Markt of the Frankfurt Stock Exchange is a trading segment that was
launched in March 1997. It is designed for innovative, small to mid-size
companies in high growth industries or in traditional industries that have an
international orientation and that are willing to provide active investor
relations. In 1998, the index of the Neuer Markt growth segment closed at
2,744.55 points, up 174% from 1997. Issuers are requested to provide investors
on an ongoing basis with information such as annual and quarterly reports,
including cash flow statements, and a corporate action timetable. This
information is required to be submitted in English and German as well as in
electronic form, thus enabling the stock exchange to disseminate corporate
information via the Internet.
Trading on the Neuer Markt
Trading of ordinary shares listed on the Neuer Markt takes place on the floor
of the stock exchange, but is computer-aided. Markets in listed securities are
generally of the auction type, but listed securities also change hands in
inter-bank dealer markets off of the Frankfurt Stock Exchange. Price formation
is determined by open bid by state-appointed specialists (Amtliche Makler) who
are themselves exchange members, but who do not, as a rule, deal with the
public. Prices of currently traded securities are displayed continuously during
trading hours. At the half-way point of each trading day, a single standard
quotation is determined for all ordinary shares.
The members' association of the Frankfurt Stock Exchange publishes a daily
list of prices which contains the standard prices of all traded securities, as
well as their highest and lowest quotations during the past year.
Ordinary shares traded on the Neuer Markt can also be accepted for trading on
a computer-aided system called Xetra. Trading on Xetra takes place on every
business day between 9:00 a.m. and 8:00 p.m., Frankfurt time. Trading within
the Xetra system is done by banks and securities dealers who have been admitted
to trading on at least one of Germany's stock exchanges. Xetra is integrated
into the Frankfurt Stock Exchange and is subject to its rules and regulations.
Transactions on the Frankfurt Stock Exchange, including transactions within
the Xetra system, are settled on the second business day following trading.
Transactions for large volumes or involving foreign parties off of the
Frankfurt Stock Exchange are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
Following a recent amendment to the rules governing securities trading by
German banks (Sonderbedingungen fur Wertpapiergeschafte), customer orders to
buy or sell listed securities must be executed on a stock exchange, unless the
customer instructs otherwise. Trading can be suspended by the Frankfurt Stock
Exchange if orderly stock exchange trading is temporarily endangered or if a
suspension is in the public interest.
A specific feature of the Neuer Markt of the Frankfurt Stock Exchange is the
introduction of the obligatory "Designated Sponsors," or market-maker, an
entity admitted for trading at the Frankfurt Stock Exchange which provides
additional liquidity by quoting prices for the buying and selling of ordinary
shares on request. Each issuer on the Neuer Markt of the Frankfurt Stock
Exchange has to nominate at least two Designated Sponsors which will not only
ensure that there is sufficient liquidity for its ordinary shares, but also
serve as consultants on all stock market related matters for the issuer. Neuer
Markt equity listings are admitted to electronic trading through Xetra.
77
<PAGE>
Trading on German stock exchanges is regulated by, among others, the Federal
Supervisory Office for Securities Trading (Bundesaufsichtsamt fur den
Wertpapierhandel).
Our ADSs have been approved for listing on The Nasdaq Stock Market's National
Market under the symbol "ISHP" and the ordinary shares are listed on the Neuer
Markt of the Frankfurt Stock Exchange. Ordinary shares trade on the Neuer Markt
under the symbol "ISH." The Neuer Markt is still a relatively new market.
Accordingly, we cannot assure you that an active trading market for the
ordinary shares will be maintained on the Neuer Markt or that the Neuer Markt
will not experience problems in settlement or clearance as trading develops.
Any such delays or problems could adversely affect the market price of the
ordinary shares and in turn our ADSs. Persons proposing to trade the ordinary
shares on the Neuer Markt should inform themselves about the potential costs of
such trading.
78
<PAGE>
GERMAN TAXATION
The following is a summary of certain German tax provisions. It does not
purport to comprise all the information that could be relevant to a decision to
purchase Shares in the Offering. The summary is based on the tax provisions
applicable in Germany at the time this prospectus is printed; these may be
subject to amendments, possibly with retroactive effect. Apart from certain
explanatory details the summary discusses only the corporation tax, income tax
and dividend withholding tax as applied to dividends and capital gains, as well
as the inheritance and gift tax, and is limited to certain aspects of these
types of taxes. This summary does not deal with the individual tax
circumstances of a particular shareholder. In particular, this discussion does
not comprehensively treat the tax considerations that will be relevant to U.S.
investors; see "Taxation of U.S. Investors". Any person who is in doubt as to
his tax position is urged to consult his tax advisor.
Before explaining the German taxation of shareholders, the taxation of the
Company shall be briefly surveyed.
Taxation of the Company
In principle, German corporations are subject to a corporation tax on
retained profits at a rate of 40% and on distributed profits at a rate of 30%.
Dividends received by the corporation from foreign subsidiaries and profits
from foreign permanent establishments may be exempt from the German corporation
tax in whole or in part. At present, a solidarity surcharge
(Solidaritatszuschlag) of 5.5% is levied on the German corporation tax. For
distributed profits earned in or after 1999, the effective tax rate for the
corporation tax and solidarity surcharge is 31.94%. The effective tax rate is
higher than the combined total nominal tax burden of 31.65% (30% plus 5.5%
thereon), since the solidarity surcharge is not a tax-deductible item and is,
therefore, subject to the corporation tax and not directly included in the
corporation tax credit system (see "Taxation of Dividends").
Moreover, German corporations are subject to a profit-related trade tax on
income that, depending on the municipality in which the corporation maintains
its permanent establishment(s), generally ranges from 15% to 21% of the trade
taxable base. In computing the corporation tax of a corporation, the trade tax
on income is deductible as a business expense.
Taxation of Dividends
In principle, dividends paid to shareholders resident in Germany are subject
to income or corporation tax in the hands of these shareholders. Under certain
circumstances, exceptions apply to dividend payments from tax-exempt foreign
earnings to shareholders who are subject to corporation tax and have their seat
or place of management in Germany or that are deemed repayments of capital for
tax purposes. The tax is calculated at regular tax rates. However, dividend
payments to individuals are tax-free to the extent that such payments, together
with other investment income, do not exceed an annual exemption amount of DM
3,100 (DM 6,200 in case of a married couple filing jointly). A solidarity
surcharge, currently of 5.5%, is levied on the shareholder's assessed income or
corporation tax liability.
Generally, shareholders resident in Germany are entitled to a credit of the
corporation tax paid by the corporation amounting to three sevenths of the
declared dividend. This tax credit reduces the shareholder's income or
corporation tax burden. The tax credit also reduces the basis of the solidarity
surcharge that is levied on the shareholder's income or corporation tax at a
rate of 5.5%. Shareholders not resident in Germany are not entitled to such tax
credit. Persons resident in Germany are also not entitled to the tax credit in
certain cases, e.g., to the extent that profits are distributed that are tax-
exempt at the corporate level by virtue of a double taxation convention or to
the extent that the dividend is deemed a repayment of capital for tax purposes.
In addition to the corporation tax, dividends paid by a German corporation
are subject to a withholding tax of 25% of the declared dividend plus a
solidarity surcharge of 5.5% thereon, i.e. 1.375% of the dividend. The
withholding tax and the solidarity surcharge thereon will be credited against
the income or corporation tax
79
<PAGE>
liability of a shareholder resident in Germany, or refunded to him so that they
have the effect of a tax prepayment. Shareholders resident in Germany who have
furnished their custodian bank with a certificate stating that they do not need
to a file tax return (Nicht-Veranlagungsbescheinigung), which is issued by the
tax office of their statutory seat or domicile, will receive the dividend
without deduction of withholding tax and the solidarity surcharge, plus a cash
payment equal to the creditable corporation tax. The same applies if a
withholding certificate (Freistellungsauftrag) has been filed with the
custodian bank, but only to the extent that the exemption amount shown on its
face has not yet been exhausted. Subject to certain requirements, the custodian
bank may pay dividends to a tax-exempt organization without deduction of
withholding tax or the solidarity surcharge, provided it is furnished with
appropriate documentation (Nicht-Veranlagungsbescheinigung); however, in this
case, no credit for or refund of the corporation tax is available.
For shareholders resident in Germany who have not provided their custodian
bank with a Nicht-Veranlagungsbescheinigung or who have already exhausted the
exemption amount shown on their withholding certificate, the corporation tax
levied on the corporation is neutralized under the corporation tax credit
system, i.e. the dividend income will be taxed at the shareholder's individual
income or corporation tax rate. For this purpose the shareholder will be taxed
on the basis of a gross dividend (declared dividend plus corporation tax
credit). A shareholder resident in Germany will receive 51.54% of the gross
dividend in cash and tax credits equal to 48.46% of the gross dividend (17.5%
as tax credit for dividend withholding tax (plus 0.96% tax credit for the
solidarity surcharge thereon) and 30% as a tax credit for the corporation tax
paid by the corporation). If the shareholder's applicable income or corporation
tax rate (plus solidarity surcharge) on the gross dividend is less than the tax
credit of 48.46%, the excess tax credit will be refunded to him. If the
personal income or corporation tax rate is higher, additional income tax or
corporation tax plus solidarity surcharge will be levied from the shareholder.
Individuals resident in Germany whose shares form part of the assets of a
trade or business and corporations and partnerships conducting a trade or
commercial business are subject to a trade tax on income on the gross dividend
received if their shareholding is less than one tenth of the issued share
capital of the corporation at the beginning of the calendar year. In general,
the trade tax rate is 15% to 21%, depending on the local multiplier of the
municipalities in which the shareholder maintains permanent establishment(s).
The trade tax is a deductible expense for income and corporation tax purposes.
Under the provisions of a double taxation convention applicable to the
particular case, the German withholding tax rate on a dividend paid by a
corporation resident in Germany to a nonresident shareholder may be reduced. As
a rule, a shareholder entitled to a reduced withholding tax rate under a double
taxation convention must, however, apply to the German tax authorities for a
refund of the amount by which the dividend withholding tax and solidarity
surcharge thereon exceed the amount which may be levied in accordance with the
double taxation convention. Only if further prerequisites are met may the
corporation initially apply a reduced withholding tax rate.
In certain cases, the dividend withholding tax may be reduced to zero.
Essentially, this applies if the shareholder is a corporation resident not in
Germany but in another Member State of the European Union and if certain
further requirements are met.
If the Shares form part of the assets of a fixed base or permanent
establishment in Germany of a shareholder who is not a resident of Germany,
such shareholder will be taxed similarly to a shareholder resident in Germany
whose shares form part of the assets of a trade or business. In principle, this
shareholder may credit taxes against his final tax liability in the same manner
as a shareholder resident in Germany. Trade tax on income will be imposed under
the same circumstances and at the same rates as applicable to shareholders
resident in Germany. If the shareholder is an individual, profits derived from
a fixed base or permanent establishment in Germany are subject to income tax at
the rate applicable to such shareholder.
The tax rate for shareholders not resident in Germany and subject to
corporation tax amounts to 40% (plus 5.5% solidarity surcharge thereon) if the
shares form part of the assets of a permanent establishment in
80
<PAGE>
Germany. To the extent that the tax credits exceed the corporation tax plus the
solidarity surcharge due on the profit of the permanent establishment, any
excess amount will be refunded. No withholding tax will be levied on the German
permanent establishment's transfer of a dividend received to the corporation's
foreign head office.
Taxation of Capital Gains
A shareholder resident in Germany is subject to taxation in Germany on
capital gains from the disposition of Shares if the disposition is made within
one year of the acquisition of the Shares.
Irrespective of whether the shareholder is resident in Germany, under its
domestic tax law Germany taxes capital gains from the disposition of Shares, if
the shareholder at any time during the five years preceding the disposition
held, directly or indirectly, at least 10% of the corporation's issued share
capital. If the shareholder acquired the shares without consideration during
the five years preceding the disposition, the capital gains is also subject to
tax if the shareholder's predecessor in title (or one of the predecessors, if
several successive transfers without consideration took place) held at least
10% of the corporation's issued share capital at any time during the five years
preceding the disposition. If the shares are disposed of more than one year
after their acquisition, upon request a capital gain will be subject to tax at
a reduced rate, determined by the tax rate applicable to the first fifth of the
capital gain but taking into account the tax rate applicable to other income of
the taxpayer. Many double taxation conventions entered into by Germany exempt
nonresident shareholders from German income or corporation tax on capital gains
from the disposition of shares, unless the shares form part of the assets of a
permanent establishment or a fixed base in Germany.
However, a shareholder resident in Germany is always taxed on capital gains
in Germany, irrespective of the holding period and the size of his
shareholding, if the shares form part of the assets of a trade or business.
This applies accordingly to shareholders who are not resident in Germany, if
the shares form part of the assets of a permanent establishment or a fixed base
in Germany.
Inheritance and Gift Tax
According to German tax law, the transfer of Shares at death or by way of
gift is generally subject to German inheritance and gift tax, if:
(i) the Shares form part of the assets of a trade of business of the
decedent or donor for which a permanent establishment is maintained or a
permanent representative has been appointed in Germany;
(ii) the decedent or donor, or the heir at the time of the death or the
other acquirer at the time of the gift, has his domicile or habitual abode
in Germany, or is a German national not resident in Germany who has not
resided continuously abroad for more than five years; or
(iii) the decedent or donor, alone or together with related parties
directly or indirectly, held at least one tenth of the issued share capital
of a joint stock corporation having its statutory seat or place of
management in Germany.
The few double taxation conventions on inheritance and gift tax currently in
force (e.g., the convention entered into with the United States) usually
provide that the German inheritance and gift tax may only be levied in cases of
(i) and, subject to certain restrictions, (ii).
Other German Taxes
The sale or transfer of shares is not subject to a transfer tax, stamp duty
or similar tax in Germany. At present, net worth tax and trade tax on capital
are not levied. The unification or transfer of 95% or more of the Shares may
trigger land transfer tax.
81
<PAGE>
Reform of Corporate Taxation
The German Federal Parliament (Bundestag) and the German Federal Council
(Bundesrat) passed a bill to reduce the tax rates and to reform the taxation of
enterprises (Steuersenkungsgesetz--StSenkG). The amendments will in parts
become effective already as of January 1, 2001, and in other parts in the
following years. In case of fiscal years deviating from calendar year and in
case of non-German corporations special rules about the applicability apply.
Among other things, the changes include the following:
. The corporation tax credit system will be abolished within a
transitional period. As a result, at the shareholder's level a credit of
the corporation tax paid by the company will no longer be granted.
. Retained and distributed profits of a corporation will be taxed at a
uniform corporation tax rate of 25%.
. The withholding tax rate on dividends will be reduced to 20%.
. The marginal income tax rate for individuals will be reduced to 48.5%
from the calendar year 2001 on, to 47% from the calendar year 2003 on
and to 43% from 2005 on. The Governement of the Federal Republic of
Germany released a draft bill, that contains a further reduction of the
marginal income tax rate to 42% from 2005 on.
. For shareholders resident in Germany, who are not subject to corporation
tax, the so-called "half-income" method (Halbeinkunfteverfahren) will
apply in principle as of January 1, 2002. Thereby, only half of any
dividend payments received will be subject to income tax. However, only
half of the expenses related to such investments are deductible.
. As of January 1, 2002 dividend payments made to a shareholder domiciled
in Germany and subject to corporation tax or to a corporate shareholder
not resident in Germany which holds the Shares in the assets of a
permanent establishment in Germany, will be tax exempt. However, 5% of
the dividends paid by a foreign company are subject to German
corporation tax.
. As of January 1, 2002, capital gains from a disposal of Shares by an
individual will be subject to tax even after the expiration of a one-
year holding period, if such a shareholder directly or indirectly held
shares representing an interest in the corporation's share capital of at
least 1% at any time within the last five years. For taxable capital
gains of a shareholder not subject to corporation tax the "half-income"
method will also apply. For a shareholder domiciled in Germany and
subject to corporation tax, or for a corporate shareholder not domiciled
in Germany which holds the Shares as assets of a permanent establishment
in Germany, capital gains will only be tax-exempt after a minimum
holding period of one year.
82
<PAGE>
TAXATION OF U.S. INVESTORS
General
The following is a summary of material U.S. and German tax considerations
relating to the ownership and disposition of ordinary shares or ADSs by U.S.
Holders, which we define below. As discussed below, our discussion does not
purport to be comprehensive, but we have provided a materially complete
description of the tax considerations which may be relevant to the ownership
and disposition of ordinary shares or ADSs by U.S. Holders. The discussion is
based on tax laws of the United States and Germany as in effect on the date
hereof, including the Convention Between the United States of America and The
Federal Republic of Germany for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital and to
Certain other Taxes, which we refer to as the Income Tax Treaty, and the
Convention Between the United States of America and the Federal Republic of
Germany for the Avoidance of Double Taxation with Respect to Taxes on Estates,
Inheritances, and Gifts, which we refer to as the Estate Tax Treaty. These laws
are subject to change, possibly with retroactive effect.
In general, a "U.S. Holder" is any beneficial owner of shares or ADSs:
. who is a resident of the United States for the purposes of the Income
Tax Treaty;
. who is not also a resident of the Federal Republic of Germany for the
purposes of the Income Tax Treaty;
. who owns the shares or ADSs as capital assets;
. who owns, directly or indirectly, less than 10% of the voting stock;
. who does not hold shares as part of the business property of a permanent
establishment located in Germany or as part of a fixed base of an
individual located in Germany and used for the performance of
independent personal services; and
. who is entitled to benefits under the Income Tax Treaty with respect to
income and gain derived in connection with the shares or ADSs.
The discussion does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to the ownership and disposition of
shares or ADSs, and, in particular, it does not address United States federal
taxes other than income tax and German taxes other than income tax, gift and
inheritance taxes and capital tax. Moreover, the discussion does not consider
any specific facts or circumstances that may apply to a particular U.S. Holder.
Some U.S. Holders including tax-exempt entities, certain insurance companies,
traders in securities that elect to mark to market, investors that actually or
constructively own 10% or more of the voting shares, holders subject to the
alternative minimum tax, securities broker-dealers and certain other financial
institutions, holders who hold the shares or ADSs in a hedging transaction or
as part of a straddle or conversion transaction or holders whose functional
currency is not the U.S. dollar, may be subject to special rules. Prospective
investors are urged to consult their tax advisors regarding the United States
federal, state, local, German and other tax consequences of owning and
disposing of shares or ADSs. In particular, prospective investors are urged to
consult their tax advisers to confirm their status as U.S. Holders and the
consequences to them if they do not so qualify.
In general, for United States federal income tax purposes, holders of ADRs
evidencing ADSs will be treated as the owners of the shares represented by such
ADSs. Unless the context otherwise requires, all references in this section to
"shares" are deemed to refer likewise to ADSs representing an ownership
interest in shares.
Taxation of Dividends
For United States federal income tax purposes, U.S. Holders must include in
income, as foreign source ordinary income, the gross amount of any dividend by
us, as determined before reduction for German
83
<PAGE>
withholding taxes to the extent paid or deemed paid out of our current or
accumulated earnings and profits as determined for United States federal income
tax purposes. As discussed in more detail below, the amount of the dividend
shall include, where applicable, the German tax credit-related refund, under
the Income Tax Treaty, equal to 5% of the gross amount of the dividend which is
treated for United States federal income tax purposes as a distribution equal
to 5.88% of the gross amount of the dividend actually paid.
Dividends paid in Deutsche marks to a U.S. Holder of shares will be included
in income in a U.S. dollar amount calculated by reference to the exchange rate
in effect on the date the dividends, including the deemed refund of German
corporate tax, are received by the U.S. Holder or, in the case of ADSs, by the
depositary bank. If dividends paid in Deutsche marks are converted into U.S.
dollars on the date received, U.S. Holders generally should not be required to
recognize foreign currency gain or loss in respect of the dividend income.
Generally, any gain or loss resulting from currency exchange fluctuations,
during the period from the date the dividend payment is includible in income to
the date that payment is converted into U.S. dollars, will be treated as
ordinary income or loss. Such gain or loss will generally be considered income
from sources within the United States for foreign tax credit limitation
purposes.
U.S. Holders may be eligible for a United States foreign tax credit for
certain German income taxes paid on these dividends. U.S. Holders should be
aware that under no circumstances will a United States foreign tax credit be
available in respect of any portion of a foreign tax which the U.S. Holder is
entitled to have refunded, whether pursuant to the terms of a tax treaty or
foreign law. For foreign tax credit limitation purposes, dividends paid by us
will be considered income from sources outside the United States, but generally
will be treated separately, together with other items of "passive income," or
in the case of certain holders "financial services income." Dividends paid by
us will not be eligible for the dividends-received deduction generally allowed
to United States corporations in respect of dividends received from United
States corporations.
Under German law, German corporations (as described in "German Taxation--
Taxation of Dividends") generally are required to withhold tax on dividends in
a total amount equal to 26.375% of the gross amount paid to resident and
nonresident shareholders, consisting of a 25% withholding tax plus a 1.375%
surtax. A partial refund of this withholding tax can be obtained by U.S.
Holders under the Income Tax Treaty.
In the case of a U.S. Holder, the German withholding tax is partially
refunded under the Income Tax Treaty to reduce the withholding tax to 15% of
the gross amount of the dividend. In addition, so long as the German imputation
system provides German resident individual shareholders with a tax credit for
corporate taxes on dividends paid by German corporations, the Income Tax Treaty
provides that U.S. Holders are entitled to a further refund equal to 5% of the
gross amount of the dividend. For United States federal income tax purposes,
the benefit resulting from this refund is treated as a dividend received by the
U.S. Holder with respect to German corporate taxes equal to 5.88% of the gross
amount of the dividend actually paid, subject to a 15% German withholding tax
equal to 0.88% of the dividend actually paid, that is, 15% of 5.88%.
Thus, for each $100 of gross dividend paid by us to a U.S. Holder, such
holder will initially receive $73.625, that is, $100 less 26.375% withholding
tax. The dividend after partial refund of the withholding tax under the Income
Tax Treaty will be subject to a German withholding tax of $15. If the U.S.
Holder also applies for the additional 5% refund, German withholding tax is
effectively reduced to $10. The cash received per $100 of gross dividend
therefore is $90. For United States federal income tax purposes, the U.S.
Holder will be treated as having received a total dividend of $105.88, to the
extent such amount is paid out of our current and accumulated earnings and
profits as determined for United States federal income tax purposes, consisting
of the $100 gross dividend and the deemed refund of German corporate tax of
$5.88. The notional $105.88 dividend is deemed to have been subject to German
withholding tax of $15.88. Thus, for each $100 of gross dividend, the U.S.
Holder will include $105.88 in gross income and will be entitled to a foreign
tax credit of $15.88, subject to the general limitations of United States
federal income tax law.
Effective January 1, 1998, a 5.5% surtax on the German withholding tax is
levied on dividend distributions paid by a German resident company. The surtax
amounts to 1.375%, that is, 5.5% x 25% of the
84
<PAGE>
gross dividend amount. Since the Income Tax Treaty limits the maximum amount
the German withholding tax, U.S. Holders are entitled to a full refund of this
surtax.
German Refund Procedures
In the case of U.S. Holders of ADSs, Citibank, which is the depositary bank,
and we will perform, on behalf of such U.S. Holders, certain administrative
functions necessary to obtain the 5% refund, the refund of the German
withholding tax in excess of 15%, and the refund of the 5.5% German surtax when
applicable. The following procedure is currently permitted by the German tax
authorities but that permission may be revoked, or the procedure may be
amended, at any time in the future.
In order to utilize this procedure, the U.S. Holder will be required to
submit the following items to Citibank, the depositary bank:
. a certification of their last filed U.S. federal income tax return from
the Internal Revenue Service on IRS Form 6166; and
. a complete and signed form, which will be provided to the U.S. Holder by
the depositary bank, stating basic information required for us to file
the German claim for refund form on behalf of the U.S. Holder
authorizing us to perform these procedures and agreeing that the German
tax authorities may inform the Internal Revenue Service of any refunds
of German taxes.
The depositary bank will provide the U.S. Holder with an unsigned request for
an IRS Form 6166 which the U.S. Holder will be required to file with the
Internal Revenue Service at the address specified below to obtain the Form
6166. The issued Form 6166 will be valid for a period of three years from the
date of the last filed return to which it relates.
The depositary bank will act on the signed authorization and receipt of IRS
Form 6166 prepare and file, on behalf of U.S. Holders, the German claim for
refund tax with the German tax authorities. The German tax authorities will
issue the refunds which will be denominated in Deutsche marks in the name of
the depositary bank which will convert the refunds into U.S. dollars and issue
corresponding checks to the U.S. Holders.
The claim for refunds must be submitted within four years of the end of the
calendar year in which the dividend is received. The depositary bank and we
anticipate filing the claims for refunds within a reasonable time after receipt
of the necessary documentation. U.S. Holders are urged to return the necessary
documentation to the depositary bank in a timely fashion.
U.S. Holders holding ADRs registered with brokers participating in the
Depositary Trust Company will not be able to utilize this procedure because
brokers use the Quick Conditional Refund process.
In order to obtain the five percent tax credit-related refund, the refund of
the German withholding tax in excess of 15%, and the refund of the 5.5% German
surtax, U.S. Holders of shares must submit the following items directly to the
German tax authorities:
. a claim for refund;
. the original bank voucher, or certified copy, issued by the paying
entity documenting the tax withheld; and
. an IRS Form 6166.
Refund claims will be made by Citibank on a special refund claim form, which
must be filed with the German tax authorities at the following address:
Bundesamt fur Finanzen, FriedhofstraBe 1, D-53225 Bonn, Germany. The refund
claim forms may be obtained from the German tax authorities at the same address
where the applications are filed, or from the Embassy of the Federal Republic
of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998.
85
<PAGE>
U.S. Holders may obtain a Form 6166, which is a certification of the U.S.
Holder's last filed United States federal income tax return, by filing a
request with the office of the Director of the Internal Revenue Service Center
at the following address: Internal Revenue Service Center, Philadelphia,
Pennsylvania, Foreign Certificate Request, P.O. Box 16347, Philadelphia, PA
19114-0447. Requests for certification are to be made in writing and must
include the U.S. Holder's name, social security number or employer
identification number, tax return form number, and tax period for which such
certification is requested. The Internal Revenue Service will send IRS Form
6166 directly to the U.S. Holder.
Refunds under the Income Tax Treaty are not available for shares held by a
U.S. Holder in connection with a permanent establishment or fixed base in
Germany.
Taxation of Capital Gains
German Taxation. Under the Income Tax Treaty, a U.S. Holder will not be
liable for German tax on capital gains realized or accrued on the sale or other
disposition of shares, unless the shares are held in connection with a
permanent establishment or fixed base in Germany.
United States Federal Income Taxation. Upon a sale or other disposition of
shares, a U.S. Holder will recognize gain or loss for United States federal
income tax purposes in an amount equal to the difference between the U.S.
dollar value of the amount realized and the U.S. Holder's tax basis, determined
in U.S. dollars, in the shares. Such gain or loss will generally be capital
gain or loss. In the case of certain non-corporate U.S. Holders, including
individuals, any capital gain will generally be subject to U.S. federal income
tax at preferential rates if specified minimum holding periods are met. In
addition, any gain or loss realized by a U.S. Holder on the sale or other
disposition of shares will generally be treated as U.S. source gain.
Passive Foreign Investment Company Status
We believe that we are not a passive foreign investment company, which we
refer to as a PFIC, for U.S. federal income tax purposes and do not expect to
become a PFIC in the year that includes this offering or in future years.
However, because this conclusion is a factual determination made annually and
because there are uncertainties in the application of the relevant rules, we
cannot assure you that we will not be considered to be a PFIC for any fiscal
year. In general, a non-U.S. corporation will be classified as a PFIC if either
(i) at least 75% of its gross income for a taxable year is passive income or
(ii) if the average quarterly value of assets held by it during a taxable year
which produce or are held for the production of passive income represents at
least 50% of the value of all of its assets. For this purpose, the corporation
must take into account a proportionate share of the income and assets of each
corporation in which it owns, directly or indirectly, at least a 25% interest.
If we were a PFIC, a U.S. Holder would generally be subject to special rules
with respect to (a) any gain realized on the sale or other disposition of the
shares and (b) any "excess distribution" by us to the U.S. Holder. An excess
distribution generally consists of distributions to the U.S. Holder on the
shares during a single taxable year that are greater than 125% of the average
annual distributions received by the U.S. Holder in the three preceding taxable
years or during the U.S. Holder's holding period for the shares, if shorter.
Under these rules:
. the gain or excess distribution would be allocated ratably over the U.S.
Holder's holding period for the shares;
. the amount allocated to the taxable year in which the gain or excess
distribution was realized would be taxable as ordinary income;
. the amount allocated to each prior year, with certain exceptions, would
be subject to tax at the highest tax rate in effect for that year; and
86
<PAGE>
. the interest charge generally applicable to underpayments of tax would
be imposed in respect of the tax attributable to each such year. Special
rules apply with respect to the calculation of the amount of the foreign
tax credit with respect to excess distributions by a PFIC.
In certain circumstances, a U.S. Holder, in lieu of being subject to the
passive foreign investment company rules discussed above, may make an election
to include gain on the stock of a passive foreign investment company as
ordinary income under a mark-to-market method provided that such stock is
regularly traded on a qualified exchange. Under current law, the mark-to-market
election may be available to a U.S. Holder since the ADSs will be listed on the
Nasdaq National Market, which constitutes a qualified exchange as designated in
the Code. There can be no assurances, however, that the ADSs will be "regularly
traded" on such exchange. It is intended that only the ADSs will be listed on
the Nasdaq National Market. The ordinary shares are listed on the Neuer Markt
of the Frankfurt Stock Exchange, which must meet certain trading, listing,
financial disclosure and other requirements to be treated as a qualified
exchange under applicable Treasury regulations for purposes of the mark-to-
market election, and no assurance can be given that the shares will be
"regularly traded" for purposes of the mark-to-market election.
If a U.S. Holder makes an effective mark-to-market election, the U.S. Holder
will recognize as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of
the passive foreign investment company shares or ADSs and the U.S. Holder's
adjusted tax basis in such shares or ADSs. Losses would be allowed only to the
extent of net mark-to-market gain previously included by the U.S. Holder under
the election for prior taxable years. A U.S. Holder's adjusted tax basis in
passive foreign investment company shares or ADSs will be increased by the
amount of any income inclusion and decreased by the amount of any deductions
under the mark-to-market rules.
If a U.S. Holder makes a mark-to-market election, it will be effective for
the taxable year for which the election is made and all subsequent taxable
years unless the shares or ADSs are no longer regularly traded on a national
securities exchange or the Internal Revenue Service consents to the revocation
of the election. A mark-to-market election is subject to complex and specific
rules and requirements, and U.S. Holders are urged to consult their tax
advisors about the availability of the mark-to-market election and whether
making the election would be advisable in their particular circumstances.
If we were a PFIC, a U.S. Holder would be required to make an annual return
on IRS Form 8621 regarding distributions received with respect to shares and
any gain realized on the disposition of shares.
Gift, Estate and Inheritance Taxes
The Estate Tax Treaty provides that an individual whose domicile is
determined to be in the United States for purposes of the treaty will not be
subject to German inheritance and gift tax, or the equivalent of the United
States federal estate and gift tax, on the individual's death or making of a
gift unless the shares are part of the business property of a permanent
establishment located in Germany or are part of the assets of a fixed base of
an individual located in Germany and used for the performance of independent
personal services. An individual's domicile in the United States, however, does
not prevent imposition of German inheritance and gift tax with respect to an
heir, donee, or other beneficiary who is domiciled in Germany at the time the
individual died or the gift was made.
The Estate Tax Treaty also provides a credit against United States federal
estate and gift tax liability for the amount of inheritance and gift tax paid
to Germany, subject to certain limitations, in a case where the shares are
subject to both German inheritance or gift tax and United States federal estate
or gift tax.
Other German Taxes
There are no German transfer, stamp or other similar taxes that would apply
to U.S. Holders who purchase or sell shares.
87
<PAGE>
U.S. Information Reporting and Backup Withholding
Dividend payments on the shares and proceeds from the sale, exchange or
redemption of shares may be subject to information reporting to the IRS and
possible U.S. backup withholding at a 31% rate. Backup withholding will not
apply, however, to a holder who furnishes a correct taxpayer identification
number or certificate of foreign status and makes any other required
certification or who is otherwise exempt from backup withholding. Persons
required to establish their exempt status generally must provide such
certification on IRS Form W-9, entitled Request for Taxpayer Identification
Number and Certification, in the case of U.S. persons and on IRS Form W-8 BEN,
entitled Certificate of Foreign Status, in the case of non-U.S. persons.
Finalized U.S. Department of Treasury regulations, which are applicable to
payments made after December 31, 2000, have generally expanded the
circumstances under which information reporting and backup withholding may
apply unless the holder provides the information described above.
Amounts withheld as backup withholding may be credited against a holder's
U.S. federal income tax liability, and a holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information. U.S. Holders of shares should consult their tax advisors regarding
the application of the information reporting and backup withholding rules.
88
<PAGE>
LIMITATIONS AFFECTING SECURITY HOLDERS
At the current time, Germany does not restrict the export or import of
capital, except for investments in Iraq and Libya in accordance with applicable
resolutions adopted by the United Nations and the European Union. However, for
statistical purposes only, every individual or corporation residing in Germany
must report to the German Central Bank (Bundesbank), subject only to certain
immaterial exceptions, any payment received from or made to an individual or a
corporation resident outside Germany if such payment exceeds DM 5,000 (or the
equivalent in a foreign currency). In addition, German residents must report
any claims against or any liabilities payable to nonresidents if such claims or
liabilities, in the aggregate, exceed DM 3 million (or the equivalent in a
foreign currency) during any one month. German residents must also report any
direct investment outside Germany if such investment exceeds DM 100,000.
There are no limitations on the right of non-resident or foreign owners to
hold or vote our shares or ADSs imposed by German law or the articles of
association.
89
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated September 28, 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Chase Securities
Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the
following respective number of ADSs:
<TABLE>
<CAPTION>
Number
Underwriter of ADSs
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation................................ 1,547,700
Chase Securities Inc.................................................. 810,700
U.S. Bancorp Piper Jaffray Inc........................................ 589,600
ABN AMRO Rothschild (a division of ABN AMRO Incorporated)............. 33,500
Adams, Harkness & Hill, Inc........................................... 33,500
Banc of America Securities LLC........................................ 33,500
Dain Rauscher Incorporated............................................ 33,500
Deutsche Bank Securities Inc.......................................... 33,500
E*Offering Corp....................................................... 33,500
First Union Securities, Inc........................................... 33,500
Invemed Associates LLC................................................ 33,500
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... 33,500
Prudential Securities Incorporated.................................... 33,500
Tucker Anthony Incorporated........................................... 33,500
Wit SoundView Corporation............................................. 33,500
---------
Total............................................................... 3,350,000
=========
</TABLE>
Investors may request delivery in the form of ordinary shares rather than
ADSs.
The underwriting agreement provides that the underwriters are obligated to
purchase all the ADSs in the offering if any are purchased, other than those
ADSs 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
ADSs may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to 500,000 additional ADSs from us at the public offering price less
the underwriting discounts and commissions. This option may be exercised only
to cover any over-allotments of ADSs.
The underwriters propose to offer the ADSs initially at the public offering
price on the cover page of this prospectus and to selling group members at that
price less a concession of $1.15 per ADS. The underwriters and selling group
members may allow a discount of $0.10 per ADS on sales to other broker/dealers.
After the 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 ADS 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.................. $1.93 $1.93 $6,465,500 $7,430,500
Expenses payable by us.. $0.57 $0.49 $1,900,000 $1,900,000
</TABLE>
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock being offered.
90
<PAGE>
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 of 1933
relating to, any of our ordinary shares or securities convertible into or
exchangeable or exercisable for any of our ordinary shares, 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 90 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof or pursuant to our dividend reinvestment plan.
Members of our supervisory board and management board, our executive officers
and a security holder have agreed that they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any of our
ordinary shares or securities convertible into or exchangeable or exercisable
for any of our ordinary shares, 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
ordinary shares, whether any such aforementioned transaction is to be settled
by delivery of our ordinary shares or such other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 90 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering price
up to 250,000 ADSs for employees, directors and other persons associated with
us who have expressed an interest in purchasing securities in the offering. The
number of ADSs available for sale to the general public in the offering will be
reduced to the extent such persons purchase such reserved ADSs. Any reserved
ADSs not so purchased will be offered by the underwriters to the general public
on the same terms as the other ADSs.
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.
Our ordinary bearer shares are listed on the Neuer Markt of the Frankfurt
Stock Exchange under the symbol ISH. The ADSs have been approved for listing on
The Nasdaq Stock Market's National Market under the symbol "ISHP".
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under
the Securities Exchange Act of 1934.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of ADSs in excess of
the number of ADSs the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of ADSs over-allotted by the underwriters is not
greater than the number of ADSs that they may purchase in the over-
allotment option. In a naked short position, the number of ADSs involved
is greater than the number of ADSs in the over-allotment option. The
underwriters may close out any short position by either exercising their
over-allotment option and/or purchasing ADSs in the open market.
. Syndicate covering transactions involve purchases of the ADSs in the
open market after the distribution has been completed in order to cover
syndicate short positions. In determining the source of ADSs to close
out the short position, the underwriters will consider, among other
things, the price of ADSs available for purchase in the open market as
compared to the price at which they may purchase ADSs through the over-
allotment option. If the underwriters sell more ADSs than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying ADSs in the open market. A
naked short position is more likely to be created if the
91
<PAGE>
underwriters are concerned that there could be downward pressure on the
price of the ADSs in the open market after pricing that could adversely
affect investors who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the ADSs originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering transaction
to cover syndicate short positions.
. In passive market making, market makers in the ADSs who are underwriters
or prospective underwriters may, subject to limitations, make bids for
or purchases of ADSs until the time, if any, at which a stabilizing bid
is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may gave the effect of raising or maintaining the market price of our
ADSs or preventing or retarding a decline in the market price of the ADSs. As
a result, the price of the ADSs may be higher than the price that might
otherwise exist in the open market. These transactions may be effected on The
Nasdaq National Market, the Neuer Markt of the Frankfurt Stock Exchange 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 ADSs 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.
92
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the ADSs 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 ADSs are made. Any resale of the ADSs in Canada must be made under
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the ADSs.
Representations of Purchasers
By purchasing ADSs in Canada and accepting a purchase confirmation a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that
. the purchaser is entitled under applicable provincial securities laws to
purchase the ADSs without the benefit of a prospectus qualified under
those securities laws,
. where required by law, that the purchaser is purchasing as principal and
not as agent, and
. the purchaser has reviewed the text above under Resale Restrictions.
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of ADSs to whom the Securities Act (British Columbia) applies is
advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any ADSs acquired
by the purchaser in this offering. The 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 report must be filed for ADSs acquired
on the same date and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of ADSs should consult their own legal and tax advisors
with respect to the tax consequences of an investment in the ADSs in their
particular circumstances and about the eligibility of the ADSs for investment
by the purchaser under relevant Canadian legislation.
93
<PAGE>
LEGAL MATTERS
The validity of our shares and ADSs will be passed upon for us by Shearman &
Sterling, San Francisco, California, our United States counsel, and Haarmann,
Hemmelrath & Partner, our German counsel. The underwriters have been
represented by Wilson Sonsini Goodrich & Rosati, Palo Alto, California, United
States counsel, and Oppenhof Raedler, German counsel.
EXPERTS
The audited financial statements included in this prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen
Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form F-1 under
the Securities Act with respect to the securities offered in this offering.
This prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or other document filed as an exhibit to the
registration statement are materially complete but, in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the registration statement, and each such statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions.
Prior to this offering, we were not subject to the periodic reporting
requirements of the Securities Exchange Act. As a result of this offering, we
will become subject to those requirements and in accordance therewith will be
required to file reports and other information with the Commission. Reports and
other information filed with the Commission, including copies of the
registration statement, may be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of Commission located at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade
Center, New York, New York 10048. Copies of these materials at prescribed rates
will also be available by mail from the public reference branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
As a foreign private issuer, we are exempt under the Securities Exchange Act
from, among other things, the rules governing the furnishing and content of
proxy statements adopted under Section 14 of the Securities Exchange Act and
the short-swing profit recovery provisions set forth in Section 16 of the
Securities Exchange Act.
We will furnish Citibank, the depositary for our ADSs, with annual reports in
English, which will include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP. We
will also furnish to Citibank in English all notices of shareholders' meetings
and other reports and communications that are made generally available to our
shareholders. Citibank will make those notices, reports and communications
available to holders of ADSs in the manner we request and will mail to all
record holders of ADSs a notice containing a summary of the information
contained in any notice of a shareholders' meeting received by Citibank.
See "Description of American Depositary Shares."
94
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Convertible Redeemable Preferred Stock and
Shareholders' Equity.................................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To INTERSHOP Communications Aktiengesellschaft:
We have audited the accompanying balance sheets of INTERSHOP Communications
Aktiengesellschaft (a German corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations (as
restated--see Note 2), shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of INTERSHOP Communications
Aktiengesellschaft and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Nendza Bolash
Wirtschaftsprufer Certified Public
Accountant
Hamburg, September 26, 2000
F-2
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
As of
December 31, As of June 30,
---------------- ----------------
1998 1999 2000 2000
------- ------- ------- -------
(Euro) (Euro) (Euro) US$
(unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................. 34,185 12,065 18,054 17,151
Restricted cash............................ 114 1,437 1,507 1,431
Trade receivables, net of allowances for
doubtful accounts of (Euro)443,
(Euro)1,614, (Euro)2,250 and US$2,138,
respectively.............................. 5,886 23,333 38,170 36,261
Prepaid expenses and other current assets.. 2,542 3,870 16,366 15,549
------- ------- ------- -------
Total current assets..................... 42,727 40,705 74,097 70,392
PROPERTY AND EQUIPMENT, net................ 3,667 5,610 13,475 12,802
INVESTMENTS................................ 512 6,222 2,702 2,567
OTHER ASSETS............................... 315 1,252 1,518 1,442
------- ------- ------- -------
Total assets............................. 47,221 53,789 91,792 87,203
======= ======= ======= =======
CURRENT LIABILITIES
Current portion of capital lease
obligation................................ 25 33 -- --
Notes payable to shareholders.............. -- 7,000 16,759 15,921
Accounts payable........................... 2,710 5,149 9,053 8,600
Accrued liabilities........................ 3,224 9,960 22,930 21,784
Deferred revenue........................... 5,059 8,543 10,780 10,241
------- ------- ------- -------
Total current liabilities................ 11,018 30,685 59,522 56,546
NOTES PAYABLE TO SHAREHOLDERS AND CAPITAL
LEASE OBLIGATIONS......................... 230 20 20 19
DEFERRED REVENUE........................... 1,748 220 53 50
------- ------- ------- -------
Total liabilities........................ 12,996 30,925 59,595 56,615
------- ------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common stock, stated value (Euro)1--
authorized: 154,187,975 shares;
outstanding: 77,924,505, 84,390,520 and
85,355,940 shares at December 31, 1998 and
1999 and June 30, 2000, respectively...... 13,281 16,878 85,356 81,088
Paid-in capital............................ 50,225 48,169 -- --
Notes receivable from shareholders......... (1,428) (141) -- --
Deferred compensation...................... (799) (273) (131) (124)
Accumulated deficit........................ (27,017) (45,406) (53,618) (50,937)
Accumulated other comprehensive income
(loss).................................... (37) 3,637 590 561
------- ------- ------- -------
Total shareholders' equity .............. 34,225 22,864 32,197 30,588
------- ------- ------- -------
Total liabilities and shareholders'
equity.................................. 47,221 53,789 91,792 87,203
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-3
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended December 31, Ended June 30,
------------------------------------- ----------------------------
1997 1998 1999 1999 1999 2000 2000
------ ------- ------- ----------- ------- ----------- -------
(Euro) (Euro) (Euro) US$ (Euro) (Euro) US$
(As restated--see Note 2) (As restated--see Note 2)
----------------------------- ----------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses.......................... 2,947 11,295 29,534 28,057 10,515 39,950 37,952
Services, maintenance and other
revenues......................... 2,088 6,577 16,732 15,896 5,954 17,591 16,712
------ ------- ------- ------- ------- ------- -------
Total revenues................... 5,035 17,872 46,266 43,953 16,469 57,541 54,664
------ ------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses.......................... 442 1,742 4,786 4,547 1,346 3,280 3,116
Services, maintenance and other
revenues......................... 2,245 3,766 8,465 8,041 3,305 14,207 13,497
------ ------- ------- ------- ------- ------- -------
Total cost of revenues........... 2,687 5,508 13,251 12,588 4,651 17,487 16,613
------ ------- ------- ------- ------- ------- -------
Gross profit....................... 2,348 12,364 33,015 31,365 11,818 40,054 38,051
------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.......... 1,006 4,368 7,115 6,759 2,979 3,534 3,358
Sales and marketing............... 4,705 18,368 34,771 33,032 12,447 25,318 24,052
General and administrative........ 3,454 6,729 11,206 10,647 4,943 9,343 8,875
Legal settlement costs............ -- 1,866 -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
Total operating expenses......... 9,165 31,331 53,092 50,438 20,369 38,195 36,285
------ ------- ------- ------- ------- ------- -------
Operating income (loss)............ (6,817) (18,967) (20,077) (19,073) (8,551) 1,859 1,766
------ ------- ------- ------- ------- ------- -------
Other income (expense):
Interest income................... 122 968 515 489 289 225 213
Interest expense.................. (292) (797) (42) (40) 5 (139) (132)
Other income (expense)............ (28) 1,488 1,215 1,154 590 1,015 964
------ ------- ------- ------- ------- ------- -------
Total other income (expense),
net............................. (198) 1,659 1,688 1,603 884 1,101 1,045
------ ------- ------- ------- ------- ------- -------
Net income (loss).................. (7,015) (17,308) (18,389) (17,470) (7,667) 2,960 2,811
Accretion of redeemable preferred
stock............................. (149) (220) -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
Net income (loss) attributable to
common shareholders............... (7,164) (17,528) (18,389) (17,470) (7,667) 2,960 2,811
====== ======= ======= ======= ======= ======= =======
Net income (loss) per AG share
attributable to common
shareholders:
Basic............................ (0.24) (0.38) (0.23) (0.22) (0.10) 0.04 0.04
====== ======= ======= ======= ======= ======= =======
Diluted.......................... (0.24) (0.38) (0.23) (0.22) (0.10) 0.03 0.03
====== ======= ======= ======= ======= ======= =======
Net income (loss) per ADS share
attributable to common
shareholders:
Basic............................ (0.12) (0.19) (0.12) (0.11) (0.05) 0.02 0.02
====== ======= ======= ======= ======= ======= =======
Diluted.......................... (0.12) (0.19) (0.12) (0.11) (0.05) 0.01 0.01
====== ======= ======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding for
AG share calculation:
Basic............................ 30,170 45,965 79,883 79,883 77,945 82,771 82,771
====== ======= ======= ======= ======= ======= =======
Diluted.......................... 30,170 45,965 79,883 79,883 77,945 100,436 100,436
====== ======= ======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding for
ADS share calculation:
Basic............................ 60,340 91,930 159,766 159,766 155,890 165,542 165,542
====== ======= ======= ======= ======= ======= =======
Diluted.......................... 60,340 91,930 159,766 159,766 155,890 200,872 200,872
====== ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-4
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Statements of Convertible Redeemable Preferred Stock and
Shareholders' Equity
(in thousand euro, except share data)
<TABLE>
<CAPTION>
Convertible
Redeemable
Preferred Stock
-------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance,
December 31,
1996............ 33,600,000 1,355
Net loss........ -- --
Foreign currency
translation
adjustments..... -- --
Issuance of
common stock.... -- --
Exercise of
stock options... -- --
Issuance of
Series C
preferred
stock........... 6,000,000 3,482
Accretion of
preferred
stock........... -- 149
----------- ------
Balance,
December 31,
1997............ 39,600,000 4,986
=========== ======
Net loss........ -- --
Foreign currency
translation
adjustments..... -- --
Issuance of
common stock of
Inc............. -- --
Issuance of
Series D
preferred
stock........... 1,169,550 1,873
Issuance of
common stock for
cash to member
of supervisory
board...........
Issuance of
common stock for
cash and
forgiveness of
legal settlement
obligation...... -- --
Accretion of
preferred
stock........... -- 220
Conversion of
preferred stock
of subsidiary to
common stock of
parent, net of
share amounts
not converted... (37,841,550) (7,079)
Shares not
converted....... (2,928,000) --
Reclassification
for formation of
AG.............. -- --
Issuance of
common stock in
initial public
offering, net... -- --
Exercise of
stock options... -- --
Deferred
compensation.... -- --
Amortization of
deferred
compensation.... -- --
----------- ------
Balance,
December 31,
1998............ -- --
=========== ======
Net loss........ -- --
Foreign currency
translation
adjustments..... -- --
Unrealized gain
on marketable
securities...... -- --
Conversion of
common stock of
subsidiary to
common stock of
parent.......... -- --
Exercise of
stock options... -- --
Change in stated
value of common
stock........... -- --
Collections on
notes receivable
from
shareholders.... -- --
Amortization of
deferred
compensation.... -- --
----------- ------
Balance,
December 31,
1999............ -- --
=========== ======
Net income
(unaudited)..... -- --
Foreign currency
translation
adjustments
(unaudited)..... -- --
Unrealized loss
on marketable
security
(unaudited)..... -- --
Conversion of
preferred stock
of subsidiary to
common stock of
parent, net of
share amounts
not converted
(unaudited)..... -- --
Exercise of
stock options
(unaudited)..... -- --
Issuance of
common stock for
cash to member
of supervisory
board (net of
tax)
(unaudited)..... -- --
Collections on
notes
receivables from
stockholders
(unaudited)..... -- --
Amortization of
deferred
compensation
(unaudited)..... -- --
Allocation of
par value
resulting from
stock split
(unaudited)..... -- --
----------- ------
Balance, June
30, 2000
(unaudited)..... -- --
=========== ======
<CAPTION>
Shareholders' Equity
------------------------------------------------------------------------------------------------
Common Stock Notes Accumulated Total Compre-
---------------------------- Receivable Deferred Accum- Other Shareholders' hensive
Stated from Compen- ulated Comprehensive Equity Income
Shares Value APIC Shareholders sation Deficit Income (Loss) (Deficit) (Loss)
------------ ------ -------- ------------ -------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996............ 30,000,000 -- 51 -- -- (2,325) (40) (2,314) --
Net loss........ -- -- -- -- -- (7,015) -- (7,015) (7,015)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- (132) (132) (132)
Issuance of
common stock.... 112,500 -- 17 -- -- -- -- 17 --
Exercise of
stock options... 3,026,550 -- 400 (400) -- -- -- -- --
Issuance of
Series C
preferred
stock........... -- -- -- -- -- -- -- -- --
Accretion of
preferred
stock........... -- -- -- -- -- (149) -- (149) --
------------ ------ -------- ------------ -------- -------- ------------- ------------- --------
Balance,
December 31,
1997............ 33,139,050 -- 468 (400) -- (9,489) (172) (9,593) (7,147)
============ ====== ======== ============ ======== ======== ============= ============= ========
Net loss........ -- -- -- -- -- (17,308) -- (17,308) (17,308)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 135 135 135
Issuance of
common stock of
Inc............. 300,000 -- 186 -- -- -- -- 186 --
Issuance of
Series D
preferred
stock........... -- -- -- -- -- -- -- -- --
Issuance of
common stock for
cash to member
of supervisory
board........... 250,005 43 596 -- -- -- -- 639 --
Issuance of
common stock for
cash and
forgiveness of
legal settlement
obligation...... 900,450 153 5,661 -- -- -- -- 5,814 --
Accretion of
preferred
stock........... -- -- -- -- -- (220) -- (220) --
Conversion of
preferred stock
of subsidiary to
common stock of
parent, net of
share amounts
not converted... 37,841,550 -- 7,079 -- -- -- -- 7,079 --
Shares not
converted....... (13,230,000) -- -- -- -- -- -- -- --
Reclassification
for formation of
AG.............. -- 9,894 (9,894) -- -- -- -- -- --
Issuance of
common stock in
initial public
offering, net... 15,000,000 2,557 44,774 -- -- -- -- 47,331 --
Exercise of
stock options... 3,723,450 634 394 (1,028) -- -- -- -- --
Deferred
compensation.... -- -- 961 -- (961) -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- 162 -- -- 162 --
------------ ------ -------- ------------ -------- -------- ------------- ------------- --------
Balance,
December 31,
1998............ 77,924,505 13,281 50,225 (1,428) (799) (27,017) (37) 34,225 (17,173)
============ ====== ======== ============ ======== ======== ============= ============= ========
Net loss........ -- -- -- -- -- (18,389) -- (18,389) (18,389)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 652 652 652
Unrealized gain
on marketable
securities...... -- -- -- -- -- -- 3,022 3,022 3,022
Conversion of
common stock of
subsidiary to
common stock of
parent.......... 2,233,500 416 (416) -- -- -- -- -- --
Exercise of
stock options... 4,232,515 732 1,027 -- -- -- -- 1,759 --
Change in stated
value of common
stock........... -- 2,449 (2,449) -- -- -- -- -- --
Collections on
notes receivable
from
shareholders.... -- -- -- 1,287 -- -- -- 1,287 --
Amortization of
deferred
compensation.... -- -- (218) -- 526 -- -- 308 --
------------ ------ -------- ------------ -------- -------- ------------- ------------- --------
Balance,
December 31,
1999............ 84,390,520 16,878 48,169 (141) (273) (45,406) 3,637 22,864 (14,715)
============ ====== ======== ============ ======== ======== ============= ============= ========
Net income
(unaudited)..... -- -- -- -- -- 2,960 -- 2,960 2,960
Foreign currency
translation
adjustments
(unaudited)..... -- -- -- -- -- -- 474 474 474
Unrealized loss
on marketable
security
(unaudited)..... -- -- -- -- -- -- (3,521) (3,521) (3,521)
Conversion of
preferred stock
of subsidiary to
common stock of
parent, net of
share amounts
not converted
(unaudited)..... 280,000 56 (56) -- -- -- -- -- --
Exercise of
stock options
(unaudited)..... 685,420 137 3,150 -- -- -- -- 3,287 --
Issuance of
common stock for
cash to member
of supervisory
board (net of
tax)
(unaudited)..... -- -- 5,850 -- -- -- -- 5,850 --
Collections on
notes
receivables from
stockholders
(unaudited)..... -- -- -- 141 -- -- -- 141 --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- 142 -- -- 142 --
Allocation of
par value
resulting from
stock split
(unaudited)..... -- 68,285 (57,113) -- -- (11,172) -- -- --
------------ ------ -------- ------------ -------- -------- ------------- ------------- --------
Balance, June
30, 2000
(unaudited)..... 85,355,940 85,356 -- -- (131) (53,618) 590 32,197 (87)
============ ====== ======== ============ ======== ======== ============= ============= ========
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from
Deutsche marks into euros using the exchange rate as of January 1, 1999.
F-5
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended December 31, Ended June 30,
------------------------------------- ----------------------------
1997 1998 1999 1999 1999 2000 2000
------ ------- ------- ----------- ------- ----------- -------
(Euro) (Euro) (Euro) US$ (Euro) (Euro) US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... (7,015) (17,308) (18,389) (17,470) (7,667) 2,960 2,811
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation........................ 510 1,657 2,076 1,972 1,098 1,998 1,898
Provision for doubtful accounts..... 67 269 2,037 1,935 784 1,281 1,217
Amortization of deferred
compensation....................... -- 162 308 293 159 142 135
Legal settlement costs.............. -- 1,866 -- -- -- -- --
Change in:
Accounts receivable................. (2,244) (4,080) (18,220) (17,309) (5,081) (16,118) (15,312)
Prepaid expenses and other current
assets............................. (822) (1,695) (1,474) (1,400) 42 (12,496) (11,871)
Other assets........................ (38) (58) (830) (789) (610) (266) (252)
Accounts payable.................... 1,880 436 2,228 2,117 371 3,904 3,708
Deferred revenue.................... 9,819 (3,245) 1,542 1,465 (1,089) 2,070 1,967
Accrued expenses and other
liabilities........................ 451 1,013 6,298 5,983 (1,748) 6,321 6,005
------ ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities................. 2,608 (20,983) (24,424) (23,203) (13,741) (10,204) (9,694)
------ ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unaffiliated company.... -- (512) (1,199) (1,139) (1,199) -- --
Purchases of equipment................ (1,902) (3,302) (3,625) (3,443) (1,721) (9,863) (9,370)
Restricted cash....................... (117) -- (1,227) (1,166) (156) (70) (66)
Purchase of marketable securities..... -- -- (1,490) (1,416) -- -- --
------ ------- ------- ------- ------- ------- -------
Net cash used in investing
activities........................... (2,019) (3,814) (7,541) (7,164) (3,076) (9,933) (9,436)
------ ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred
stock................................ 3,377 1,873 -- -- -- -- --
Proceeds from sale of common stock.... -- 52,104 1,759 1,671 2,054 15,787 14,996
Proceeds from debt issuance........... 1,765 1,975 7,937 7,540 945 10,758 10,221
Collections on notes receivable from
shareholders......................... -- -- 1,287 1,223 -- 141 134
Repayments of indebtedness............ (1,027) (3,233) (1,144) (1,087) (1,435) (1,033) (981)
------ ------- ------- ------- ------- ------- -------
Net cash provided by financing
activities........................... 4,115 52,719 9,839 9,347 1,564 25,653 24,370
------ ------- ------- ------- ------- ------- -------
Effect of change in exchange rates on
cash................................. 140 1,205 6 6 2,370 473 449
------ ------- ------- ------- ------- ------- -------
Net change in cash and cash
equivalents.......................... 4,844 29,127 (22,120) (21,014) (12,883) 5,989 5,689
Cash and cash equivalents, beginning
of year.............................. 214 5,058 34,185 32,476 34,185 12,065 11,462
------ ------- ------- ------- ------- ------- -------
Cash and cash equivalents, end of
year................................. 5,058 34,185 12,065 11,462 21,302 18,054 17,151
====== ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-6
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of June 30, 1999 and 2000 unaudited)
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
INTERSHOP Communications AG, a German stock corporation (the "Company"), is
the successor to INTERSHOP Communications, Inc. and INTERSHOP Communications
GmbH. INTERSHOP Communications GmbH was originally founded in 1992 as
NetConsult Communications GmbH in Germany as a limited liability company.
NetConsult Communications GmbH established a wholly owned subsidiary,
NetConsult Communications, Inc., a Delaware corporation, in March 1996. These
companies were subsequently renamed INTERSHOP Communications GmbH and INTERSHOP
Communications, Inc. (the predecessor company), respectively.
In December 1996, INTERSHOP Communications, Inc. (U.S., Inc.) entered into a
share exchange agreement with INTERSHOP Communications GmbH (GmbH) to acquire
100% of GmbH's outstanding shares. The shareholders of GmbH's common shares
received common shares in U.S., Inc. Holders of existing debt (approximately
(Euro)1.1 million) and capital (approximately (Euro)200,000) in GmbH, totaling
approximately (Euro)1.4 million, received 6,720,000 shares of preferred stock
in U.S., Inc. The fair value of the preferred stock issued was equal to the
carrying value of the debt and capital for which it was exchanged. The share
exchange did not alter the relative ownership interest of the parent company.
Upon completion of the transaction, U.S., Inc. became the parent company of
GmbH and its subsidiaries.
On June 23, 1998, the holders of 79.26% of the shares of U.S., Inc. exchanged
their shares of preferred and common stock of U.S., Inc., totaling 20,591,348,
into 61,729,050 shares of the Company. As a result of this transaction, U.S.,
Inc. became a majority-owned subsidiary of the Company. Two stockholders,
including Stephan Schambach, our founder and Chief Executive Officer, did not
contribute all of their shares of U.S., Inc. due to certain tax consequences,
and, as of June 30, 2000, still hold 16.2% and 1.5%, respectively, of U.S.,
Inc.'s common stock. These two stockholders are entitled to exchange their
shares in U.S., Inc. for shares in the Company at a ratio of 1:3, using
conditional capital specifically approved for this purpose. The instruments
held by these individuals are considered to be part of the majority interest in
AG given the related party nature of the holdings, their conversion rights and
their probable conversion, given the fact that they are subject to repurchase
at US $0.01 per share if not converted by 2004. Accordingly, the cost basis of
such shares is included in additional paid in capital in the accompanying
consolidated financial statements. Conversions of U.S., Inc. shares to AG
shares subsequent to the initial conversion in June 1998 are treated as an
increase to the stated value of the common stock and a corresponding decrease
to additional paid in capital. During 1999, these stockholders converted
744,500 common shares of U.S., Inc. for 2,233,500 shares of the Company. During
the first six months of 2000, these stockholders converted 93,333 common shares
of U.S., Inc. for 280,000 shares of the Company. As of June 30, 2000, these
stockholders held 4,548,167 shares in U.S., Inc., and these shares are
convertible into 13,644,500 shares of the Company at any time. If these two
shareholders were to have converted their shares as of June 30, 2000, they
would own approximately 13.6% of the Company.
The accompanying consolidated financial statements reflect the consolidated
results of the Company and its wholly and majority owned subsidiaries, which
have been prepared according to United States generally accepted accounting
principles ("U.S. GAAP"). All significant intercompany transactions and
balances between the companies have been eliminated.
The Company has previously prepared and reported its consolidated financial
statements as of and for the year ended December 31, 1997 in U.S. Dollars, as
the parent company at that time was U.S., Inc. These financial statements were
restated and presented in Deutsche marks ("DM") after the Company acquired the
majority of the outstanding shares of U.S., Inc. in 1998. With the introduction
of the euro ((Euro)) on January 1, 1999, the Company has elected to present the
accompanying consolidated financial statements in euro.
F-7
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Accordingly, the Deutsche mark consolidated financial statements for each
period presented have been restated into euro using the Deutsche mark/euro
exchange rate as of January 1, 1999 of (Euro)1 = DM 1.95583. The Company's
restated financial statements in euro depict the same trends as would have been
presented if it had continued to present its consolidated financial statements
in Deutsche marks. The consolidated financial statements will, however, not be
comparable to financial statements for periods prior to January 1, 1999 in euro
of other companies that previously reported their financial information in a
currency other than Deutsche marks.
The financial information expressed in US Dollars is presented for the
convenience of the reader and is translated from euro at the Noon buying rate
in New York City for cable transfers in euro as certified for custom purposes
by the Federal Reserve Bank of New York on June 30, 2000 which was (Euro)1.00
to US$0.95. The translated amounts should not be construed as a representation
that the euro has been, could have been, or could be in the future, converted
into US Dollars at this or any other rate of exchange.
Unless otherwise noted, all references to the "Company" refer to INTERSHOP
Communications AG and its subsidiaries, as well as its predecessors. The
Supervisory Board has authorized the filing of a registration statement with
the U.S. Securities and Exchange Commission to register shares of its common
stock in the form of American Depositary Shares ("ADSs"). Each ADS will
represent 1/2 of one AG share.
The Company is a global provider of electronic commerce software applications
that enable businesses to sell their products and services over the Internet.
The Company's products can be integrated with existing business systems to
allow its customers to sell goods and services over the Internet without
replacing their existing business systems. The merchandising capabilities of
the Company's products, such as customer profiling and cross-selling, help
allow its customers to maximize sales revenues. The Company also provides
professional services for its customers to assist in the installation and
ongoing maintenance of our software applications.
During 1997, the Company commenced commercial shipment of its products and
emerged from the development stage. Although no longer in the development
stage, the Company continues to be subject to the risks and challenges similar
to other companies in a comparable stage of development. These risks include,
but are not limited to, operating in a new and rapidly evolving market,
competition from larger companies, dependence on new products, dependence on
key personnel, uncertain profitability, and a limited operating history.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Data
The unaudited interim financial statements as of June 30, 2000 and for the
six months ended June 30, 1999 and 2000 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with accounting principles
generally accepted in the United States.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Foreign Currency Translation
The functional currency of the Company's operations outside of Germany is the
local country's currency. Consequently, assets and liabilities of operations
outside Germany are translated into euros using exchange rates at the end of
each reporting period. Revenues and expenses are translated at the average
exchange rates prevailing during the period. Cumulative translation gains and
losses are reported as a separate component of shareholders' equity.
Statement of Cash Flows
The Company paid (Euro)229,000, (Euro)540,000 and (Euro)37,000 in cash for
interest in 1997, 1998 and 1999, respectively. The Company paid (Euro)25,000
and (Euro)134,000 in cash for interest for the six months ended June 30, 1999
and 2000, respectively. The Company paid (Euro)9,000, (Euro)13,000 and
(Euro)61,000 in cash for taxes in 1997, 1998 and 1999, respectively, and
(Euro)38,000 and (Euro)98,000 for the six months ended June 30, 1999 and 2000,
respectively. The Company sold equipment and leased it back in 1997 in a non-
cash transaction. The Company recognized no gain or loss on the transactions
and the value of the leased equipment was (Euro)119,000.
The Company considers all investments with original maturities of 90 days or
less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The Company performs
ongoing credit evaluations of its customer's financial condition and the risk
with respect to trade receivables is further mitigated by the fact that the
Company's customer base is diversified.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and long-term debt
approximate their fair values.
Marketable securities designated as available for sale are recorded at market
with any unrealized gain or loss being recorded in the shareholders' equity
section of the Balance Sheet.
Property and Equipment
Property and equipment are stated at cost. Capital leases are recorded at the
present value of the future minimum lease payments at the date of acquisition.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years. Capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease terms or their estimated useful life.
Software Development Costs
The Company accounts for internally generated software development costs in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility of the product, which the Company
defines as the development of a working model and further defines as the
completion of beta testing of the software. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable
F-9
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenue, estimated economic
life and changes in technology. Such costs are reported at the lower of
unamortized cost or net realizable value. To date, internal software
development costs that were eligible for capitalization have not been
significant and the Company has charged all software development costs to
research and development expense as incurred.
The Company expenses all research and development costs as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses of (Euro)0.9
million, (Euro)1.5 million and (Euro)4.2 million were included with sales and
marketing expenses for 1997, 1998 and 1999, respectively. For the six months
ended June 30, 1999 and 2000, advertising expenses were (Euro)2.7 million and
(Euro)2.5 million, respectively.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October 1995. This accounting standard permits
the use of either a fair value based method of accounting or the method defined
in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements.
Companies that elect to employ the method proscribed by APB 25 are required to
disclose the pro forma net income (loss) that would have resulted from the use
of the fair value based method. The Company has elected to continue to account
for its stock-based compensation arrangements under the provisions of APB 25,
and, accordingly, it has included in Note 8 the pro forma disclosures required
under SFAS No. 123.
Revenue Recognition
The Company generates the following types of revenue:
Licenses. License fees are earned under software license agreements primarily
to end-users, and to a lesser extent resellers and distributors. Revenues from
licenses to end-users are recognized upon shipment of the software if
persuasive evidence of an arrangement exists, collection of the resulting
receivable is probable and the fee is fixed and determinable. If an acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. As of January 1, 1998,
the Company adopted the provisions of the American Institute of Certified
Public Accountants ("AICPA") Statement Of Position ("SOP") 97-2, "Software
Revenue Recognition" ("SOP 97-2").
Service and maintenance. Services consist of support arrangements and
consulting and education services. Support agreements generally call for the
Company to provide technical support and provide certain rights to unspecified
software updates to customers. Revenue on technical support and software update
rights is recognized ratably over the term of the support agreement. The
Company provides consulting and education services to its customers; revenue
from such services is generally recognized as the services are performed.
For arrangements that include multiple elements, the fee is allocated to the
various elements based on vendor-specific objective evidence of fair market
value established by independent sale of the elements when sold separately.
F-10
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
In June 1997, the Company entered into a software license agreement with a
shareholder for total license fees of (Euro)10.1 million, which was received in
cash in 1997. The Company is recognizing the revenue associated with this
agreement over the three-year term of the agreement. In 1997, the Company
recognized (Euro)1.7 million of revenue associated with this agreement,
representing 33% of consolidated revenue in 1997. In 1998, the Company
recognized (Euro)3.4 million of revenue associated with this agreement, and
(Euro)0.8 million related to other agreements with this customer, which
combined represented 23% of consolidated revenue in 1998. In 1999, the Company
recognized (Euro)4.2 million of revenue associated with this agreement
representing 9% of consolidated revenue in 1999. For the six months ended June
30, 1999 and 2000, the Company recognized (Euro)2.1 million, or 13% of revenue,
and (Euro)2.2 million, or 4% of revenue, respectively, associated with this
agreement. In 1999, an executive from this customer became a member of our
Supervisory Board. Another member of our Supervisory Board is also an executive
with another one of our customers. Sales to this customer represented 13%, 6%
and 2% of consolidated revenue in 1997, 1998 and 1999, respectively. Sales to
this customer represented 4% and 2% of consolidated revenue for the six months
ended June 30, 1999 and 2000, respectively. Besides these two customers, no
other customer accounted for 10% or more of consolidated revenues for any year
presented.
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which the Company adopted beginning on
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The objective of SFAS No. 130 is to report a measure of
all changes in equity of an enterprise that results from transactions and other
economic events of the period other than transactions with shareholders
("comprehensive income"). Comprehensive income is the total of net income
(loss) and all other non-owner changes in shareholders' equity.
Accumulated other comprehensive income (loss) consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended Period
December 31, Ended
---------------------- June 30,
1998 1999 2000
--------- ----------- -----------
<S> <C> <C> <C>
Foreign currency translation
adjustment............................ (Euro)(37) (Euro) 615 (Euro)1,089
Unrealized gain (loss) on available-
for-sale securities................... -- 3,022 (499)
--------- ----------- -----------
(Euro)(37) (Euro)3,637 (Euro) 590
========= =========== ===========
</TABLE>
In the years ended December 31, 1997 and 1998, the only component of other
comprehensive income is the net foreign currency translation, which was
(Euro)132,000 and (Euro)135,000, respectively. In the six months ended June 30,
1999, the only component of other comprehensive income is the net foreign
currency translation, which was (Euro)292,000. A summary of the components of
other comprehensive income for the year ended December 31, 1999 and the period
ended June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
------------------------------ ---------------------------------
Before Tax Income After Tax Before Tax Income After Tax
Amount Tax Amount Amount Tax Amount
----------- ------ ----------- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss)
on available-for-sale
securities............ (Euro)3,022 -- (Euro)3,022 (Euro)(3,521) -- (Euro)(3,521)
Foreign currency
translation
adjustment............ 652 -- 652 474 -- 474
----------- ---- ----------- ------------ ---- ------------
(Euro)3,674 -- (Euro)3,674 (Euro)(3,047) -- (Euro)(3,047)
=========== ==== =========== ============ ==== ============
</TABLE>
F-11
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Earnings Per Share
Basic net income (loss) per common share is presented in conformity with SFAS
No. 128 "Earnings Per Share" for all periods presented. Basic net income (loss)
per share is computed using the weighted-average number of vested outstanding
shares of common stock. As discussed in Note 1, certain shareholders hold
shares in U.S., Inc., and these shares were previously included in basic
weighted average common and common equivalent shares outstanding for the
purpose of calculating earnings per share. The Company has restated earnings
per share to exclude these shares from the calculation of basic earnings per
share. For the years ended December 31, 1998 and 1999 and the six-months ended
1999 and 2000, basic net income (loss) per share previously reported were
(Euro)(0.29), (Euro)(0.19), (Euro)(0.08), and (Euro)0.03, in comparison with a
restated basic earnings per share of (Euro)(0.36), (Euro)(0.23), (Euro)(0.10),
and (Euro)0.04.
Diluted net income (loss) per share is computed using the weighted-average
number of vested shares of common stock outstanding and, when dilutive,
unvested common stock outstanding, potential common shares from options and
warrants to purchase common stock using the treasury stock method and from
convertible securities using the as-if-converted basis. The options exercised
that result in shares subject to repurchase have been excluded in computing the
number of weighted average shares outstanding for basic earnings per share
purposes. All potential common shares have been excluded from the computation
of diluted net loss per share for 1997, 1998 and 1999 because the effect would
be antidilutive. The weighted-average number of vested shares of common stock
outstanding includes the shares of U.S., Inc., converted at a ratio of 1:3,
held by two shareholders of the Company as discussed further in Note 1.
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three years ended December 31, 1999 and for the six months ended June 30, 1999
and June 30, 2000, respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31 30,
------------------------------------------ -------------------------
1997 1998 1999 1999 2000
------------ ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net income (loss)
attributable to common
shareholders........... (Euro)(7,164) (Euro)(17,528) (Euro)(18,389) (Euro)(7,667) (Euro)2,960
============ ============= ============= ============ ===========
Basic earnings per
share:
Weighted average common
shares outstanding..... 31,335 48,590 82,633 81,445 84,991
Less: Weighted average
shares subject to
repurchase............. (1,165) (2,625) (2,750) (3,500) (2,220)
------------ ------------- ------------- ------------ -----------
Total weighted average
common shares.......... 30,170 45,965 79,883 77,945 82,771
Basic earnings (loss)
per share.............. (Euro) (0.24) (Euro) (0.38) (Euro) (0.23) (Euro) (0.10) (Euro) 0.04
============ ============= ============= ============ ===========
Diluted earnings per
share:
Weighted average common
shares outstanding..... 30,170 45,965 79,883 77,945 82,771
Add: Weighted average
shares subject to
repurchase............. -- -- -- -- 2,220
Convertible shares of
U.S., Inc. .......... -- -- -- -- 13,645
Common Stock option
grants............... -- -- -- -- 1,800
------------ ------------- ------------- ------------ -----------
Total weighted average
common shares and
common stock
equivalents............ 30,170 45,965 79,883 77,945 100,436
------------ ------------- ------------- ------------ -----------
Diluted earnings (loss)
per share.............. (Euro) (0.24) (Euro) (0.38) (Euro) (0.23) (Euro) (0.10) (Euro) 0.03
============ ============= ============= ============ ===========
</TABLE>
F-12
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Pursuant to the Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for
nominal consideration, prior to the anticipated effective date of the offering,
are included in the calculation of basic and diluted net income (loss) per
share as if they were outstanding for all periods presented. To date, the
Company has not had any issuances or grants for nominal consideration.
Earnings per share data has been presented on both a per weighted AG share
and per weighted ADS share basis. The ADS weighted share amounts were computed
by dividing all AG weighted share amounts by two reflect the conversion ratio
between AG shares and ADS shares. The total number of shares excluded from the
calculations of diluted net income (loss) per AG share were approximately
6,495,000, 5,625,000, 2,365,000 and 2,220,000 for the years ended December 31,
1997, 1998 and 1999, and the six month period ended June 30, 2000,
respectively. Shares excluded in the per ADS loss per share calculation were
approximately 12,990,000, 11,250,000, 4,730,000 and 4,400,000, respectively.
See Note 9 for further information on these securities.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The Company will adopt SAB 101 as required in the fourth quarter of fiscal 2000
and is evaluating the effect that such adoption may have on its consolidated
results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to record derivative financial instruments on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statements No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (or January 1, 2001
for the Company). In June 2000, the FASB issued Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities--an Amendment
of FASB Statement No. 133." SFAS 138 amends SFAS 133 to (a) exclude from the
scope of SFAS No. 133 nonfinancial assets that will be delivered in quantities
expected to be used or sold by a company over a reasonable period in the normal
course of business and for which physical delivery is probable,
(b) permit hedging of a benchmark interest rate, (c) allow hedging of foreign-
currency-denominated assets and liabilities and (d) allow for limited hedging
of net foreign currency exposures. The Company has no derivative financial and
commodity instruments, forward contracts or hedging arrangements in cash and
cash equivalents. These statements should not have a material impact on the
current financial condition or results of the Company's operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. These statements will not have a material impact on the financial
condition or results of the Company's operations.
F-13
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- ------------------------
1998 1999 1999 2000
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Trade show and
advertising
prepayments............. (Euro) 107 (Euro) 178 (Euro) 265 (Euro) 6,290
VAT receivable........... 27 2,435 1,008 3,543
Other.................... 2,408 1,257 1,261 6,533
----------- ----------- ----------- ------------
Total.................. (Euro)2,542 (Euro)3,870 (Euro)2,534 (Euro)16,366
=========== =========== =========== ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
Computer equipment................. (Euro)4,834 (Euro)7,724 (Euro)11,427
Furniture and fixtures............. 1,138 2,552 4,205
Leasehold improvements............. 36 332 4,501
----------- ----------- ------------
6,008 10,608 20,133
Accumulated depreciation and
amortization...................... (2,341) (4,998) (6,658)
----------- ----------- ------------
Property and equipment, net........ (Euro)3,667 (Euro)5,610 (Euro)13,475
=========== =========== ============
</TABLE>
Equipment under capital leases included in property and equipment as of
December 31, 1998 and 1999 was (Euro)114,000. Accumulated amortization of
leased equipment was (Euro)26,000 and (Euro)81,000 as of December 31, 1998 and
1999, respectively. The leases were paid in full at June 30, 2000.
5. INVESTMENTS
During 1998 and 1999, the Company made investments in a non-public company in
Israel totaling (Euro)0.5 million and (Euro)1.2 million, respectively. The
total investment of (Euro)1.7 million in this entity represents an ownership
interest of approximately 12% as of December 31, 1999. The investments are
carried at their original cost basis.
In 1999, the Company acquired approximately (Euro)1.5 million of common stock
in a public company in the United Kingdom. These equity securities are
classified as available for sale securities. The Company recorded an unrealized
gain of (Euro)3.0 million during 1999 and an unrealized loss of (Euro)3.5
million during 2000 based on the market value at December 31, 1999 and June 30,
2000 of the securities of (Euro)4.5 million and (Euro)1.0 million,
respectively. The unrealized gain (loss) was included as a component of
comprehensive income in the statement of shareholders' equity for 1999 and
2000.
F-14
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- ------------------------
1998 1999 1999 2000
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
VAT payable................. (Euro) -- (Euro)2,476 (Euro) 760 (Euro) 4,572
Accrued commissions......... 170 1,817 281 1,148
Employee compensation....... 947 2,068 1,342 2,944
German taxes payable........ -- -- -- 6,650
Other....................... 2,107 3,599 1,601 7,616
----------- ----------- ----------- ------------
(Euro)3,224 (Euro)9,960 (Euro)3,984 (Euro)22,930
=========== =========== =========== ============
</TABLE>
7. NOTES PAYABLE TO SHAREHOLDERS
During 2000, the Company entered into a secured loan agreement for $10.0
million with an officer of the Company who is also a shareholder and a member
of the management board. Interest on the note is payable quarterly at 6.13%.
The loan is callable with three months notice beginning December 31, 2000.
There is a prepayment penalty of three months interest if the loan is paid down
prior to December 31, 2000.
During 1999, the Company entered into a secured loan agreement for (Euro)7.0
million with an officer of the Company who is also a shareholder and a member
of the management board. Interest on the note is payable quarterly at 6%. The
loan is callable with three months notice beginning December 31, 2000. There is
a prepayment penalty of three months interest if the loan is paid down prior to
December 31, 2000.
The outstanding principal on these notes were (Euro)7,000,000 and
(Euro)16,759,000 at December 31, 1999 and June 30, 2000, respectively.
During 1996, the Company entered into a series of unsecured loans with
certain shareholders. Interest is payable quarterly at 10%. The outstanding
principal on the notes are classified as long-term and were (Euro)179,000,
(Euro)20,000, and (Euro)20,000 at December 31, 1998 and 1999 and June 30, 2000,
respectively. The loans may be repaid at any time, at the discretion of the
Company, but no later than February 2004.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
Facilities and certain furniture and equipment are leased under operating
leases. As of December 31, 1999, future minimum annual lease payments
(excluding the lease payments relating to capitalized facilities discussed in
Note 3) are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
2000.......................................................... (Euro) 5,035
2001.......................................................... 4,122
2002.......................................................... 4,237
2003.......................................................... 4,311
2004.......................................................... 4,244
Subsequent years.............................................. 8,151
------------
Total....................................................... (Euro)30,100
============
</TABLE>
F-15
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Rent expense was (Euro)492,000, (Euro)1,277,000 and (Euro)2,022,000 for the
years ended December 31, 1997, 1998 and 1999, respectively. Rent expense was
(Euro)720,000 and (Euro)1,611,000 for the six months ended June 30, 1999 and
June 30, 2000, respectively. The Company did not enter into any material
operating leases during the six months ended June 30, 2000.
Legal Matters
The Company is a defendant in various legal matters arising in the normal
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate resolution of these matters is not expected to have a
material effect on these consolidated financial statements.
9. SHAREHOLDERS' EQUITY
Stock Splits and Change in Stated Value
In conjunction with the share exchange discussed in Note 1 between the
shareholders of U.S., Inc. and the Company in June 1998, the shares of U.S.,
Inc. were exchanged for shares of the Company on a 1-for-5 basis. In June 1999,
the Company changed the stated value of its common stock from DM 5 per share to
(Euro)1 per share and effected a 3-for-1 stock split. Unless otherwise noted,
all share and per share amounts presented have been restated to retroactively
reflect this conversion ratio and stock split for all periods presented.
The adjustment to the stated value of the Company's common stock is reflected
in the Consolidated Statements of Convertible Redeemable Preferred Stock and
Shareholders' Equity as an increase to the stated value of the common stock for
(Euro)2.4 million and a corresponding decrease to additional paid in capital as
of June 1999.
On June 27, 2000, the Company's Annual Shareholder Meeting authorized a 5-
for-1 stock split and authorized management to repurchase up to 10% of its
outstanding common stock through November 2001. The stock split became
effective on August 16, 2000, when it was registered in the commercial register
in accordance with German stock corporation law. All share and per share
amounts presented in the accompanying financial statements have been restated
to retroactively reflect the stock split for all periods presented.
Convertible Redeemable Preferred Stock
During 1997, the Company issued 6,000,000 shares of preferred stock at
approximately (Euro)0.6 per share resulting in aggregate proceeds of (Euro)3.5
million. In March 1998, the Company sold 1,169,550 shares of preferred stock in
U.S., Inc. at approximately (Euro)1.60 per share resulting in aggregate
proceeds of (Euro)1.9 million.
Significant rights, restrictions, and preferences of preferred stock included
cash dividends at a rate of 8% per annum, as defined, liquidation preferences,
voting rights, and conversion and redemption features.
Prior to the share exchange between the shareholders of U.S., Inc. and the
Company in June 1998, all outstanding shares of preferred stock converted to
the same number of shares of common stock of U.S., Inc. After considering the
conversion ratio and stock split discussed above, shares of U.S., Inc. common
stock were converted to shares of the Company on a 1-for-3 basis.
F-16
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Convertible Promissory Note
In April 1998, U.S. Inc. entered into a convertible promissory note, which
bears interest at 7%, with a member of the Company's Supervisory Board for
US$500,000. The principal and accrued interest were convertible at the option
of the holder, in whole or in part, into shares of U.S. Inc.'s next series of
preferred stock issued in connection with a third party financing at the
purchase price per share paid by the third party investors. The principal and
interest would automatically convert into common stock in the event that U.S.
Inc. completed an underwritten public offering, as defined, at the initial
public offering price less a 25% discount. In the event that a new series of
preferred stock were not issued, or a public offering did not occur, then the
outstanding principal and accrued interest were convertible at the option of
the holder, in whole or in part, into common stock of U.S. Inc. at (Euro)1.60
per share. All principal and unpaid interest was due and payable, to the extent
not converted, on October 28, 1998.
In conjunction with the legal entity reorganization that occurred in June
1998, the U.S. Inc. repaid the note to the board member, and the board member
purchased 250,005 shares of the Company's common stock for (Euro)2.56 per
share, resulting in aggregate proceeds of (Euro)639,118.
Legal settlement obligation
In May 1998, we entered into a legal settlement related to a trademark
dispute that obligated us to pay (Euro)1.9 million. An investor paid this
amount on behalf of the Company. In exchange, this investor purchased 900,450
shares from the Company on June 23, 1998. The final purchase price for these
shares was determined based on the average trading price for one month
following the Company's initial public offering in Germany. Based on this
average trading price, the investor paid an additional (Euro)4.0 million in
cash for these shares. The Company has recorded the legal settlement cost of
(Euro)1.9 million and the additional cash received of (Euro)4.0 million as an
increase in equity in exchange for the 900,450 shares issued.
Deferred Compensation
In connection with the grant of certain stock options to employees prior to
the initial public offering in July 1998, the Company recorded deferred
compensation of approximately (Euro)1.0 million representing the intrinsic
value of the options, i.e., the difference between the deemed value of the
common stock for accounting purposes and the option exercise price of such
options at the date of grant. This amount is presented as a reduction of
shareholders' equity and amortized ratably over the vesting period of the
applicable options. Approximately (Euro)162,000 and (Euro)308,000 was expensed
during the years ended December 31, 1998 and 1999, respectively, and the
balance will be expensed ratably over the remaining vesting periods.
Approximately (Euro)162,000 and (Euro)142,000 was expensed during the six
months ended June 30, 1999 and 2000, respectively. Compensation expense is
decreased in the period of forfeiture for any accrued but unvested compensation
arising from the early termination of an option holder's services. No
compensation expense related to any other periods presented has been recorded.
1997 Equity Incentive Plan
The Company had originally reserved 10,000,000 shares of common stock for
issuance to employees, directors and consultants under its 1997 Equity
Incentive Plan (the 1997 Plan). The Board of Supervisors may grant incentive or
non-statutory stock options at prices not less than 100% or 85%, respectively,
of fair market value as determined by the Board of Supervisors, at the date of
grant. Options vest ratably over periods determined by the Board, generally
three years. The Board also has the authority to set exercise dates (no
F-17
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
longer than ten years from the date of grant), payment terms, and other
provisions for each grant. The Company generally had the right of first refusal
for all common stock issued under the 1997 Plan should the holder desire to
sell or otherwise transfer any of the shares. The Company's right of first
refusal terminated upon the effective date July 16, 1998, of the Company's
initial public offering.
1999 Equity Incentive Plan
Effective as of June 21, 1999, the Company adopted a new stock option plan
(the 1999 Plan) covering board members, executive officers and certain
employees. The options under the 1999 Plan vest ratably over a four year period
beginning six months from the date of grant; however, pursuant to the German
Stock Corporation Act, no options will be exercisable, even though a portion is
vested, prior to the second anniversary of the date of grant. The exercise
price of the options is equal to 120% of the market price of the shares on the
date of grant, where the market price is determined to be the average closing
price as quoted on the Neuer Markt for the 10 trading days prior to the date of
grant.
There are two pools of shares authorized under the 1999 Plan. There are
665,000 shares for grants of stock options to members of the management board
and general managers of subsidiaries and 7,500,000 shares for grants of stock
options to all other employees. During the year ended December 31, 1999, the
Company granted 790,000 options with a weighted average exercise price of
(Euro)25.68 per share. No shares under the 1999 Plan were exercised, expired or
cancelled in 1999. During the six months ended June 30, 2000, the Company
granted 1,995,000 options with a weighted average exercise price or
(Euro)105.75 per share. In 2000, no shares under the 1999 Plan were exercised
or expired; however, 147,595 shares were cancelled at a weighted average
exercise price of (Euro)96.46 per share.
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. If compensation cost for the Plan had been determined
based on the fair value at the grant dates for the awards calculated in
accordance with the method prescribed by SFAS No. 123, the impact on the
Company's net loss and net loss per share would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net loss attributable to
common shareholders
As reported................. (Euro)(7,164) (Euro)(17,528) (Euro)(18,389)
Pro forma................... (7,337) (17,563) (21,204)
Basic and diluted earnings per
AG share
As reported................. (Euro) (0.24) (Euro) (0.38) (Euro) (0.23)
Pro forma................... (0.24) (0.38) (0.27)
Basic and diluted earnings per
ADS
As reported................. (Euro) (0.12) (Euro) (0.19) (Euro) (0.12)
Pro forma................... (0.12) (0.19) (0.13)
</TABLE>
F-18
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Option activity under the plans was as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------- Six Months Ended
1997 1998 1999 June 30, 2000
---------------------- ---------------------- ----------------------- ------------------------
Weighted Weighted Weighted Weighted
Number of Average Number of Average Number of Average Number of Average
Shares Exercise Shares Exercise Shares Exercise Shares Exercise
Outstanding Price Outstanding Price Outstanding Price Outstanding Price
----------- ---------- ----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- -- 6,495 (Euro)0.11 5,625 (Euro) 0.59 2,365 (Euro) 14.78
Granted................. 10,530 (Euro)0.13 3,960 0.84 2,235 15.66 1,995 105.75
Exercised............... (3,030) 0.13 (3,720) 0.23 (4,235) 0.43 (655) 4.95
Canceled................ (1,005) 0.22 (1,110) 0.20 (1,260) 1.11 (335) 44.54
------ ---------- ------ ---------- ------ ----------- ----- ------------
Outstanding at end of
period................. 6,495 (Euro)0.11 5,625 (Euro)0.59 2,365 (Euro)14.78 3,370 (Euro) 67.52
====== ========== ====== ========== ====== =========== ===== ============
</TABLE>
The following table summarizes information with respect to the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Number Average
Range of Options Life Exercise Exercisable Exercise
Exercise Prices Outstanding (Years) Price at 12/31/99 Price
--------------- ----------- ----------- -------- ----------- --------
(000s) (Euro) (000s) (Euro)
<S> <C> <C> <C> <C> <C>
0.02 - 0.03 105 7.6 0.03 30 0.02
0.16 - 0.31 65 8.0 0.30 15 0.30
0.63 330 8.2 0.63 45 0.63
1.26 130 8.6 1.26 10 1.26
4.60 - 6.92 130 8.9 5.46 95 5.50
7.22 - 10.84 385 9.2 9.19 170 9.20
11.30 - 15.29 430 9.4 12.83 95 12.80
18.44 - 26.94 675 4.7 22.80 -- --
29.93 - 44.66 80 4.9 36.33 -- --
46.57 - 64.00 35 5.0 51.54 -- --
----- ---
2,365 7.5 14.78 460 7.31
===== ===
</TABLE>
The 1997 Plan allows for the issuance of options that are immediately
exercisable through execution of a restricted stock purchase agreement. Shares
purchased subject to a restricted stock purchase agreement generally vest over
three years. In the event of termination of employment, the Company may
repurchase unvested shares at a price equal to the original issuance price. As
of December 31, 1999, 1,789,010 shares of common stock issued and outstanding
were unvested and subject to repurchase by the Company at (Euro)0.02 to
(Euro)1.26 per share. All shares that were exercised early are held by a
trustee on behalf of the employee. In the event that an employee leaves the
Company with unvested shares, the unvested shares are sold in the open market,
and the proceeds of the sale are contributed to the Company.
The fair value of each option grant is estimated on the date of grant
utilizing risk-free interest rates on the date of grant (5.8%-6.5% in 1997,
4.2%-5.6% in 1998 and 4.6%-6.2% in 1999) with maturities equal to the expected
option term of 4.5 years. The dividend assumed is estimated at 0% in 1997, 1998
and 1999 and the volatility is assumed to be 0% through the date of the
Company's initial public offering in 1998 and 69% for all periods subsequent to
that date.
F-19
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
Shares Reserved for Future Issuance
As of December 31, 1999, the Company had conditional capital of 23,856,985
shares. Conditional capital is equivalent to shares reserved for future
issuance, as follows:
<TABLE>
<S> <C>
Conversion of remaining U.S. Inc. shares........................ 13,924,500
Stock options................................................... 9,932,485
----------
23,856,985
==========
</TABLE>
In January 2000, the Chairman of the Company's Supervisory Board purchased
250,000 shares from a trust that administers certain shares issued under the
Company's 1997 Equity Incentive Plan. Consistent with the terms of the trust,
the proceeds of the sale, (Euro)12.5 million, net of related tax effects, were
recorded as a capital contribution in paid-in capital.
In March 2000, the Company issued 2,175,000 shares related to its pending
registration with the U.S. Securities and Exchange Commission to register
shares of its common stock in the form of American Depository Shares ("ADSs").
The 2,175,000 shares are not included in shareholders' equity or in the
weighted-average number of vested shares outstanding for purposes of computing
earnings per share since it is anticipated that the lead underwriter would
return the 2,175,000 shares to the Company and the Company would return the
(Euro)435,000 to the lead underwriter in the event a public stock offering did
not occur.
10. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which taxes become payable.
The income tax benefit differs from the amounts which would result by
applying the applicable German statutory rates to the loss before taxes, as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------- Period Ended
1997 1998 1999 June 30, 2000
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Provision (benefit) at
German statutory rate.. (Euro)(2,919) (Euro)(10,079) (Euro)(9,783) (Euro) 1,575
Foreign income/losses
taxed/benefited at a
different tax rate..... 13 3,480 2,998 320
Change in valuation
allowance.............. 3,186 8,749 9,854 (1,366)
Tax credits............. (4) (17) -- --
Nondeductible expense... 9 40 214 91
Deductible IPO costs.... -- (2,173) (79) --
Change in statutory tax
rate................... -- -- (2,490) --
Other................... (285) -- (714) (620)
------------ ------------- ------------ ------------
Provision (benefit) for
income taxes........... (Euro) -- (Euro) -- (Euro) -- (Euro) --
============ ============= ============ ============
</TABLE>
F-20
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
The components of the deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>
As of
------------------------- As of
1998 1999 June 30, 2000
----------- ------------ -------------
<S> <C> <C> <C>
Net operating loss carryforwards..... (Euro)9,797 (Euro)18,973 (Euro)16,273
Tax credit carryforwards............. 42 82 82
Accruals not currently deductible.... 506 1,287 1,845
Capitalized start-up costs and other
intangibles not currently
deductible.......................... 17 16 349
Other................................ 43 (99) 344
----------- ------------ ------------
10,405 20,259 18,893
Valuation allowance.................. (10,405) (20,259) (18,893)
----------- ------------ ------------
Net deferred tax asset............... (Euro) -- (Euro) -- (Euro) --
=========== ============ ============
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset for
all periods through June 30, 2000 as a result of uncertainties regarding the
realization of the asset including the limited operating history of the
Company, the lack of profitability through December 31, 1999 and the Company's
projected losses for fiscal 2000.
For the year ended December 31, 1999, the Company had net operating loss
carryforwards for tax reporting purposes in various tax jurisdictions as
follows (in thousands):
<TABLE>
<S> <C>
U.S. Federal.................................................. (Euro)37,275
U.S. state.................................................... 19,938
German........................................................ 6,597
Other......................................................... 4,236
------------
Total....................................................... (Euro)68,046
============
</TABLE>
In addition, as of December 31, 1999, the Company had U.S. Federal and U.S.
state income tax credit carryforwards of approximately (Euro)70,000 and
(Euro)48,000, respectively. U.S. Federal and state net operating losses
carryforwards expire in various periods through 2019. The German net operating
loss carry forwards for tax purposes relate to corporate income tax and
municipal trade tax and carry forward indefinitely. The Tax Reform Act of 1986
and German tax law contains provisions which may limit the net operating loss
and tax credit carryforwards to be used in any given year upon the occurrence
of certain events, including a significant change in ownership interest.
11. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
and Enterprise and Related Information."
The Company is organized based upon the nature of the products and services
it offers. Under this organizational structure, the Company operates in two
fundamental business segments: product and service. The product segment
includes the development and sale of the Company's software products. The
service segment provides service and support for the Company's products. The
Company's products are primarily developed at its facilities in Jena, Germany,
and are sold through a direct sales force and independent distributors in
Europe, North America, South America, Australia and Asia.
F-21
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
The information in the following tables is derived directly from the
Company's internal financial reporting used by the Company's chief decision
makers for corporate management purposes. The Company evaluates its segments'
performance based on several factors, of which the primary financial measure is
gross margin. Unallocated costs include corporate and other costs not allocated
to business segments for management reporting purposes. The accounting policies
followed by the Company's business segments are the same as those described in
Note 2 to the consolidated financial statements. The Company does not allocate
assets by segment for management reporting purposes.
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated customers:
Product.............................. (Euro)2,947 (Euro)11,295 (Euro)29,534 (Euro)10,515 (Euro)39,950
Services............................. 2,088 6,577 16,732 5,954 17,591
----------- ------------ ------------ ------------ ------------
Total revenue...................... (Euro)5,035 (Euro)17,872 (Euro)46,266 (Euro)16,469 (Euro)57,541
=========== ============ ============ ============ ============
Gross margin:
Product.............................. (Euro)2,505 (Euro) 9,553 (Euro)24,748 (Euro) 9,169 (Euro)36,670
Services............................. (157) 2,811 8,267 2,649 3,384
----------- ------------ ------------ ------------ ------------
Total gross margin................. (Euro)2,348 (Euro)12,364 (Euro)33,015 (Euro)11,818 (Euro)40,054
=========== ============ ============ ============ ============
</TABLE>
Revenues by geographic location are attributed to the country from which the
sale is made and are presented below (in thousands):
<TABLE>
<CAPTION>
For the
For the Year Ended Six Months Ended
December 31, June 30,
-------------------- -----------------
1997 1998 1999 1999 2000
------ ------ ------ -------- --------
(Euro) (Euro) (Euro) (Euro) (Euro)
<S> <C> <C> <C> <C> <C>
Germany............................... 3,895 10,232 17,190 6,724 21,859
United States......................... 961 5,940 18,366 6,633 23,413
United Kingdom........................ -- 797 7,000 1,125 4,498
Other*................................ 179 903 3,710 1,987 7,771
----- ------ ------ -------- --------
Total............................... 5,035 17,872 46,266 16,469 57,541
===== ====== ====== ======== ========
</TABLE>
--------
* Revenues for other geographic locations are substantially derived from France
in 1997 and 1998 and France and Sweden in 1999 and France, Sweden and Asia in
2000.
Long-lived assets located by geographic location are as follows (in
thousands):
<TABLE>
<CAPTION>
As of December 31, As of June 30,
-------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(Euro) (Euro) (Euro) (Euro) (Euro)
<S> <C> <C> <C> <C> <C>
Germany................................. 1,256 1,404 1,644 1,565 3,154
United States........................... 802 2,074 2,671 2,417 7,294
United Kingdom.......................... -- 48 716 364 2,266
Other................................... 33 141 579 229 761
----- ----- ----- ------ -------
Total................................. 2,091 3,667 5,610 4,575 13,475
===== ===== ===== ====== =======
</TABLE>
F-22
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 1999 and 2000 unaudited)
12. SUBSEQUENT EVENTS (Unaudited)
In July, 2000, the Company acquired the assets of Owis Software GmbH ("Owis")
for 26,550 shares of the Company's Capital Stock, the market value of which was
approximately (Euro)2.4 million, and approximately (Euro)2.5 million in cash,
resulting in an aggregate purchase price of approximately (Euro)4.9 million.
The value assigned to the shares issued was determined based on the market
price of the Company's common stock over a period of time before and after the
Company and Owis had reached agreement on the purchase price and the proposed
transaction was announced. The Company did not assume any options in the
transaction. The purchase price will be allocated to the assets acquired and
the liabilities assumed, and any excess purchase price will be allocated to
acquired intangible assets, primarily acquired assembled workforce, and
goodwill, which, based on preliminary assessments, will be written off over a
period of three to five years.
In August 2000, the Company acquired the assets of Subotnic GmbH ("Subotnic")
for 248,462 shares of the Company's capital stock, the market value of which
was approximately (Euro)20.3 million. The value assigned to the shares issued
was determined based on the market price of the Company's common stock over a
period of time before and after the Company and Subotnic had reached agreement
on the purchase price and the proposed transaction was announced. The Company
did not assume any options in the transaction. The purchase price will be
allocated to the assets acquired and the liabilities assumed, and any excess
purchase price will be allocated to acquired intangible assets, primarily
acquired assembled workforce and developed technology, and goodwill, which,
based on preliminary assessments, will be written off over a period of three to
five years.
In August 2000, the Company sold 500,000 shares at (Euro)80 per share in a
private placement. The Company will use the net proceeds of approximately
(Euro)38.9 million for general corporate purposes.
F-23
<PAGE>
[INTERSHOP LOGO APPEARS HERE]
