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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 2000
REGISTRATION NO. 333-35104
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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YOUCENTRIC, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
NORTH CAROLINA 7372 56-1879797
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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14045 BALLANTYNE CORPORATE PLACE, SUITE 101
CHARLOTTE, NC 28277
(704) 643-1000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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THOMAS M. FEDELL
CHAIRMAN OF THE BOARD
YOUCENTRIC, INC.
14045 BALLANTYNE CORPORATE PLACE, SUITE 101
CHARLOTTE, NC 28277
(704) 643-1000
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
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Copies to:
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BRENT B. SILER, ESQ. E. LYNWOOD MALLARD, ESQ. MARK F. MCELREATH, ESQ.
SCOTT E. PUESCHEL, ESQ. ELIZABETH G. WREN, ESQ. MARK C. KANALY, ESQ.
HALE AND DORR LLP KILPATRICK STOCKTON LLP ALSTON & BIRD LLP
ONE FREEDOM SQUARE 3500 ONE FIRST UNION CENTER ONE ATLANTIC CENTER
11951 FREEDOM DRIVE 301 S. COLLEGE STREET, SUITE 3500 1201 WEST PEACHTREE STREET
RESTON, VIRGINIA 20190 CHARLOTTE, NC 28202 ATLANTA, GA 30309-3424
TELEPHONE: (703) 654-7000 TELEPHONE: (704) 338-5000 TELEPHONE: (404) 881-7000
TELECOPY: (703) 654-7100 TELECOPY: (704) 338-5125 TELECOPY: (404) 881-4777
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
---------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the Securities and Exchange Commission
declares our registration statement effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 2000
5,000,000 SHARES
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<S> <C>
YOUCENTRIC, INC. (YOUCENTRIC LOGO)
</TABLE>
COMMON STOCK
$ PER SHARE
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- YOUcentric, Inc. is offering 5,000,000 shares of its common stock.
- We anticipate that the initial public offering price will be between $11.00
and $13.00 per share.
- This is our initial public offering and no public market currently exists
for our shares.
- Proposed trading symbol: Nasdaq National Market -- YOUC
---------------------------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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<CAPTION>
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PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to YOUcentric...................................... $ $
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The underwriters have a 30-day option to purchase up to 750,000 additional
shares of common stock from us to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
U.S. BANCORP PIPER JAFFRAY
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
LEGG MASON WOOD WALKER
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
[Artwork for Inside Front Cover]
[Diagram of a circle broken into three pieces, which are labeled "Enterprise,"
"Sales Partners" and "Customers," brought together at the center by a smaller,
unbroken circle labeled "YOUrelate." Each of the three pieces of the broken
circle contain the following sample computer screens, which are being accessed
via a Web browser, such as Internet Explorer or Netscape:
- In the "Enterprise" piece, the display depicts the computer screen that one of
our client's employees might use to review projected customer orders in the
sales pipeline;
- In the "Sales Partners" piece, the display depicts the computer screen that
one of our client's sales partners might see in the course of reviewing a
customer service incident; and
- In the "Customers" piece, the display depicts the computer screen that one of
our client's customers might see while making an inquiry about the status of
an order.]
We provide mass-customized software that enables
businesses to manage and optimize their complex
and rapidly evolving relationships with customers,
sales partners, suppliers and employees.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Special Notice Regarding Forward-Looking Statements......... 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 31
Management.................................................. 42
Related Party Transactions.................................. 49
Principal Shareholders...................................... 52
Description of Capital Stock................................ 54
Shares Eligible for Future Sale............................. 57
Underwriting................................................ 59
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find More Information......................... 62
Index to Financial Statements............................... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of time of delivery of this prospectus
or of any sale of our common stock.
In this prospectus, "YOUcentric," "we," "us" and "our" refer to YOUcentric, Inc.
YOUcentric, the YOUcentric logo, YOUrelate, Jsales and Assembly Line are
trademarks of YOUcentric. All other trademarks and trade names used in this
prospectus are the property of their owners.
<PAGE> 5
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PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information, including
our financial statements and the related notes, appearing elsewhere in this
prospectus.
YOUCENTRIC
We provide software that allows our clients to engage in marketing, sales and
service with their prospects, customers, partners and suppliers. Our product,
YOUrelate, is engineered using advanced Web-based technologies including
Enterprise Java, which provide a foundation capable of supporting thousands of
users on a single system and allow our product to operate on a wide variety of
networks, databases, operating systems and Web-enabled devices. Our software is
component-based, which allows it to be mass-customized to match the way each
client conducts business and to be easily adapted as their business evolves. We
believe the component-based nature of our product allows us to implement our
software more efficiently than is typical for our industry.
In today's highly competitive global marketplace, it is critical for businesses
to focus on attracting and retaining customers to maximize the value of customer
relationships. Businesses have invested in customer relationship management
software as a critical element of these initiatives. Traditional customer
relationship management vendors typically provide software that is internally
focused, rigid in its structure and time-consuming to install. With the growth
of the Web, businesses have begun changing the way that they initiate, manage
and develop relationships. As a result of these changes, a new generation of
electronic business, or e-business, relationship management software vendors has
emerged to target single, specific aspects of the customer relationship, such as
Internet content management and personalization offerings.
We developed YOUrelate in response to the shortcomings of traditional software
applications and the narrow functionality of first-generation Web-based
e-business products. AMR Research, an independent market research firm, predicts
the worldwide market for customer relationship management software in which we
compete, will grow at a compound annual rate of 49% from $2.3 billion in 1998 to
$16.8 billion in 2003. We believe that e-business relationship management
software will constitute a large portion of this market growth.
YOUcentric is a next-generation software provider that helps clients attract new
customers, enhance the loyalty of existing customers and increase revenues by
managing their business relationships, both inside and outside the organization.
Among other things, our software is designed to allow our clients to:
- communicate and collaborate with customers, partners and suppliers;
- access, update and manage a common body of information through almost any
device that has a Web browser;
- manage sales across multiple channels;
- automate marketing programs;
- manage partner relationships;
- offer customer self service; and
- automate contact center management.
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1
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Our goal is to be the leading provider of e-business relationship management
software solutions. Our strategy is to:
- exploit our emerging leadership in Web-based, mass-customized
relationship management software;
- continue to expand our direct sales force and our indirect distribution
channels;
- penetrate currently targeted vertical markets and pursue additional
vertical markets;
- continue to expand functionality to support a wide variety of wireless,
Web-enabled devices;
- expand market share by pursuing relationships with application service
providers; and
- expand our international presence.
We were incorporated in North Carolina as Sales Vision, Inc. in October 1994 and
changed our name to YOUcentric, Inc. in October 1999. Our principal executive
offices are located at 14045 Ballantyne Corporate Place, Suite 101, Charlotte,
NC 28277 and our telephone number is (704) 643-1000 or (800) 275-4314. Our
website address is www.youcentric.com. Information on our website does not
constitute part of this prospectus.
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THE OFFERING
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Common stock offered by YOUcentric............. 5,000,000 shares
Common stock to be outstanding after this
offering..................................... 32,101,711 shares
Offering price................................. $ per share
Use of proceeds................................ We intend to use a portion of the net proceeds
of this offering to make required payments to
the holders of our Series A preferred stock
upon its conversion and the remainder for sales
and marketing, research and development,
international expansion, and for working
capital and other general corporate purposes.
Proposed Nasdaq National Market symbol......... YOUC
</TABLE>
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Except as otherwise indicated, information in this prospectus:
- gives effect to common and preferred stock splits effected in 1999 and
2000;
- gives effect to the conversion of all outstanding shares of our preferred
stock into 11,065,385 shares of our common stock, which will occur
automatically upon the closing of this offering; and
- assumes that the initial public offering price per share in this offering
will be $12.00.
If the initial public offering price is more than $12.81 per share, the total
number of shares of common stock that will be outstanding after this offering
would be less than the number used in the share calculations throughout this
prospectus. More information about the number of shares that would be
outstanding at various initial public offering prices is presented under the
caption "Capitalization."
The number of shares to be outstanding after this offering is based on shares
outstanding at August 31, 2000 and excludes:
- 7,794,143 shares of common stock subject to outstanding options and
warrants at a weighted average exercise price of $1.56 per share; and
- 7,025,651 additional shares of common stock reserved for issuance under
our equity plans.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the financial data for our business. You
should read this information together with the financial statements and the
related notes appearing later in this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The statement of operations data for the years ended December 31,
1997, 1998 and 1999, are derived from, and are qualified by reference to, our
audited financial statements included in this prospectus. The statement of
operations data for the six month periods ended June 30, 1999 and 2000 and the
balance sheet data as of June 30, 2000 are derived from, and are qualified by
reference to, our unaudited financial statements included in this prospectus.
The statement of operations data for the years ended December 31, 1995 and 1996
are derived from our unaudited financial statements that are not included in
this prospectus. The pro forma balance sheet data gives effect to the automatic
conversion of all outstanding convertible preferred stock into common stock on
the closing of this offering and our recognition of stock-based compensation
expense for stock options outstanding at June 30, 2000 that vest upon the
closing of this offering. The pro forma as adjusted balance sheet data also
reflects the sale of the shares of common stock offered by us in this offering
and our receipt and application of the estimated net proceeds, after deducting
the estimated underwriting discounts and commissions and the estimated expenses
that we expect to pay in connection with this offering. See Note 1 to our
financial statements appearing elsewhere in this prospectus for information
regarding shares used in computing basic and diluted net loss per share
attributable to common shareholders.
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SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
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STATEMENT OF OPERATIONS DATA:
Total revenues.......................... $ 193 $ 653 $1,352 $2,790 $ 4,113 $ 2,076 $ 5,406
Net income (loss)....................... (45) 5 (181) (846) (7,022) (2,143) (21,639)
Accretion for preferred stock redemption
feature and dividends................. -- -- -- -- (11,398) (8,476) (6,196)
Net income (loss) attributable to common
shareholders.......................... (45) 5 (181) (846) (18,420) (10,619) (27,835)
Basic and diluted loss per share
attributable to common shareholders... $(0.00) $0.00 $(0.01) $(0.05) $ (1.15) $ (0.66) $ (1.74)
Pro forma basic and diluted net loss per
share attributable to common
shareholders.......................... $ (1.11) $ (1.43)
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JUNE 30, 2000
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 10,025 $ 10,025 $ 55,381
Working capital............................................. 17,859 9,223 63,214
Stock redemption and dividends payable...................... -- 8,636 --
Capital lease obligations................................... 201 201 201
Redeemable convertible preferred stock...................... 53,756 -- --
Shareholders' equity (deficiency)........................... (34,940) 10,180 64,173
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following factors could harm our business and future operating results and could
result in a partial or complete loss of your investment.
WE HAVE A RECENT HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND WE MAY NEVER
BECOME OR REMAIN PROFITABLE
Our revenues may not continue to grow and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses for the past
three fiscal years and the six months ended June 30, 2000. As of June 30, 2000,
we had an accumulated deficit of $49.9 million. In addition, our net use of cash
in operating activities totaled $7.0 million for the six months ended June 30,
2000. While we are unable to predict accurately our future operating expenses,
we currently expect these expenses to increase significantly following the
completion of this offering, particularly as we expand our sales and marketing
and product development efforts. We have incurred and expect to continue to
incur substantial non-cash stock-based compensation expenses, which will make it
more difficult for us to achieve profitability. We will need to generate
significant increases in revenues to achieve and maintain profitability and
positive cash flow, and we may not be able to do so. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND MAY CAUSE OUR STOCK PRICE
TO DECLINE
Our operating results are difficult to predict and are likely to fluctuate
significantly on a quarterly and an annual basis due to a number of factors,
many of which are outside our control. Our financial results may, as a
consequence, fall short of the expectations of public market analysts or
investors, which may cause the price of our common stock to decline.
Our revenues and operating results in any quarter will depend substantially on
the size and timing of software license sales and the progress of client
implementations and customizations in that quarter. The timing of sales,
difficulties or delays in implementation, the timing of client acceptance of our
product and the lapse of client cancellation privileges may affect our revenue
recognition and may cause our operating results to vary significantly. If we
have lower revenues for a particular quarter than we expect, we will likely be
unable to reduce our operating expenses in time to compensate for any revenue
shortfall. Therefore, any significant shortfall in revenues could have an
immediate negative impact on our operating results in that quarter.
We have a significant amount of deferred revenues related to one client contract
that contains a cancellation clause. At the time this cancellation clause
lapses, we will record the related deferred revenue. As a result, there may be
periods in which billings in excess of earned revenues decrease even though
client order bookings increase.
In addition, the typical sales cycle of our product is long and unpredictable,
generally between three and nine months. Our product is typically purchased as
part of a significant enhancement to a client's information technology system.
We need to educate potential clients regarding the use and benefits of our
product, and our clients must often make a significant capital investment
decision in order for us to achieve sales of our product. A successful sales
cycle typically results in costs associated with presentations to both business
and technical decision makers, as well as a proof-of-concept demonstration to
establish technical fitness. Our sales cycle is affected by general business
cycles and the financial condition of each prospective client, as well as our
clients' fiscal year budgeting cycles.
Other factors that could affect our operating results include:
- changes in the mix of our sales between software licenses and services;
- the timing and amount of our marketing, sales and product development
expenses;
- the cost and time required to develop new software products or
enhancements to existing products; and
- the introduction, timing and market acceptance of new products introduced
by us or our competitors.
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WE RECENTLY INTRODUCED YOURELATE, AND WE EXPECT TO DEPEND UPON SALES OF THIS ONE
PRODUCT AND RELATED SERVICES FOR SUBSTANTIALLY ALL OF OUR REVENUE
Our future financial performance will depend substantially on our ability to
develop and maintain market acceptance of YOUrelate, which is based on advanced
Web technologies, some of which have not yet achieved broad market acceptance.
We released YOUrelate 3.0 in December 1999 and YOUrelate 3.1 in March 2000 and,
as of August 31, 2000, have sold this product to only a limited number of
clients, some of which are still in the implementation process. We generated
substantially all of our revenues through 1999 from licenses and services
related to prior products which we no longer actively market. We expect to rely
on sales of YOUrelate and related services for substantially all of our revenue
for the foreseeable future. Factors adversely affecting the pricing or demand
for YOUrelate, such as competition, technological change, evolution in client
preferences or changing technological standards, could materially harm our
business and financial results. Many of these factors are beyond our control and
difficult to predict. In addition, because we have a limited operating history
and the market for our product is new and evolving, we cannot accurately predict
either the future growth, if any, or the ultimate size of the market for our
product. Therefore, the revenue and income potential of our business and our
market are unproven.
THE FAILURE OF WEB-BASED E-BUSINESS RELATIONSHIP MANAGEMENT SOFTWARE TO ACHIEVE
MARKET ACCEPTANCE WOULD CAUSE US TO LOSE REVENUES
We have designed YOUrelate to be completely Web-based. The market for Web-based
e-business relationship management software products is still emerging, and
continued growth in demand for, and acceptance of, these products remains
uncertain. The success of our business in the face of intense competition will
depend on the growth of the overall market for Web-based e-business relationship
management products. Many of our prospective clients are not fully aware of the
potential benefits of e-business relationship management solutions and, as a
result, our product may never achieve market acceptance. We have spent, and will
be required to continue to spend, considerable resources educating potential
clients about our product and about e-business relationship management software
in general. However, even with these educational efforts, market acceptance of
our product may not increase. If the market for our product does not grow or
grows more slowly than we anticipate, or the market turns out to have
significantly less potential than we estimate, our business and financial
results would suffer.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO BUILD, TRAIN AND RETAIN THIS TEAM COULD RESULT IN LOWER REVENUES
We currently sell our product primarily through our direct sales team, and any
failure to build, train and retain this team could result in lower revenues. Our
ability to increase our sales will depend on our ability to recruit, train and
retain qualified sales people with the advanced skills and technical knowledge
required to sell our product. There is a general shortage of the sales personnel
we need, and competition for qualified personnel is intense in our industry.
We have limited experience in establishing and maintaining a sales force. We
expanded our sales team from two people at the end of 1998 to 16 people at
August 31, 2000. We may be unable to hire enough qualified sales personnel to
support our expansion. Even if we are able to hire as planned, doing so will be
expensive, and our expanded sales organization may not be able to compete
successfully against more extensive and well-funded sales and marketing
operations of our current or potential competitors. In addition, expansion of
our direct sales force may lead to conflict with our indirect distribution
relationships, which could harm our relationships with our sales partners and
clients.
ANY FAILURE TO MANAGE OUR RAPID GROWTH PROPERLY COULD STRAIN OUR RESOURCES
Any failure to manage our rapid growth properly could compromise the quality of
our product and our ability to retain key personnel and could, therefore, harm
our business and financial results. We increased our total number of
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<PAGE> 11
employees and consultants from 25 at the end of 1998 to 199 at August 31, 2000.
Our recent growth has placed significant demands on management as well as on our
administrative, operational and financial resources. We intend to continue to
expand our operations and pursue existing and potential market opportunities.
OUR ABILITY TO GROW AS PLANNED WILL BECOME INCREASINGLY DEPENDENT ON OUR ABILITY
TO ENTER INTERNATIONAL MARKETS, AND WE MAY EXPERIENCE DIFFICULTIES IN DOING SO
A key element of our strategy is to establish our international sales presence
through new distribution partners and, to a lesser extent, direct sales. The
difficulties inherent in expanding internationally, or the failure to do so,
could have a negative impact on our business and financial results. We currently
have limited experience in marketing and distributing our product
internationally, and have only a limited number of offices and personnel located
in international markets. To date, we have not received any material revenue
from the sale of our product in international markets. Our failure to develop
international sales could have a significant negative impact on our revenues and
operating results. The establishment of an international sales presence will
require significant management attention and financial resources and may not
produce desired levels of revenue.
To create an international sales presence through our direct sales force, we
must continue to hire and train experienced international personnel as well as
export qualified U.S. personnel to staff and manage our international
operations. We must also enter into distribution relationships in international
markets. If we are not able to establish and maintain successful international
operations and distribution relationships, our future growth could be limited.
To achieve broad acceptance in international markets, our product must not only
be distributed in the language of the geographic area, but must also be
localized to handle native languages, local business practices, dialects and
cultures in each region. To date, we have not fully localized our product for
any international market and we cannot assure you that our localization efforts
will be successful. Our international business, if established, will be subject
to other inherent risks, which could harm our business and financial results,
including:
- longer accounts receivable collection cycles;
- seasonal business activity in some parts of the world;
- difficulties in enforcing agreements and intellectual property rights;
- fluctuations in local economic, market and political conditions;
- trade barriers;
- the need for compliance with a wide variety of U.S. and foreign export
regulations;
- potential adverse tax consequences; and
- currency exchange rate fluctuations.
WE HAVE SOLD OUR PRODUCT TO A LIMITED NUMBER OF CLIENTS IN EACH PERIOD; ANY
DELAY IN SALES TO OR IMPLEMENTATION OR ACCEPTANCE OF OUR PRODUCT BY ANY OF THESE
CLIENTS COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND FINANCIAL RESULTS
To date, we have depended on a limited number of clients for a significant
portion of our revenues in each period. Although we expect the identity of our
significant clients to change from period to period, we anticipate that a
limited number of clients will continue to account for a significant portion of
our revenues in each period. In 1999, sales of products and services to one
customer accounted for 38.2% of our total revenues. In 1998, sales of products
and services to three different customers accounted for 22.1%, 21.6% and 14.0%
of our total revenues. For the six months ended June 30, 2000, sales of products
and services to two other customers accounted for 45.3% and 11.2% of our total
revenues. Delays in sales to, or implementation or acceptance by, any
significant clients, or our failure to broaden our client base, could harm our
business and financial results.
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INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES MAY CAUSE US TO LOSE SALES
We expect that new competitors will continue to enter the market for Web-based
e-business relationship management software as the size and visibility of the
market opportunity increases, which could have a negative impact on our business
and financial results. We also expect that competition will increase as a result
of software industry consolidations and the formation of alliances among
industry participants. Increased competition could result in pricing pressures,
reduced margins or the failure of our product to achieve or maintain market
acceptance.
We currently compete with a number of companies offering products that include
elements of our product's functionality. Many of these competitors have longer
operating histories and significantly greater resources and name recognition
than we do. We may be unable to compete successfully against these companies. We
expect that competition will increase as other established and emerging
companies enter our market and as new products and technologies are introduced.
We currently encounter competition primarily from two principal types of
competitors:
- traditional customer relationship management, or CRM, vendors, such as Onyx,
Oracle, Pivotal and Siebel; and
- vendors of Web-based e-business products, such as BroadVision, Firepond and
Kana Communications.
The success of any of these competitors in developing a successful e-business
relationship management solution could cause our sales to decline and harm our
business.
In addition, we sometimes compete with systems integrators who focus on
providing Web-based applications for their customers. We could also lose sales
if the internal technology departments of potential clients elect to develop
capabilities in-house that are similar to those offered by our product.
IF JAVA-BASED APPLICATIONS DO NOT CONTINUE TO ENJOY MARKET ACCEPTANCE, IF
SOFTWARE DEVELOPERS DO NOT CONTINUE TO SUPPORT THE JAVA PROGRAMMING LANGUAGE, OR
IF XML DOES NOT ACHIEVE MARKET ACCEPTANCE, WE COULD LOSE REVENUES
Because our product is based in large part upon the Java programming language
and XML, or eXtensible Markup Language, an emerging standard for sharing data
over the Internet, sales of our product depend on the continued market
acceptance of enterprise Java-based applications, continued development support
for Java and the market acceptance of XML. If acceptance of Java-based
applications diminishes, our product would become less attractive and could
become uncompetitive. In addition, if the Java software developer community
becomes significantly fragmented with regard to the Java standard, or if a
future release of Java technology contains significant errors, our sales could
be harmed.
We anticipate that XML will achieve broad market acceptance in the near future,
but it is possible that a competing standard could replace XML, in which case
the market may not accept an XML-based product. If XML is replaced by a new
standard, our software might not be compatible with the new standard or we might
not be able to develop a product using this standard in a timely manner.
Consequently, a failure of XML-based products to achieve broad market acceptance
or the introduction of a competing standard could harm our business.
THE LOSS OF KEY EMPLOYEES COULD COMPROMISE OUR ABILITY TO GROW
Our future success will depend to a significant degree upon the continued
efforts and abilities of our key technical, customer support, sales and
management personnel, many of whom would be difficult to replace if they were to
leave for any reason. Competition for highly skilled employees with technical,
management, marketing, sales, product development and other specialized training
is intense and there can be no assurance that we will be successful in
attracting and retaining such personnel. As a result, we may experience
increased costs in order to attract and retain skilled employees. The loss of
any of our senior management or other key technical, customer support, sales and
marketing personnel, particularly if lost to competitors, could harm our
business and financial results.
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<PAGE> 13
WE EXPECT TO RELY INCREASINGLY ON THIRD PARTIES TO IMPLEMENT LARGER DEPLOYMENTS
OF OUR PRODUCT, WHICH COULD BE EXPENSIVE AND COULD COMPROMISE CLIENT
SATISFACTION
As we increase our reliance on third-party distribution partners to sell our
product, we also expect to increase our reliance on them to implement solutions
for our clients. If these distribution partners, or other third parties we
engage, do not provide adequate implementation services, our clients could
become dissatisfied with our product. In order to avoid dissatisfaction, we may
need to provide supplemental implementation services at no additional cost to
the client. We could also experience delays in revenue recognition if
third-party client implementation projects fall behind schedule.
IF WE FAIL TO PROVIDE ADEQUATE PROFESSIONAL SERVICE AND CUSTOMER SUPPORT, WE MAY
BE UNABLE TO SUSTAIN OR GROW OUR BUSINESS
Our ability to continue to grow, to retain current and future clients and to
recognize revenues from our licenses depends in part upon the quality of our
professional service and customer support operations. Failure to offer ongoing
client support and adequate integration, consulting and other professional
services in connection with the implementation of our product, either directly
or through third parties, could cause demand for our product to decline and
could cause delays in our ability to recognize revenue from the applicable
license.
OUR PRODUCT MAY SUFFER FROM DEFECTS, ERRORS OR INADEQUACIES THAT MAY EXPOSE US
TO LIABILITY AND COULD CAUSE US TO LOSE SALES
Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. Any new
products or releases may not be free from errors after commercial shipments have
begun. In addition, two of our contractual arrangements also provide for an
indefinite warranty of prior performance that survives modifications of the
product by our clients. Any errors that are discovered after commercial release,
or as a result of client modification, could result in a loss of revenues, delay
in market acceptance, diversion of development resources, damage to our
reputation or increased service and warranty costs, any of which could cause our
business and financial results to suffer. Furthermore, our strategy requires
that our software be able to accommodate substantial increases in the number of
users concurrently using our product. We are just beginning to deploy
large-scale Web-based software implementations, and none of our large-scale
deployments has been operating at any customer site for an extended period of
time. If our product does not perform adequately in large-scale implementations,
we may lose sales, resulting in decreased revenues.
WE MAY FACE PRODUCT LIABILITY CLAIMS WHICH COULD BE COSTLY AND COULD HARM OUR
REPUTATION
Because our clients use our product for important business applications, errors,
defects or other performance problems could result in financial or other damages
to our clients. If our clients incur damages, they could pursue claims against
us, which, if successful, could result in our having to make substantial
payments. Although our license agreements typically contain provisions designed
to limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate the provisions limiting our
liability. A product liability claim brought against us, even if without merit,
would likely be time-consuming and costly for us to litigate or settle, and
could result in harm to our reputation among clients and potential clients.
FAILURE TO MAINTAIN AND EXPAND OUR RELATIONSHIPS WITH SOFTWARE VENDORS, SYSTEMS
INTEGRATORS, CONSULTING FIRMS, APPLICATION SERVICE PROVIDERS AND OTHER
DISTRIBUTION PARTNERS COULD IMPEDE ACCEPTANCE OF OUR PRODUCT, DELAY THE GROWTH
OF OUR REVENUES AND HARM OUR ABILITY TO PROVIDE IMPLEMENTATION AND SUPPORT OF
OUR PRODUCT
To increase our revenues and implementation capabilities, we intend to develop
and expand our relationships with software vendors, systems integrators,
consulting firms, application service providers and other distribution partners.
These distribution partners are important to us because they may recommend our
product to their clients and
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<PAGE> 14
implement and support our product for their clients. These companies are not
contractually obligated to continue to provide implementation services for us or
to sell or otherwise promote our product. We expect to rely more heavily on
these types of partners in the future. Although we seek to develop and maintain
relationships with these distribution partners, they may have similar or more
established relationships with our competitors.
This increased focus on indirect distribution of our software product may cause
our business and financial results to suffer if we are unsuccessful in:
- training and supervising our distribution partners;
- providing adequate incentives to our distribution partners;
- providing adequate service and support to our end users through our
distribution partners;
- retaining company and brand loyalty with our distribution partners and
their clients; and
- managing collection of receivables from distribution partners on a timely
basis.
If our distribution partners do not increase this segment of their business, or
reduce or discontinue their relationships with us or their support of our
product, our business could be harmed. Without these third parties, we would
have to expand our services organization to increase the consulting and
professional services that we provide to our clients and divert resources from
other areas of our business. If we are required to expand our professional
services capabilities, we may not be able to do so quickly enough to avoid
client dissatisfaction.
OUR DISTRIBUTION PARTNERS COULD CHOOSE TO COMPETE WITH US OR WITH EACH OTHER,
PURSUE RELATIONSHIPS WITH OUR COMPETITORS OR TARGET THE SAME SALES
OPPORTUNITIES, ANY OF WHICH COULD HARM OUR BUSINESS
Our system integrators, consulting firms and other distribution partners could
choose to develop their own products and incorporate those products into their
systems or product offerings in lieu of our product. In addition, our
distribution partners may compete with one another. To the extent that one of
our distribution partners views the software or relationships we have developed
with another distribution partner as competitive, it may decide to stop doing
business with us, which could harm our business. Our distribution partners also
have relationships with our competitors, and they could, at any time, decide to
pursue those relationships in lieu of a relationship with us, which could harm
our business. Our distribution partners and our direct sales force might also
target the same sales opportunities, which could lead to an inefficient
allocation of sales resources as we both market similar products to the same end
users. These overlapping sales efforts could also negatively impact our
relationships with our distribution partners and make them less willing to
market our product aggressively.
OUR PRODUCT RELIES ON SOFTWARE LICENSED TO US OR OUR CLIENTS BY THIRD PARTIES
Our product relies on software, such as Sun Microsystems' Java programming
language, as well as object/relational mapping and data synchronization
software, that is licensed to us or our clients on a non-exclusive basis by
third-party software companies. Because our product relies on software developed
and maintained by third parties, we currently depend on their abilities to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. The third-party software
currently offered in conjunction with our product may become obsolete or
incompatible with future versions of our product, which could force us to
develop or identify new software compatible with our own. In doing so, we may
incur costs. Furthermore, if our current suppliers fail to continue to license
their software to us, we could incur costs and experience delays as a result of
having to identify and integrate alternate software into our product.
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<PAGE> 15
WE WILL BE OBLIGATED TO RECORD SIGNIFICANT ACCOUNTING CHARGES IN THE FUTURE IN
CONNECTION WITH RECENT STOCK OPTION ISSUANCES, WHICH WILL MAKE IT MORE DIFFICULT
FOR US TO ACHIEVE PROFITABILITY
In December 1999 and in March, June and August 2000, we granted stock options to
some of our employees and consultants and a director. As of August 31, 2000,
options to purchase an aggregate of 7,606,970 shares of our common stock at a
weighted average exercise price of $1.58 per share were outstanding. In
connection with these option grants, we will be obligated to record stock-based
compensation expenses over the next several years, which will make it more
difficult for us to become profitable and will contribute to fluctuations in our
quarterly financial results. We will recognize these expenses proportionately
over the vesting periods of the options. We currently expect the aggregate
expense in connection with all of the options to be $49.6 million, of which
$14.3 million is reflected in our unaudited financial statements for the six
months ended June 30, 2000. In addition, because a portion of the options will
become fully vested upon the closing of this offering, a significant portion of
the total charge, which we currently expect to be $14.5 million, will be
accelerated and recognized in the quarter in which this offering is completed,
which will cause a disproportionate adverse effect on our financial performance
in that quarter. The remainder of the expense will be recognized over the
remaining vesting periods of the options, which range through the third quarter
of 2004, and will adversely affect our quarterly financial results throughout
that period.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH MAY FORCE US TO MAKE
EXPENSIVE MODIFICATIONS TO OUR PRODUCT AND HINDER MARKET ACCEPTANCE OF OUR
PRODUCT
The market in which we compete is characterized by rapid technological change.
Existing products become obsolete and unmarketable when products using new
technologies are introduced and new industry standards emerge. For example, we
may need to modify our product when third parties change software, such as Java,
that we integrate into our product. As a result, the life cycle of our product
is difficult to estimate. To be successful, we must continue to enhance our
current product line and develop new products that successfully respond to these
developments. We have delayed enhancements and new product release dates in the
past and may not be able to introduce enhancements or new products successfully
or in a timely manner in the future. Our business and financial results would be
harmed if we delay releases of new products and product enhancements, or if
these products and product enhancements fail to achieve market acceptance when
released. In addition, clients may defer or forego purchases of our product if
our competitors or major vendors introduce or announce new products or product
enhancements that are similar to ours.
WE MAY BE UNABLE TO ACHIEVE AND MAINTAIN ADEQUATE PROTECTION OF OUR PROPRIETARY
RIGHTS, AND THE FAILURE TO DO SO COULD HARM OUR BUSINESS
Our success and ability to compete depend in part on our ability to protect our
proprietary rights. Any infringement of our proprietary rights could result in
significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in a loss of our competitive advantage and decreased
revenues. To protect our proprietary rights, we rely primarily on a combination
of copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as those
contained in license agreements with consultants, vendors, clients and
distribution partners. There remains a risk that existing copyright, trademark
and trade secret laws afford only limited protection. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as the laws of the United States. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our product and obtain and use
information that we regard as proprietary.
Other parties may breach confidentiality agreements and other protective
contracts into which we have entered. We may not become aware of, or have
adequate remedies in the event of, a breach. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and diversion of resources and
could harm our future operating results.
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<PAGE> 16
WE HAVE GIVEN SOME THIRD PARTIES ACCESS TO THE SOURCE CODE TO OUR SOFTWARE AND
OWNERSHIP RIGHTS TO MODIFICATIONS THEY MAKE, WHICH COULD RESULT IN LIMITATIONS
ON OUR RIGHTS TO OUR SOFTWARE
All of the contractual arrangements under which we have licensed our products
provide our clients with access to all or a portion of the source code for our
software and allow them to modify all or a portion of the software. Some of
these contractual arrangements provide that the client has exclusive rights to
any modifications it creates; however, the client is prohibited by the
provisions of our license agreement from providing to third parties any
competing products it may develop based on our source code. The rights of our
clients to modify our software could restrict our ability to use and exploit any
of these client modifications, as well as any similar modifications we may make
to either our Jsales or YOUrelate product. In addition, under a distribution
agreement, the source code of our Jsales product has been placed in escrow and
may be released upon a material default under the agreement or our failure to
continue doing business. Furthermore, the source code to our YOUrelate product
has been placed in escrow pursuant to agreements with several of our clients,
and may be released if we fail to continue doing business. If our source code
were to be released from these escrow arrangements, our rights to our software
might be impaired.
WE MAY FACE THIRD-PARTY CLAIMS ALLEGING INFRINGEMENT OF THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD RESULT IN SIGNIFICANT EXPENSE TO US AND RESULT IN
OUR LOSS OF SIGNIFICANT RIGHTS
Software and Web-related businesses are subject to frequent litigation relating
to intellectual property rights. From time to time, third parties may assert
patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business. This risk may increase as the
number of entrants in our market increases and the functionality of our product
is enhanced and overlaps with the products of other companies. Any claims
against us, any purchaser or any user of our product asserting that our product
infringes or may infringe proprietary rights of third parties, with or without
merit, could be time-consuming, result in costly litigation, divert the efforts
of our technical and management personnel, cause product shipment delays,
disrupt our relationships with our clients or require us to enter into royalty
or licensing agreements, any of which could have a negative impact upon our
operating results. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. In the event a claim against us
is successful and we cannot obtain a license to the relevant technology on
acceptable terms, license a substitute technology, or redesign our products to
avoid infringement, our business and financial results would be harmed.
We are aware of another company that uses the name "Ucentric" as its corporate
name and Internet domain name but which appears to be engaged in an unrelated
business. While we believe that we have superior rights to the trademark
"YOUcentric" in the market for e-business relationship management products, we
could nevertheless become subject to a claim in the future that our trademark
infringes the rights of this company. The loss or limitation of any of our
rights to the trademark "YOUcentric" could harm our business.
FACTORS ADVERSELY AFFECTING THE INTERNET, INCLUDING GOVERNMENT REGULATION, COULD
DECREASE DEMAND FOR OUR PRODUCT
Because our product is based on Web technologies and relies on the
infrastructure of the Internet to enable collaboration and sharing of
applications and information, any factors that adversely affect acceptance of,
access to or performance of the Internet could have a negative impact on the
ability of our clients to use our product and could, therefore, decrease demand
for our product and harm our business. Among the factors that could adversely
affect Internet acceptance, access and performance are:
- slow access and download times;
- security concerns;
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- network problems or service disruptions that prevent users from accessing
an internet server; and
- delays in, or disputes concerning, the development and adoption of
industry-wide Internet standards and protocols.
In addition, as electronic commerce, or e-commerce, and the Internet continue to
evolve, we expect that federal, state and foreign governments will adopt laws
and regulations covering issues such as user privacy, taxation of goods and
services provided over the Internet, pricing, content and quality of products
and services. If enacted, these laws and regulations could limit the market for
e-commerce, and therefore the market for our product and services. Although many
of these regulations may not apply directly to our business, we expect that laws
regulating the solicitation, collection or processing of personal or consumer
information could indirectly affect our business.
DIFFICULTIES AND FINANCIAL BURDENS ASSOCIATED WITH ACQUISITIONS COULD HARM OUR
BUSINESS AND FINANCIAL RESULTS
We may consider acquiring complementary businesses and technologies in the
future. In the event we make an acquisition, we could incur substantial debt,
assume contingent liabilities, incur one-time accounting charges, be required to
amortize goodwill or issue equity securities which would dilute current
shareholders' percentage ownership. Additionally, we may not be able to
successfully integrate any technologies, products, personnel or operations of
companies that we may acquire in the future. These difficulties could disrupt
our ongoing business, distract our management and employees, and increase our
expenses. If we are unable to successfully address any of these risks, our
business could be seriously harmed.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD CONTROL MATTERS REQUIRING SHAREHOLDER APPROVAL AFTER THIS OFFERING
Following the completion of this offering, our officers and directors together
will beneficially own 76% of the outstanding shares of our common stock. As a
result, these shareholders will be able to control all matters requiring
shareholder approval and, thereby, our management and affairs. Matters that
typically require shareholder approval include:
- election of directors;
- mergers or consolidations;
- the sale of all or substantially all our assets; and
- authority to adopt stock option and other plans under which additional
shares of capital stock may be issued.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could depress the market price of
our common stock.
YOU WILL PAY SUBSTANTIALLY MORE FOR YOUR SHARES THAN THEIR NET TANGIBLE BOOK
VALUE
If you purchase shares of common stock in this offering, you will pay more for
your shares than their net tangible book value. This dilution is in large part
because our earlier investors paid substantially less than the offering price in
this offering when they purchased their shares of common stock.
OUR STOCK MAY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS DUE TO A
NUMBER OF FACTORS, INCLUDING THE FACT THAT WE ARE A TECHNOLOGY COMPANY, WHICH
MAY PREVENT OUR SHAREHOLDERS FROM RESELLING OUR COMMON STOCK AT A PROFIT
The securities markets have experienced significant price and volume
fluctuations, and the market prices of the securities of software and other
technology companies such as ours have been especially volatile. This market
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volatility, as well as general economic, market or political conditions, could
reduce our stock price regardless of our operating performance. In addition, our
operating results could be below the expectations of public market analysts and
investors, and in response our stock price could decrease significantly.
Investors may be unable to resell their shares of our common stock at or above
the offering price. In the past, companies that have experienced volatility in
their stock price have faced securities class action litigation. If we become
the subject of securities class action litigation, we could face substantial
costs and a diversion of our management's attention and resources.
THE PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS AND NORTH CAROLINA LAW MAY
INHIBIT POTENTIAL ACQUISITION BIDS THAT SHAREHOLDERS MAY BELIEVE ARE DESIRABLE,
AND THE MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT
Following the completion of this offering, our board of directors will have the
authority to issue up to 5,000,000 shares of preferred stock. The board of
directors will be able to fix the price, rights, preferences, privileges and
restrictions of the preferred stock in a manner that may have a negative impact
on our common stock without any further vote or action by our shareholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, our stock price and the voting and other rights of our
shareholders may be negatively impacted. The issuance of preferred stock may
also result in the loss of voting control to other shareholders. We have no
current plans to issue any shares of preferred stock following this offering.
Following the completion of this offering, our organizational documents will
contain other provisions that could have an anti-takeover effect including:
- our board of directors will have the power to increase the number of
directors and fill resulting vacancies;
- shareholders will have limited ability to remove directors;
- shareholders will not be able to call a special meeting of shareholders;
and
- shareholders will be required to give advance notice to nominate
directors or submit proposals for consideration at shareholder meetings.
OUR BROAD DISCRETION IN USING THE PROCEEDS FROM THIS OFFERING MAY HAVE A
NEGATIVE IMPACT ON OUR FINANCIAL CONDITION
Our decisions regarding the use of the proceeds of this offering could have a
negative impact on our business, operating results and financial condition. We
will have broad discretion as to how we use most of the proceeds of this
offering. You will not have the opportunity to evaluate the economic, financial
or other information we consider in deciding how to use these proceeds.
THE SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK THAT WILL BE ELIGIBLE FOR
SALE IN THE NEAR FUTURE COULD CAUSE OUR STOCK PRICE TO DECLINE
Our current shareholders hold a substantial number of shares of our common
stock, which they will be able to sell in the public market in the near future.
Sales of a substantial number of shares of our common stock could cause our
stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock. The section
headed "Shares Eligible for Future Sale" appearing later in this prospectus
contains more information regarding the number of shares that may be sold in the
future by our existing shareholders and option holders.
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SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will" and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position or state other forward-looking information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
predict or control with any certainty. The factors listed above in the section
captioned "Risk Factors," as well as any other cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you should be
aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could have a material adverse effect on our
business, results of operations and financial position.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 5,000,000 shares of
common stock we are offering will be approximately $54.0 million, assuming an
initial public offering price of $12.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters exercise their over-allotment option in full, we will
receive an additional $8.4 million.
We will use a portion of the net proceeds to make payments to the holders of our
Series A preferred stock in the amount of $8.0 million, the original purchase
price of their shares, plus approximately $800,000 in accrued dividends. We will
use the remaining net proceeds for working capital and other general corporate
purposes.
Following the closing of this offering through 2001, we currently anticipate
that we will incur between $25 million and $35 million in sales and marketing
expenses, between $10 million and $15 million in research and development
expenses and between $4 million and $8 million for international expansion.
Depending upon our revenue levels, we may use a portion of the remaining net
proceeds for these purposes. This represents our current best estimate of the
application of the net proceeds based upon the current state of our business
operations, our current plans for expansion and the current economic and
industry conditions. The net proceeds are subject to reallocation among these
categories and additional categories that we may later identify. The amount or
timing of our actual expenditures will depend on numerous factors, including our
profitability, our business development activities, our ability to achieve
operating efficiencies and competition. Our management will have broad
discretion concerning the allocation and use of a significant portion of the net
proceeds. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
currently have no specific acquisitions planned.
Pending their use, we intend to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
Upon the closing of this offering, we will pay accrued dividends of
approximately $800,000 to the holders of our Series A preferred stock in cash in
accordance with the terms of our preferred stock. Except for that payment, we
have never paid cash dividends on our capital stock and we do not anticipate
paying cash dividends in the foreseeable future. We anticipate that we will
retain any future earnings to finance the growth and development of our
business.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding convertible preferred stock into common stock on the closing
of this offering, an accrual for the $8.0 million conversion payment that
we will be required to make upon the conversion of the Series A preferred
stock and our recognition of stock-based compensation expense for stock
options outstanding at June 30, 2000 that vest upon the closing of this
offering; and
- on a pro forma as adjusted basis to reflect the sale of the shares of
common stock offered by us in this offering and our receipt and
application of the estimated net proceeds, including the $8.0 million
conversion payment plus accrued dividends, after deducting the estimated
underwriting discounts and commissions and the estimated expenses that we
expect to pay in connection with this offering.
This table also reflects an amendment to our articles of incorporation to be
filed immediately after the closing of this offering that will eliminate the
authorized Series A and Series B redeemable convertible preferred stock
following the closing of this offering, increase the number of shares of common
stock authorized to be issued and authorize the issuance of additional preferred
stock.
You should read this table together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our financial statements and
the related notes and the other financial information in this prospectus. The
information provided below is unaudited.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 10,025 $ 10,025 $ 55,381
======== ======== =========
Capital lease obligations................................... $ 201 $ 201 $ 201
Redeemable convertible preferred stock:
Series A, no par value; 4,159,446 shares authorized,
issued and outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro forma as
adjusted............................................... 25,159 -- --
Series B, no par value; 2,911,900 shares authorized,
2,572,376 shares issued and outstanding, actual; no
shares authorized, issued and outstanding, pro forma
and pro forma as adjusted.............................. 28,597 -- --
Shareholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued or outstanding, actual,
pro forma and pro forma as adjusted.................... -- -- --
Common stock, no par value; 100,000,000 shares authorized;
16,036,326 shares issued and outstanding, actual;
27,101,711 shares issued and outstanding, pro forma;
32,101,711 shares issued and outstanding, pro forma as
adjusted............................................... 14,934 74,562 128,555
Accumulated other comprehensive loss...................... (12) (12) (12)
Accumulated deficit....................................... (49,862) (64,370) (64,370)
-------- -------- ---------
Total shareholders' equity (deficit)................... (34,940) 10,180 64,173
-------- -------- ---------
Total capitalization.............................. $ 19,017 $ 10,381 $ 64,374
======== ======== =========
</TABLE>
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The outstanding share information excludes:
- 6,489,693 shares of common stock issuable upon the exercise of options
and warrants outstanding as of June 30, 2000, at a weighted average
exercise price of $0.95 per share; and
- 1,580,100 shares of common stock reserved for future issuance as of June
30, 2000 under our equity plans.
From June 30, 2000 to August 31, 2000, we issued options exercisable to purchase
up to 1,512,050 shares of common stock at a weighted average exercise price of
$4.34 per share and adopted additional equity plans with an aggregate of
6,750,000 shares reserved for issuance. During this same period, options to
purchase 207,600 shares of common stock were cancelled.
The number of shares of common stock into which our Series B preferred stock
will convert upon completion of this offering depends in part upon the initial
public offering price per share in this offering. The share calculations
throughout this prospectus assume that the initial public offering price will be
$12.00 per share. The following table shows the total number of shares of common
stock that would be outstanding immediately after this offering, based on shares
outstanding at August 31, 2000, at a variety of initial public offering prices
per share:
<TABLE>
<CAPTION>
INITIAL PUBLIC TOTAL NUMBER OF
OFFERING PRICE SHARES OF COMMON STOCK
PER SHARE OUTSTANDING AFTER OFFERING
-------------- --------------------------
<S> <C>
$16.03or more 31,134,056
16.00 31,140,487
15.00 31,398,153
14.00 31,692,629
13.00 32,032,409
12.81or less 32,101,711
</TABLE>
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DILUTION
Our pro forma net tangible book value as of June 30, 2000 was $10.2 million, or
$0.38 per share of common stock. We have calculated this amount by:
- subtracting our total liabilities from our total tangible assets; and
- then dividing the difference by the total number of shares of common
stock that will be outstanding after giving effect to the automatic
conversion of all outstanding convertible preferred stock.
If we give effect to our sale of 5,000,000 shares of common stock in this
offering at an assumed initial public offering price of $12.00 per share, after
deducting the estimated underwriting discounts and commissions, the estimated
offering expenses payable by us and the payment of the $8.0 million conversion
payment plus accrued dividends, our adjusted pro forma net tangible book value
as of June 30, 2000 would have been $64.2 million, or $2.00 per share. This
amount represents an immediate dilution of $10.00 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share before this
offering............................................... $ 0.38
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.62
------
Pro forma net tangible book value per share after this
offering.................................................. 2.00
------
Dilution per share to new investors......................... $10.00
======
</TABLE>
The following table summarizes, on the pro forma basis described above, as of
June 30, 2000, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by new investors, assuming an initial public offering price of
$12.00 per share before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. 27,101,711 84.4% $35,971,757 37.5% $ 1.33
New investors.......................... 5,000,000 15.6 60,000,000 62.5 $12.00
---------- ----- ----------- -----
Total........................ 32,101,711 100.0% $95,971,757 100.0%
========== ===== =========== =====
</TABLE>
The table above assumes no exercise of stock options and warrants outstanding at
June 30, 2000. As of June 30, 2000, there were options and warrants outstanding
to purchase 6,489,693 shares of common stock at a weighted average exercise
price of $0.95 per share. To the extent any of these options or warrants are
exercised, there will be further dilution to new investors.
19
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and the related notes, and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1997, 1998 and 1999, and the balance sheet data as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
our audited financial statements included in this prospectus. The statement of
operations data for the six month periods ended June 30, 1999 and 2000 and the
balance sheet data as of June 30, 2000 are derived from, and are qualified by
reference to, our unaudited financial statements included in this prospectus.
The unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. The balance
sheet data as of December 31, 1995, 1996 and 1997 and our statements of
operations data for the years ended December 31, 1995 and 1996 are derived from
our unaudited financial statements that are not included in this prospectus.
Historical results are not necessarily indicative of results that may be
expected for any future period. In particular, results for the six months ended
June 30, 2000 are not indicative of results that may be expected for the full
year. The pro forma basic and diluted net loss per share attributable to common
shareholders are calculated as if all of the shares of our preferred stock were
converted into shares of our common stock at the date of its original issuance.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ----- ------ ------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license, customization and implementation
revenues.............................................. $ 91 $ 422 $1,280 $2,169 $ 3,085 $ 1,759 $ 4,470
Professional services and maintenance revenues.......... 102 231 72 621 1,028 317 936
------ ----- ------ ------ -------- -------- --------
Total revenues........................................ 193 653 1,352 2,790 4,113 2,076 5,406
------ ----- ------ ------ -------- -------- --------
Operating expenses:
Cost of software licenses, customization,
implementation, professional services and
maintenance........................................... 26 45 95 334 946 262 2,070
Sales and marketing..................................... 19 99 401 572 3,027 874 4,458
Research and development................................ 96 172 315 1,116 3,246 1,319 2,325
General and administrative.............................. 97 337 679 1,385 3,433 1,274 3,760
Stock-based compensation*............................... -- -- -- 96 565 500 14,294
------ ----- ------ ------ -------- -------- --------
Total operating expenses.............................. 238 653 1,490 3,503 11,217 4,229 26,907
------ ----- ------ ------ -------- -------- --------
Operating income (loss)................................... (45) 0 (138) (713) (7,104) (2,153) (21,501)
------ ----- ------ ------ -------- -------- --------
Other income (expense), net............................... -- 5 -- (5) 105 14 355
------ ----- ------ ------ -------- -------- --------
Income (loss) before income tax expense................... (45) 5 (138) (718) (6,999) (2,139) (21,146)
Income tax expense........................................ -- -- (43) (128) (23) (4) (493)
------ ----- ------ ------ -------- -------- --------
Net income (loss)......................................... (45) 5 (181) (846) (7,022) (2,143) (21,639)
------ ----- ------ ------ -------- -------- --------
Accretion for preferred stock redemption feature and
dividends............................................... -- -- -- -- (11,398) (8,476) (6,196)
------ ----- ------ ------ -------- -------- --------
Net income (loss) attributable to common shareholders..... $ (45) $ 5 $ (181) $ (846) $(18,420) $(10,619) $(27,835)
====== ===== ====== ====== ======== ======== ========
Basic and diluted net income (loss) per share attributable
to common shareholders.................................. $(0.00) $0.00 $(0.01) $(0.05) $ (1.15) $ (0.66) $ (1.74)
====== ===== ====== ====== ======== ======== ========
Pro forma basic and diluted net loss per share
attributable to common shareholders..................... $ (1.11) $ (1.43)
======== ========
*Stock-based compensation:
Cost of software licenses, customization,
implementation, professional services and
maintenance........................................... $ -- $ -- $ -- $ -- $ -- $ -- $ 1,845
Sales and marketing..................................... -- -- -- 96 494 437 3,492
Research and development................................ -- -- -- -- 71 63 5,435
General and administrative.............................. -- -- -- -- -- -- 3,522
------ ----- ------ ------ -------- -------- --------
Total................................................. $ -- $ -- $ -- $ 96 $ 565 $ 500 $ 14,294
====== ===== ====== ====== ======== ======== ========
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
------ ----- ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 26 $ 123 $ 164 $ 456 $ 2,471 $ 10,025
Working capital (deficiency)............................ 32 23 (138) (1,114) (3,404) 17,859
Total assets............................................ 44 344 405 2,824 9,820 33,391
Capital lease obligations............................... -- -- -- 91 187 201
Redeemable convertible preferred stock.................. -- -- -- -- 18,963 53,756
Shareholders' equity (deficiency)....................... 35 78 (149) (899) (21,646) (34,940)
</TABLE>
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements and the related notes included elsewhere in this
prospectus.
OVERVIEW
We provide Web-based e-business relationship management software that enables
businesses to manage their complex relationships with customers, sales partners,
suppliers and employees, which we refer to as the extended value chain. We were
incorporated in October 1994 and released our first software product, Sales
Object Framework, a client/server-based CRM software product, in November 1994.
In March 1998, we released Jsales, a component-based CRM software product. In
December 1999, we introduced YOUrelate, our component-based relationship
management software, which is engineered using advanced Web technologies.
REVENUE. We generate revenues from the sale of software licenses and the
related customization and implementation of such software. These revenues are
included in software license, customization and implementation revenues in our
statements of operations. We also generate revenues from the sale of maintenance
support services associated with our software and other professional services.
These revenues are included in professional services and maintenance revenues in
our statements of operations. We have historically determined software license,
customization and implementation fees primarily on a per-user basis and other
professional services fees primarily on a time-and-materials basis. To date, we
have performed significant services under most of our license arrangements
related to the customization of our product to meet the relationship management
needs of our clients. As a result, we have recognized substantially all of our
software license, customization and implementation revenues under the
percentage-of-completion method of contract accounting, which we apply to both
the software and service elements of the arrangement in accordance with the
provisions of AICPA Statement of Position No. 81-1. We measure the percentage of
completion based on the ratio of implementation and customization hours
performed as of each reporting date to the total estimated hours for the entire
project. Although we expect to continue to recognize most of our revenue on this
basis for the foreseeable future, we are currently party to one license
arrangement that has a significant client cancellation provision. For this
arrangement, we will recognize the related revenue when the cancellation
privilege has lapsed.
Professional services revenues that are not recognized using contract accounting
are recognized on a time-and-materials basis as the services are performed, if
amounts due from clients are fixed and determinable and deemed collectible by
management. Maintenance revenues are recognized ratably over the related
contract term, typically one year.
We have not historically maintained separate records for the costs of providing
software licenses, customization, implementation, professional services and
maintenance. Due to the nature of costs associated with the sale of software
licenses and the related customization and implementation, we believe the
corresponding revenues have historically been more profitable than those
associated with the sale of other professional services and maintenance
agreements. We expect this trend to continue for the foreseeable future.
CLIENTS AND CLIENT BILLINGS. Client billing occurs in accordance with contract
terms. Amounts billed to clients in excess of amounts recognized as revenue are
recorded as billings in excess of earned revenues or deferred revenues. At June
30, 2000, our billings in excess of earned revenues were $6.9 million. Of this
$6.9 million, approximately $4.5 million will be recognized under the
percentage-of-completion method of contract accounting. Of the remaining $2.4
million relating to two contracts containing significant client acceptance or
cancellation clauses, $935,000 will be recognized in the third quarter as a
result of client acceptance and $1.5 million will be recognized when the
cancellation privileges lapse. This recognition of revenue under contracts that
we have entered into, and may enter in the future, containing similar clauses,
may materially affect our results for the quarter in which acceptance occurs or
cancellation privileges lapse. As a result, there may be periods in which
billings in excess of earned revenues decrease even though client order bookings
increase.
22
<PAGE> 27
At December 31, 1999, our accounts receivable were $5.7 million, which includes
amounts billed for our largest software license arrangement to date. As of June
30, 2000, substantially all of our 1999 year-end accounts receivable had been
collected or were being paid by our clients in accordance with contract terms.
OPERATING EXPENSES. Beginning in mid-1999, we increased our sales and marketing
expenses significantly, and we expect to continue to significantly increase
these expenses in the future as we add additional sales and marketing personnel,
expand our indirect distribution channels and implementation capacity, enhance
our marketing efforts and establish our presence in international markets. We
also invested heavily in research and development in 1999 and the first six
months of 2000. All of these costs have been expensed as incurred. To enhance
our product offering and market position, we believe that it will be essential
for us to continue to make significant investments in research and development,
and we anticipate that research and development expenses are likely to increase
in future periods. As we expand our business and add additional facilities and
personnel, we expect to incur additional general and administrative expenses to
support this growth. In addition, we have expanded our professional services
organization, including the hiring of consulting professionals, training
professionals and customer support professionals. We believe these investments
are necessary to help insure the satisfaction of our clients as we focus on
expanding our business. Many of our operating expenses are based on our
expectations of the future demand for our software and are relatively fixed in
the short-term. As a result, any shortfall in revenues could adversely affect
our operating results.
STOCK-BASED COMPENSATION. We have granted stock options to employees and
non-employees below fair market value and made stock awards to employees that
require us to recognize stock-based compensation expense. For options granted to
employees, we determine stock-based compensation expense based on the difference
between the exercise prices of the options granted and the fair market value of
our common stock. For options granted to non-employees, we determine stock-based
compensation expense based on the fair value of the options granted, computed
using an established option valuation formula. We will recognize the expense
over the vesting periods of the options. For stock awards to employees, we
determine stock-based compensation based on the fair market value of the stock
at the time of the award.
During 1999 and the six months ended June 30, 2000, we granted options to
purchase a total of 6,529,170 shares of common stock to employees, consultants
and a non-employee director at exercise prices below the fair market value of
our common stock on the grant date. We recognized stock-based compensation
expense related to these options of $181,000 in 1999 and $14.3 million during
the six months ended June 30, 2000. In 1998 and 1999, we awarded common stock
and Series A preferred stock to some of our employees. Total compensation
expense related to these awards for the years ended December 31, 1998 and 1999
was approximately $96,000 and $384,000, respectively. In addition, during August
2000, we granted stock options to employees and consultants to purchase a total
of 1,512,050 shares of common stock at exercise prices below the fair market
value of our common stock on the grant date. All of the options granted in 1999
and some of the options granted in 2000 provide for acceleration of vesting in
full upon the completion of this offering. Accordingly, we will recognize
additional deferred stock-based compensation expense relating to these options
of approximately $14.5 million upon the completion of this offering. We expect
that the stock-based compensation expense relating to the remaining options will
be approximately $20.6 million, of which we expect to recognize $4.6 million in
the third and fourth quarters of 2000, $7.2 million in 2001, $4.9 million in
2002, $3.0 million in 2003 and $885,000 in 2004.
PREFERRED STOCK ACCRETION AND DIVIDENDS. We sold shares of our Series A
preferred stock in May 1999. Our Series A preferred stock has a redemption
feature that requires us to redeem the shares at the option of the holder at a
specified future date at a price that depends upon the fair market value of our
common stock on that date, as well as a cumulative dividend feature. At each
financial reporting date, we are required to measure the fair market value of
the redemption feature and record any increase in that value as accretion for
the preferred stock redemption feature. Accretion for preferred stock also
includes the cumulative dividend for the respective period. Our net loss
attributable to common shareholders is increased by the amount of these
accretions. As of December 31, 1999, the fair value of the redemption feature
was approximately $43.0 million and the amount recorded as accretion and
dividends in 1999 was approximately $11.4 million. As of June 30, 2000, the fair
value
23
<PAGE> 28
of the redemption feature was approximately $58.7 million and the total amount
recorded as accretion and dividends since the issuance of the Series A preferred
stock was approximately $17.6 million. Upon the automatic conversion of our
preferred stock into common stock upon the completion of this offering, the
holders of our Series A preferred stock will receive a payment required under
the terms of their securities of $8.0 million, plus approximately $800,000 in
accrued dividends. We intend to reflect these amounts as a dividend to common
shareholders at that time, which we will include in our net loss attributable to
common shareholders and our loss per share calculation for the quarter in which
this offering is closed.
RESULTS OF OPERATIONS
The following table sets forth some of the data from our statements of
operations expressed as a percentage of total revenues. Period-to-period
comparisons of our operating results are not indicative of our operating results
for any future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ----------------
1997 1998 1999 1999 2000
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license, customization and implementation
revenues......................................... 94.7% 77.7% 75.0% 84.7% 82.7%
Professional services and maintenance revenues...... 5.3 22.3 25.0 15.3 17.3
----- ----- ------ ------ ------
Total revenues................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ------ ------ ------
Operating expenses:
Cost of software licenses, customization,
implementation, professional services and
maintenance...................................... 7.0 12.0 23.0 12.6 38.3
Sales and marketing................................. 29.7 20.5 73.6 42.1 82.5
Research and development............................ 23.3 40.0 78.9 63.5 43.0
General and administrative.......................... 50.2 49.6 83.5 61.4 69.6
Stock-based compensation............................ -- 3.4 13.7 24.1 264.4
----- ----- ------ ------ ------
Total operating expenses......................... 110.2 125.5 272.7 203.7 497.8
----- ----- ------ ------ ------
Operating loss........................................ (10.2) (25.5) (172.7) (103.7) (397.8)
Other income (expense), net........................... -- (0.2) 2.5 0.7 6.6
----- ----- ------ ------ ------
Loss before income taxes.............................. (10.2) (25.7) (170.2) (103.0) (391.2)
Income tax expense.................................... (3.2) (4.6) (0.5) (0.2) (9.1)
----- ----- ------ ------ ------
Net loss.............................................. (13.4)% (30.3)% (170.7)% (103.2)% (400.3)%
===== ===== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Total revenues increased $3.3 million, or 160%, to $5.4 million for the six
months ended June 30, 2000 from $2.1 million for the six months ended June 30,
1999.
SOFTWARE LICENSE, CUSTOMIZATION AND IMPLEMENTATION REVENUES. Software license,
customization and implementation revenues increased $2.7 million, or 154%, to
$4.5 million for the six months ended June 30, 2000 from $1.8 million for the
six months ended June 30, 1999. The increase in software license, customization
and implementation revenues was principally due to sales in 2000 of our
YOUrelate software which was introduced in December 1999. Software license,
customization and implementation revenues as a percentage of total revenues
decreased to 82.7% for the six months ended June 30, 2000 from 84.7% for the six
months ended June 30, 1999.
PROFESSIONAL SERVICES AND MAINTENANCE REVENUES. Professional services and
maintenance revenues increased $619,000, or 195%, to $936,000 for the six months
ended June 30, 2000 from $317,000 for the six months ended
24
<PAGE> 29
June 30, 1999. This increase was attributable principally to a $290,000 increase
in maintenance contracts and a $329,000 increase in consulting engagements not
associated with any license arrangement. Professional services and maintenance
revenues as a percentage of total revenues increased to 17.3% for the six months
ended June 30, 2000 from 15.3% for the six months ended June 30, 1999.
OPERATING EXPENSES
COST OF SOFTWARE LICENSES, CUSTOMIZATION, IMPLEMENTATION, PROFESSIONAL SERVICES
AND MAINTENANCE. Cost of software licenses, customization, implementation,
professional services and maintenance consists primarily of salaries and other
personnel-related costs for professional services and maintenance personnel,
including costs of services provided by independent contractors, and costs of
product documentation. Cost of software licenses, customization, implementation,
professional services and maintenance increased $1.8 million, or 690%, to $2.1
million for the six months ended June 30, 2000 from $262,000 for the six months
ended June 30, 1999. This increase was principally due to the hiring of
additional professional services personnel and consultants related to
implementation and customization. Salaries and contract labor associated with
these additional personnel and consultants increased by $1.4 million in the six
months ended June 30, 2000. Cost of software licenses, customization,
implementation, professional services and maintenance as a percentage of total
revenues increased to 38.3% for the six months ended June 30, 2000 from 12.6%
for the six months ended June 30, 1999.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
commissions, bonuses and other personnel-related costs for sales and marketing
personnel, promotional expenses and expenses related to our efforts to increase
indirect distribution channels. Sales and marketing expenses increased $3.6
million, or 410%, to $4.5 million for the six months ended June 30, 2000 from
$874,000 for the six months ended June 30, 1999. The increase in sales and
marketing expenses for the six months ended June 30, 2000 was principally due to
a $1.6 million increase in salary expense, which reflected the hiring of
additional sales and marketing personnel and a $1.4 million increase in
advertising and other promotional activities. Sales and marketing expenses as a
percentage of total revenues increased to 82.5% for the six months ended June
30, 2000 from 42.1% for the six months ended June 30, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and personnel-related costs, including costs of services provided by
independent contractors, associated with the development of new products and the
enhancement of our existing software, as well as the performance of quality
assurance to verify the existence of a working model of a new release of the
software application. Research and development expenses increased $1.0 million,
or 76.3%, to $2.3 million for the six months ended June 30, 2000 from $1.3
million for the six months ended June 30, 1999. This increase was principally
due to increased product development activities totalling $971,000 associated
with development of the next release of YOUrelate. Research and development
expenses as a percentage of total revenues decreased to 43.0% for the six months
ended June 30, 2000 from 63.5% for the six months ended June 30, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other personnel-related costs for executive, finance
and other administrative functions, recruiting fees, outside professional fees,
non-income related taxes and depreciation and amortization of equipment. General
and administrative expenses increased $2.5 million, or 195%, to $3.8 million for
the six months ended June 30, 2000 from $1.3 million for the six months ended
June 30, 1999. This increase was principally due to increased personnel and
related costs associated with the growth of our business and an increase in
non-income related taxes. The main factors contributing to this increase
included a $1.2 million increase in personnel-related costs, a $396,000 increase
in recruiting fees and a $350,000 increase in consulting expenses. General and
administrative expenses as a percentage of total revenues increased to 69.6% for
the six months ended June 30, 2000 from 61.4% for the six months ended June 30,
1999.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense was $14.3
million for the six months ended June 30, 2000 compared to $500,000 for the six
months ended June 30, 1999. This increase was due to the
25
<PAGE> 30
vesting of stock option grants to employees and consultants. Stock-based
compensation expense as a percentage of total revenues was 264% for the six
months ended June 30, 2000 compared to 24.1% for the six months ended June 30,
1999. If we had allocated our stock-based compensation to our functional
departments, cost of software licenses, customization, implementation,
professional services and maintenance would have increased by $1.8 million,
sales and marketing expenses would have increased by $3.1 million, research and
development expenses would have increased by $5.4 million and general and
administrative expenses would have increased by $3.5 million.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased $1.3 million, or 47.4%, to $4.1 million in 1999 from
$2.8 million in 1998.
SOFTWARE LICENSE, CUSTOMIZATION AND IMPLEMENTATION REVENUES. Software license,
customization and implementation revenues increased $916,000, or 42.2%, to $3.1
million in 1999 from $2.2 million in 1998. The increase in software license,
customization and implementation revenues was due to increased sales of our
Jsales product. Software license, customization and implementation revenues as a
percentage of total revenues decreased to 75.0% in 1999 from 77.7% in 1998.
PROFESSIONAL SERVICES AND MAINTENANCE. Professional services and maintenance
revenues increased $407,000, or 65.5%, to $1.0 million in 1999 from $621,000 in
1998. This increase was attributable principally to a $719,000 increase in
maintenance contracts offset by a $312,000 decrease in consulting engagements
not associated with any license arrangement. Professional services and
maintenance revenues as a percentage of total revenues increased to 25.0% in
1999 from 22.3% in 1998.
OPERATING EXPENSES
COST OF SOFTWARE LICENSES, CUSTOMIZATION, IMPLEMENTATION, PROFESSIONAL SERVICES
AND MAINTENANCE. Cost of software licenses, customization, implementation,
professional services and maintenance increased $612,000, or 183%, to $946,000
in 1999 from $334,000 in 1998. This increase was due to the hiring of additional
professional services personnel and consultants related to implementation and
customization. Cost of software licenses, customization, implementation,
professional services and maintenance as a percentage of total revenues
increased to 23.0% in 1999 from 12.0% in 1998.
SALES AND MARKETING. Sales and marketing expenses increased $2.5 million, or
429%, to $3.0 million in 1999 from $572,000 in 1998. The increase in sales and
marketing expenses was principally due to a $1.0 million increase in
personnel-related costs, reflecting the hiring of additional sales and marketing
personnel, a $751,000 increase in expenses associated with expanded advertising
and other promotional activities and increased sales commissions and bonuses of
$100,000 related to increased software license sales. Sales and marketing
expenses as a percentage of total revenues increased to 73.6% in 1999 from 20.5%
in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $2.1
million, or 191%, to $3.2 million in 1999 from $1.1 million in 1998. This
increase was principally due to increased product development activities
associated with development of a working model of YOUrelate. This increase
consisted mainly of $1.0 million in personnel-related costs and $924,000 in
contract labor expense. Research and development expenses as a percentage of
total revenues increased to 78.9% in 1999 from 40.0% in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $2.0
million, or 148%, to $3.4 million in 1999 from $1.4 million in 1998. This
increase was principally due to a $684,000 increase in personnel and related
costs associated with the growth of our business, a $656,000 increase in
non-income related taxes, and a $187,000 increase in recruiting fees. General
and administrative expenses as a percentage of total revenues increased to 83.5%
in 1999 from 49.6% in 1998.
26
<PAGE> 31
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense was $565,000
in 1999 compared to $96,000 in 1998. This increase was related principally to
preferred stock awards and stock option grants to employees. Stock-based
compensation expense as a percentage of total revenues was 13.7% in 1999
compared to 3.4% in 1998. If we had allocated our stock-based compensation to
our functional departments, sales and marketing expenses would have increased by
$398,000 and research and development expenses would have increased by $71,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased $1.4 million, or 106%, to $2.8 million in 1998 from
$1.4 million in 1997.
SOFTWARE LICENSE, CUSTOMIZATION AND IMPLEMENTATION REVENUES. Software license,
customization and implementation revenues increased $889,000, or 69.5%, to $2.2
million in 1998 from $1.3 million in 1997. This increase in software license,
customization and implementation revenues was principally due to an increase in
sales of our products. Software license, customization and implementation
revenues as a percentage of total revenues decreased to 77.7% in 1998 from 94.7%
in 1997.
PROFESSIONAL SERVICES AND MAINTENANCE. Professional services and maintenance
revenues increased $549,000, or 763%, to $621,000 in 1998 from $72,000 in 1997.
This increase was attributable principally to the increase in maintenance
contracts and to a lesser extent to the number of consulting engagements, both
related to increased software license sales and implementations in 1998.
Professional services and maintenance revenues as a percentage of total revenues
increased to 22.3% in 1998 from 5.3% in 1997.
OPERATING EXPENSES
COST OF SOFTWARE LICENSES, CUSTOMIZATION, IMPLEMENTATION, PROFESSIONAL SERVICES
AND MAINTENANCE. Cost of software licenses, customization, implementation,
professional services and maintenance increased $239,000, or 252%, to $334,000
in 1998 from $95,000 in 1997. This increase was due to additional professional
services personnel related to implementations and customizations of an increased
number of software license sales. Cost of software licenses, customization,
implementation, professional services and maintenance as a percentage of total
revenues increased to 12.0% in 1998 from 7.0% in 1997.
SALES AND MARKETING. Sales and marketing expenses increased $171,000, or 42.6%,
to $572,000 in 1998 from $401,000 in 1997. The increases in sales and marketing
expenses reflected the hiring of an additional sales and marketing person,
expanded advertising and other promotional activities and increased sales
commissions and bonuses related to increased software license, customization and
implementation revenues. Sales and marketing expenses as a percentage of total
revenues decreased to 20.5% in 1998 from 29.7% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $801,000,
or 254%, to $1.1 million in 1998 from $315,000 in 1997. This increase was due to
increased contract programming and payroll expenses associated with our
development of working models for our product offering in 1998. Research and
development expenses as a percentage of total revenues increased to 40.0% in
1998 from 23.3% in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$706,000, or 104%, to $1.4 million in 1998 from $679,000 in 1997. This increase
was principally due to increased personnel-related costs of $332,000 and a
$122,000 increase in non-income related taxes. General and administrative
expenses as a percentage of total revenues decreased to 49.6% in 1998 from 50.2%
in 1997.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense was $96,000
in 1998, or 3.4% of total revenues, related to a common stock award to an
employee. We had no stock-based compensation expense in 1997.
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<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited statement of operations data for the
last six quarters. We have prepared this unaudited information on a basis
consistent with our audited financial statements, and in the opinion of our
management, this information reflects all normal recurring adjustments necessary
for a fair presentation of our operating results for the quarters presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
---------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software license, customization and implementation
revenues............................................ $ 475 $ 1,284 $ 829 $ 497 $ 1,443 $ 3,027
Professional services and maintenance revenues........ 146 171 295 416 359 577
------- ------- ------- ------- -------- -------
Total revenues...................................... 621 1,455 1,124 913 1,802 3,604
------- ------- ------- ------- -------- -------
Operating expenses:
Cost of software licenses, customization,
implementation, professional services and
maintenance......................................... 96 166 360 324 815 1,255
Sales and marketing................................... 332 542 911 1,242 1,849 2,609
Research and development.............................. 644 675 889 1,038 876 1,449
General and administrative............................ 573 701 706 1,453 1,682 2,078
Stock-based compensation*............................. -- 500 33 32 11,453 2,841
------- ------- ------- ------- -------- -------
Total operating expenses............................ 1,645 2,584 2,899 4,089 16,675 10,232
------- ------- ------- ------- -------- -------
Operating loss.......................................... (1,024) (1,129) (1,775) (3,176) (14,873) (6,628)
Other income (expense), net............................. (4) 18 47 44 135 220
------- ------- ------- ------- -------- -------
Loss before income taxes................................ (1,028) (1,111) (1,728) (3,132) (14,738) (6,408)
Income tax expense...................................... (3) (1) (6) (13) (344) (149)
------- ------- ------- ------- -------- -------
Net loss................................................ $(1,031) $(1,112) $(1,734) $(3,145) $(15,082) $(6,557)
======= ======= ======= ======= ======== =======
* Stock-based compensation:
Cost of software, licenses, services, and
maintenance......................................... $ -- $ -- $ -- $ -- $ 1,673 $ 172
Sales and marketing................................... -- 437 31 26 2,336 1,156
Research and development.............................. -- 63 2 6 4,752 683
General and administrative............................ -- -- -- -- 2,692 830
------- ------- ------- ------- -------- -------
Total............................................... $ -- $ 500 $ 33 $ 32 $ 11,453 $ 2,841
======= ======= ======= ======= ======== =======
</TABLE>
During the last two quarters of 1999, we implemented and customized software
with a lower value than in the second quarter of 1999 and, in addition, one
client delayed an expected software implementation and customization, which
resulted in the decline in software license, customization and implementation
revenues. During the first two quarters of 2000, the value of software
customized and implemented increased so that our software license, customization
and implementation revenues also increased during these periods.
Our quarterly operating results have fluctuated significantly in the past and
will continue to fluctuate in the future. These quarterly fluctuations are
caused by a number of factors, including the unpredictability of the timing and
level of sales, our progress in client implementations, the timing of client
acceptance or the lapse of contract cancellation privileges, the timing and
magnitude of large orders, the timing and amount of our marketing, sales and
product development expenses, the cost and time required to develop new software
products, the introduction, timing and market acceptance of new products
introduced by us or our competitors, our ability to establish and maintain
relationships with business partners, third-party implementation services
providers and strategic partners, the mix of distribution channels through which
our software is sold, the mix of international and domestic revenues and
budgeting cycles of our clients. Many of these factors are beyond our control.
Therefore, we believe the results
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<PAGE> 33
of operations for interim periods should not be relied upon as an indication of
the results to be expected in any future period.
LIQUIDITY AND CAPITAL RESOURCES
Since our incorporation in October 1994, we have satisfied our cash requirements
through cash generated by operations and private placements of our preferred
stock. Through June 30, 2000, gross proceeds from two private placements of
preferred stock totaled $35.9 million. As of June 30, 2000, we had cash and cash
equivalents of $10.0 million, compared to cash and cash equivalents of $2.5
million and $456,000 as of December 31, 1999 and 1998, respectively. In
addition, we had marketable securities of $13.3 million as of June 30, 2000. Our
working capital at June 30, 2000 was $17.9 million, compared to working capital
deficits of $3.4 million and $1.1 million at December 31, 1999 and 1998,
respectively.
Net cash provided by (used in) operating activities was ($2.0 million) in 1999,
$501,000 in 1998 and $103,000 in 1997. Net cash used in operating activities in
1999 was primarily attributable to our net loss and increases in accounts
receivable and maintenance revenues, partially offset by increases in billings
in excess of earned revenues, deferred revenue, accounts payable and accrued
liabilities. Net cash used in operating activities was $7.0 million for the six
months ended June 30, 2000. Net cash used in operating activities for the six
months ended June 30, 2000 was primarily attributable to our net loss and
increase in prepaids and other current assets, partially offset by non-cash
stock-based compensation charges.
Cash used in investing activities was $595,000 in 1999, $186,000 in 1998, and
$16,000 in 1997. Cash used in investing activities in 1999 was attributable to
purchases of property and equipment to support our expanding operations. Cash
used in investing activities was $14.2 million for the six months ended June 30,
2000 and was attributable to the purchase of marketable securities as well as
purchases of property and equipment to support our expanding operations.
Net cash provided by (used in) financing activities was $4.6 million in 1999,
($23,000) in 1998 and ($46,000) in 1997. Net cash provided by financing
activities in 1999 was primarily attributable to proceeds from our sale of
Series A preferred stock in May 1999. Net cash provided by financing activities
was $28.8 million for the six months ended June 30, 2000 and was primarily
attributable to proceeds from our sale of Series B preferred stock completed in
April 2000.
On April 7, 2000, we completed the sale of 2,572,376 shares of our Series B
preferred stock to a group of investors for cash consideration of $30.9 million.
Each share of Series B preferred stock is currently convertible into one and a
half shares of common stock, subject to certain adjustments in the event of
certain future share issuances. However, if the initial public offering price
per share of our common stock in this offering is less than $16.03, the
conversion price of the Series B preferred stock will decrease to one-half of
the initial public offering price per share; however, if the initial public
offering price is less than $12.81 per share, the conversion price will not
decrease below $6.41 per share. As the conversion price of our Series B
preferred stock decreases, the holders of these preferred securities receive a
larger number of shares of common stock upon conversion; however, due to the
limitation on the amount of the decrease, we will not be required to issue more
than approximately 967,652 additional shares of common stock to the Series B
shareholders regardless of our initial public offering price. For pro forma net
loss per share purposes, we have assumed an initial public offering price of
$12.00 per share resulting in the issuance of an additional 967,652 shares of
common stock to holders of Series B preferred stock which results in a
conversion ratio of approximately 1 to 1.875 for the Series B preferred stock.
On September 15, 2000, we entered into a commitment with a lender to establish a
$4.5 million revolving line of credit, together with a $1.4 million standby
letter of credit. We are presently negotiating a definitive agreement to reflect
this arrangement.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future as we increase our sales,
marketing and customer support activities, continue to expand our
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<PAGE> 34
research and development activities and develop and expand our network of
business partners and international operations. These operating expenses will
consume a material amount of our cash resources, including a portion of the net
proceeds of this offering. We also anticipate a substantial increase in our
capital expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We believe that the net proceeds of this offering,
together with our existing cash and cash equivalents and marketable securities,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 18 months. However, we may need to
raise additional funds in the future to support the continued expansion of our
sales and marketing force and product development efforts, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated requirements. If we seek to raise additional funds, we
may not be able to obtain funds on terms which are favorable or acceptable to
us. If we raise additional funds through the issuance of equity securities, the
percentage ownership of our shareholders would be reduced. Furthermore, these
securities may have rights, preferences or privileges senior to our common
stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. We do not use any derivative financial instruments for
hedging, speculative or trading purposes. Due to the short-term nature of our
investments, we believe that there is no material risk exposure.
Substantially all of our revenues are realized currently in U.S. dollars. In
addition, we do not maintain any asset or cash account balances in currencies
other than the U.S. dollar. Therefore, we do not believe that we currently have
any significant direct foreign currency exchange rate risk. However, we believe
international markets represent a significant growth opportunity which we intend
to continue to aggressively pursue following the completion of this offering.
Consequently, we expect we will have international revenues in the future. The
establishment of international operations will be subject to a variety of risks
that could significantly harm our business and operating results. As our
international sales and operations expand, we anticipate that our exposure to
foreign currency fluctuations will increase because we have not adopted a
hedging program to protect us from risks associated with foreign currency
fluctuations. Since substantially all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our product less competitive in foreign
markets.
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<PAGE> 35
BUSINESS
OVERVIEW
We provide mass-customized e-business relationship management software that
enables businesses to manage and optimize their complex and rapidly evolving
relationships throughout the extended value chain. Using our software, users can
communicate with each other and access, update and manage a common body of
information relevant to their role in the business relationship.
INDUSTRY BACKGROUND
The growth of the Internet has begun to transform the manner in which businesses
operate and interact with customers and partners, as well as their own
employees. Four key trends have emerged, which we believe will have significant
impact on the application of relationship management technology for businesses:
- business models are rapidly changing;
- customer relationship management has emerged as a critical initiative for
businesses as they develop better ways to retain customers and remain
competitive in changing marketplaces;
- Enterprise Java has continued to gain acceptance as a technology platform
for large scale e-business software solutions; and
- Web-enabled wireless and mobile devices are experiencing growing
popularity as a means to access Internet applications.
In today's highly competitive global marketplace, it is critical for businesses
to focus their resources on ways to attract and retain customers and maximize
the value of customer relationships. Many businesses now seek to exploit
technology to generate and enhance revenues and improve customer relationships,
as well as to reduce their operating costs. In addition, the growth in the use
of the Internet is fundamentally changing the ways that businesses initiate,
manage and develop customer and business partner relationships. Forrester
Research, an independent industry market analysis firm, predicts that total
e-commerce revenues will grow from $197.0 billion in 1999 to $1.9 trillion in
2003. In order to remain competitive, businesses are implementing new business
models focused on electronic business, or e-business, initiatives to communicate
and share information and transact with customers and business partners
worldwide. As a result, a new class of e-business software applications has
emerged that attempts to leverage the widespread availability of the Internet to
enable businesses to conduct transactions and support a broad array of
relationships over the Web.
Businesses have invested and will continue to invest heavily in customer
relationship management, or CRM, software to maximize the value of customer
relationships. AMR Research predicts that the worldwide CRM market will grow
from $2.3 billion in 1998 to $16.8 billion by 2003, a compound annual rate of
49%. Traditional CRM software products generally are only focused on achieving
internal administrative efficiencies, including the reduction of selling costs,
and usually are only used to track information within direct sales channels.
Furthermore, these software products are designed primarily for access only by a
company's internal sales personnel. In addition, traditional CRM software
products emerged before the widespread commercial use of the Internet and were
based upon client/server architectures. A client/server architecture requires
that vendor-specific software be installed and maintained on personal computers,
called clients, which are tied to and share data and applications with more
powerful server computers. Many providers of traditional CRM products have
recently added Web browser interfaces to their products, but have not
re-engineered their products to address business models that are being driven by
the Internet. These applications were not designed to exploit the more complex,
Web-based relationships that exist today, which require real-time collaborative
interactions throughout the extended value chain. Compounding this problem is
the inflexible approach of most traditional CRM products, which impose a rigid
structure upon a business and the ways it uses and shares information, rather
than adapting to the individual needs and business processes of the enterprise
and each participant in the extended value chain.
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<PAGE> 36
With the rapid growth of the Web, businesses are turning to e-business software
for their CRM needs. The first generation of e-business software has been
primarily focused on providing the infrastructure to enable consumer-oriented
transactions. A variety of e-business software applications have also been
introduced to target specific aspects of the customer relationship, such as
Internet content management, personalization offerings and e-mail routing and
response. Many of these Web-based e-business products lack the broad
functionality of traditional CRM offerings. For example, many e-business
software applications only support customer interaction over the Web and
therefore ignore the importance of traditional sales channels in developing a
comprehensive, common view of the customer.
In response to the shortcomings of traditional CRM products and first generation
Web-based e-business products, businesses are seeking more advanced Web-based
solutions that will allow them to manage complex relationships throughout the
extended value chain in order to target new customers and sell to existing
customers more effectively. Furthermore, we believe that most companies will not
abandon their traditional sales channels in favor of Web-based sales, but rather
will seek to integrate their traditional sales channels with the new channel
offered by the Web in order to enhance the efficiency of their overall sales
efforts. In order to achieve these goals, businesses are seeking:
- relationship management solutions that provide a comprehensive, common
view of customers across multiple selling channels and enable various
participants in the extended value chain to obtain real-time information
about rapidly changing customer and sales partner relationships;
- opportunities to take advantage of the latest Web technologies to enable
and enrich the collaboration of their employees, customers, sales
partners and suppliers with timely and relevant information on a variety
of Web-enabled, portable and wireless devices; and
- solutions that can be tailored to match their needs and business methods,
can quickly adapt to changes in those needs and methods, and can be
rapidly and efficiently deployed and expanded.
THE YOUCENTRIC SOLUTION
YOUrelate is a next-generation, Web-based e-business relationship management
software platform that can be mass-customized to enable businesses to manage
their complex relationships, both within their own organizations and throughout
the extended value chain. Our software enables businesses to utilize the Web to
provide comprehensive relationship management and collaboration capabilities to
their customers, sales partners, suppliers and employees. The broad
functionality of our software can be accessed using a standard Web browser on a
wide variety of devices. YOUrelate is component-based and can be configured to
suit the way an individual business operates so that users have the information
and functionality that they need. YOUrelate is engineered using advanced Web-
based technologies, which allow it to take advantage of the Web and run on a
wide variety of operating systems, networks, databases and Web-enabled devices.
Our software allows our clients to:
Significantly enhance the management of critical business
relationships throughout the extended value chain -- Our software
significantly alters relationship management by leveraging the Web to
enable a more effective collaboration among customers, sales partners,
suppliers and employees. As a result of this collaborative process, our
clients can develop a comprehensive, common view of their customers and
achieve more efficient coordination of their sales channels in order to
maximize revenue and customer satisfaction. The Web-based nature of our
software allows each participant to:
- share applications easily;
- interact with other participants; and
- access, add to and update information relevant to their role in the
extended value chain through almost any device that has a Web browser.
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As a result, our software allows a business to create a consistent and
continually updated set of information regarding the characteristics of a
particular customer that can be shared throughout the extended value chain,
including:
- their Web-based interactions, such as customer service requests and
problem resolutions;
- the status of sales efforts by channel; and
- prior product purchases or marketing efforts.
Achieve and maintain a competitive advantage through our
mass-customization capabilities -- Our software packaging model allows our
software to be tailored to the specific relationship management needs of
our clients and the participants in their extended value chain. Because our
software is component-based, we can arrange our business functionality
components to embrace unique aspects of our clients' evolving business
practices and business models in a way that is beyond the capabilities of
traditional, pre-packaged CRM software. Furthermore, once our software is
installed, it may be adapted by our clients to provide users with the
information and functionality that they need and to react to evolving
circumstances. As a result, our software allows our clients to enhance
their own unique business practices and business models.
Exploit the full capabilities of the Web -- Our software is written
entirely using advanced Web-based technologies, allowing it to handle
today's more complex, Web-based relationships and to take advantage of the
widespread availability of the Internet. Our use of these Web-based
technologies overcomes traditional technology barriers to communication and
collaboration throughout the extended value chain. In addition, our
software runs on a wide variety of operating systems, networks, databases
and Web-enabled devices. Our software is written using:
- Enterprise Java, a programming language and software platform that
runs on most widely used computer operating systems;
- hypertext markup language, or HTML, a document formatting language
designed for presentation over the Web; and
- extensible mark-up language, or XML, an emerging standard for
sharing data over the Web.
Deploy a highly functional, customized and cost-effective e-business
relationship management solution -- We can efficiently arrange our
components to create a highly customized solution without the investment of
time and money typically required to customize a traditional CRM solution.
In addition, because our software is written in Java, HTML and XML, it is
compatible with most widely used applications, databases and operating
systems, preserving our clients' prior investments in infrastructure and
avoiding the time and cost associated with major system changes.
THE YOUCENTRIC STRATEGY
Our goal is to be the leading provider of e-business relationship management
software. Key elements of our strategy to achieve this goal include:
EXPLOIT OUR EMERGING LEADERSHIP IN WEB-BASED, MASS-CUSTOMIZED RELATIONSHIP
MANAGEMENT SOFTWARE. We believe we are one of the first companies to provide
enterprise-class Web-based e-business relationship management software. We
intend to leverage this position to continue to aggressively target and
penetrate large companies which have complex, multi-channel value chains. We
believe that many of these companies are seeking the next generation of
e-business relationship management software that can support both internal and
external relationship management to maximize revenues and customer satisfaction.
CONTINUE TO EXPAND OUR DIRECT SALES FORCE AND INDIRECT DISTRIBUTION
CHANNELS. We have recently increased our sales organization significantly,
growing from two sales people at the end of 1998 to 16 as of August 31, 2000,
and we intend to continue this expansion. We are also expanding our telesales
team and intend to expand our indirect
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<PAGE> 38
distribution channels to increase our market coverage and add product
implementation capacity. We have established co-marketing relationships with IBM
and BEA Systems, a distribution and product implementation relationship with
Sybase and a product implementation relationship with marchFIRST. We intend to
continue to pursue additional relationships with leading software vendors,
systems integrators, consulting firms and other distribution partners in order
to broaden our market presence and implementation capabilities.
PENETRATE CURRENTLY TARGETED VERTICAL MARKETS AND PURSUE ADDITIONAL VERTICAL
MARKETS. To date, we have focused much of our efforts on the financial services
and life sciences vertical markets, which are characterized by rapid change and
complex relationships among the participants in the extended value chain.
Through mass-customization, our software can be rapidly tailored to address
specific requirements of these vertical markets. The focused pursuit of these
markets has increased our ability to offer and sell software that addresses the
unique needs of our target clients. We intend to continue to leverage the highly
configurable and adaptable nature of our software to create industry-specific
components, targeted to meet the unique needs of clients within a particular
industry. In addition, we will continue to organize our sales force around
complementary vertical markets so that we may offer more specialized,
consultative expertise when clients evaluate and license our product.
CONTINUE TO EXPAND FUNCTIONALITY FOR A WIDE VARIETY OF WIRELESS, WEB-ENABLED
DEVICES. Given the mobility of sales personnel, sales partners and customers,
we believe the demand for relationship management functionality through
Web-enabled wireless devices will increase, especially as the use of these
devices becomes more prevalent. Because our product is highly adaptable and
Web-based, we intend to focus our development efforts on extending our software
solution to capitalize on the growing use of Web-enabled wireless devices, such
as personal digital assistants and cellular telephones.
EXPAND MARKET SHARE BY PURSUING RELATIONSHIPS WITH APPLICATION SERVICE
PROVIDERS. We intend to continue to pursue relationships with leading
application service providers, or ASPs, who will work with us to deliver our
software as an outsourced, externally hosted service. There is a growing demand
by businesses, especially those in the mid-market, to outsource their critical
e-business software, including their relationship management needs. According to
AMR Research, the worldwide market for enterprise ASP applications is expected
to grow to $4.7 billion by 2004, a compound annual rate of approximately 153%.
Through an ASP, a business can quickly implement a solution without making the
substantial initial and ongoing investment in support staff and technology that
would otherwise be necessary. We recently entered into an agreement with 3i
Networks to provide our software as one of their hosted services. We believe
that our highly configurable, Web-based product architecture enables ASPs to
create product offerings tailored to their specific target markets in a
cost-effective manner.
EXPAND OUR INTERNATIONAL PRESENCE. We believe that international markets
represent a significant opportunity for sales of our product. To date, however,
most of our sales efforts have been focused on the U.S. market. We plan to
capitalize on international market opportunities, primarily in Latin America,
Europe and Asia, by establishing and expanding international sales offices,
establishing an international direct sales force and building strategic overseas
indirect distribution channels with software vendors and systems integrators to
provide sales, marketing and services support. We currently have a limited sales
staff in Europe, which we intend to expand, as well as a sales and support staff
based in Charlotte, North Carolina, who are responsible for Latin America. We
also intend to have sales and support staff in Asia over the next 12 to 18
months.
THE YOUCENTRIC PRODUCT -- YOURELATE
YOUrelate is Web-based software that allows our clients to deploy sophisticated
relationship management capabilities throughout their extended value chains,
using a single, centrally administered application. YOUrelate includes
pre-fabricated software applications, created from our component library, which
provide relationship management and collaboration capabilities. YOUrelate
provides a unified relationship management platform for the enterprise and its
sales partners and customers.
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ENTERPRISE FUNCTIONALITY
Users in customer service, sales and marketing, as well as executive and
occasional users, can perform relationship management functions, ranging from
simple information access to complex account, contact, opportunity and campaign
management and service and support tasks. In addition, marketing professionals
can perform account management and analyze critical sales and marketing
information, such as market demographics, campaigns, sales territories, product
trends, and customer/sales transactions, to make strategic sales and marketing
decisions. The following chart summarizes some of the key functions of YOUrelate
available to an enterprise's internal users:
<TABLE>
<S> <C>
LEAD MANAGEMENT...................... Supports the ability to systematically consolidate leads
from all sources and collect key prospect information.
ACCOUNT AND CONTACT MANAGEMENT....... Supports the ability to maintain, share and analyze key
account information, including account profile information,
related contacts, activity history and sales opportunity and
forecast information.
OPPORTUNITY MANAGEMENT............... Provides the ability to share and analyze pipeline, sales
and revenue status information across internal and external
sales teams along with the attached sales probability by
account, contact, territory and projected revenue as well as
other user-defined criteria.
TEAM SELLING......................... Provides the ability to establish and link sales teams or
individuals to accounts or industries, establish territories
and monitor certain industries to aid teams organized around
a specific industry.
CAMPAIGN AND EVENT MANAGEMENT AND
TRACKING............................. Allows the definition and management of complex marketing
campaigns and events across the entire enterprise that can
be integrated with other business functions to update sales,
service and distribution channels automatically.
INCIDENT MANAGEMENT.................. Tracks problems reported by customers from inception to
resolution. Provides a systematic approach to assign,
prioritize and escalate problem resolution.
PRODUCT INTELLIGENCE................. Allows creation of multi-level product encyclopedia and
association of relevant product information, including
specifications, pricing information, media, collateral, Web
resources, and sales and opportunity metrics.
COMPETITOR MANAGEMENT................ Allows competitor profiles and product information to be
organized and distributed to sales partner organizations.
PARTNER MANAGEMENT................... Provides the ability to maintain a directory of sales
partners and related information, such as contacts, shared
accounts and marketing opportunities.
TERRITORY MANAGEMENT................. Allows definition of multi-level territory structures for
sales management purposes. Allows assignment of accounts,
employees and business units to specific territories.
INDUSTRY MANAGEMENT.................. Provides the ability to organize and manage
industry-specific information that can be distributed to
sales organization and used in the development of targeted
marketing campaigns.
LITERATURE FULFILLMENT............... Defines and administers product literature either internally
or by an external fulfillment house. Allows tracking of
literature inventory as well as production and fulfillment
costs.
</TABLE>
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SALES PARTNER FUNCTIONALITY
YOUrelate enables our clients to exchange information with their sales partners,
including their suppliers, resellers, vendors, and distributors, to help drive
revenue generation, profitability and sales partner loyalty. Through YOUrelate,
sales partners have real-time access to sales, marketing, and service
information through a standard Web browser, regardless of their location and
technology environment. Our clients and their sales partners can collaborate and
communicate over the Web, respond more quickly to prospects and customers and
provide Web-based product and market information. The following chart summarizes
some of the key functions of YOUrelate available to an enterprise's sales
partners:
<TABLE>
<S> <C>
LEAD MANAGEMENT...................... Provides lead tracking by giving sales partners quick access
to leads from multiple sources, including Web-based leads.
Allows sales partners to register and manage leads, maintain
lead profiles and activity history and track status of leads
through the sales cycle.
COLLABORATIVE ACCOUNT MANAGEMENT AND
SELLING.............................. Provides sales partners with a comprehensive view of a
customer or prospect, including lead information, account
history, opportunity status and other customer interactions.
Allows sales partners to participate and collaborate in the
sales process and update account, contact, activity and
opportunity information as needed.
PRODUCT AND MARKET INTELLIGENCE
COLLABORATION........................ Provides sales partners access to our clients' product,
market, and industry intelligence to facilitate sales,
marketing and service efforts. Product alerts and
notifications can be broadcast to appropriate sales
partners.
CAMPAIGN COORDINATION................ Allows marketing campaigns to be coordinated with sales
partners.
</TABLE>
CUSTOMER FUNCTIONALITY
YOUrelate enables our clients' customers to access relevant enterprise
information such as product-related information and catalogs, account
information, and marketing and event updates. YOUrelate also offers customer
self-service and the ability to integrate with e-commerce capabilities.
Relationship management functions for customers can be embedded directly into
our clients' Web sites. The following chart summarizes some of the key functions
of YOUrelate available to an enterprise's customers:
<TABLE>
<S> <C>
CUSTOMER SELF-SERVICE AND SELF-
SUPPORT.............................. Provides access 24 hours a day, seven days a week, to a
variety of customer self-service and support capabilities,
including:
- problem reporting and resolution tracking -- customers can
submit problem reports and access resolution status; and
- order and invoice tracking -- customers can access details
related to orders and invoices.
PRODUCT INTELLIGENCE AND
NOTIFICATIONS........................ Provides access to a full range of product-related
information, such as features/benefits, specifications,
pricing, and competitive comparisons.
MARKETING EVENT ACCESS AND
REGISTRATION......................... Allows relevant marketing event information to be accessed
by customers. Business rules can be defined which
automatically notify or remind interested customers about
specific events.
E-COMMERCE INTEGRATION............... E-commerce catalogs and payment functions can be integrated
with customer information to provide a consolidated view of
all customer interactions.
</TABLE>
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<PAGE> 41
PRODUCT ARCHITECTURE AND TECHNOLOGY
Our software utilizes a distributed, Web-based architecture and is based on key
Internet and enterprise computing standards. YOUrelate takes advantage of
popular Java standards such as Enterprise Java Beans, a framework for developing
and deploying reusable server components, and Servlets, secure programs that
execute on the server in response to requests from a web browser. In addition,
we exploit key Internet technologies such as XML and HTML. The core of our
product, the object server, will run on multiple mainstream operating systems,
including:
- Microsoft Windows NT;
- Linux;
- Solaris;
- HP/UX; and
- IBM AS/400.
In addition, our software supports multiple leading Enterprise Java Beans
Application Server products, including:
- BEA WebLogic;
- IBM WebSphere; and
- Sybase EA Server.
Unlike the requirements of a client/server architecture, users simply need a
browser to perform any function available in our product. Software does not need
to be distributed to any user, either within the organization or to its
customers, sales partners or suppliers, making the software easier to implement,
maintain and upgrade than client/server-based software.
The YOUrelate product architecture consists of the following major elements:
<TABLE>
<S> <C>
OBJECT SERVER........................ An Enterprise Java Beans server that houses all of the
business objects representing the application, the business
rules, the security information and application services. It
maps to the customer's environment by housing a combination
of business object templates and custom objects that
correspond to the customer's business or relationship
management vision.
HTML PRESENTATION SERVER AND JAVA
CLIENT INTERFACE FOR DISCONNECTED
USERS................................ The presentation server generates the user interface for the
HTML client using standard Java protocols. The presentation
server can be integrated with existing Web servers such as
Netscape Enterprise Server, Microsoft Internet Information
Server or Apache. In addition, a Java-based user interface
is available to provide support for disconnected mobile
users.
YOURELATE BUSINESS OBJECTS AND
APPLICATION TEMPLATES................ The YOUrelate business object library is a suite of more
than 80 Java-based business components that can be used as
is, or can be extended or augmented to incorporate unique
aspects of a customer's business model. In addition,
YOUrelate application templates are employed as ready to use
applications for specific constituents.
ASSEMBLY LINE TOOL................... Our Assembly Line configuration tool allows companies to
quickly tailor and extend baseline functionality. Any
functionality component or combination of components can be
customized and integrated into an existing Web site.
DATA SOURCE PROVIDER................. One of our application programming interfaces which allows
us to support disparate enterprise data sources, including
relational databases and XML while maintaining a consistent
internal interface.
</TABLE>
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Our product uses software, such as Sun Microsystems' Java programming language,
as well as object/relational mapping and data synchronization software, that is
licensed to us or our clients on a non-exclusive basis by third-party software
companies. We do not believe that any of our software suppliers are material to
our business because there are alternative sources of supply for all of the
third-party software used by our products.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
At August 31, 2000 we had a total of 38 professional services personnel and 12
customer support personnel who offer a broad range of implementation,
maintenance and support and training services to our clients. We leverage the
highly configurable, component-based nature of our software to provide
implementation assistance at all levels of the project's life cycle. Through our
professional services personnel, we provide the following implementation
solutions:
- The YOUcentric Turnkey Solution -- Our staff develops a fully customized
solution and assists our client's technical team with deployment. This
option is ideal for clients who want a customized solution but do not
have an internal development staff.
- The YOUcentric Jump Start Solution -- After our client selects the
functionality components it desires, we deliver a working prototype, and
our staff instructs our client's development staff so that they can take
control of the application and add functionality as their needs evolve.
This option requires that our client have two or three internal
developers.
- The YOUcentric Quick Start Solution -- Our client selects from
approximately eight basic functionality components, and then our staff
assembles them and assists our client's project team in configuring and
deploying the application. Additional functionality can be easily added
as users become more proficient and business needs evolve.
We also offer technology training for our client's application developers.
Training is usually conducted at our client's location or at our headquarters in
Charlotte, North Carolina and consists of hands-on instruction in a lab setting.
The training is focused on positioning clients to function independently.
We also provide continuing maintenance and support services to our clients. Our
clients have a choice of support options depending on the level of service they
desire. Some support plans, for example, are designed for organizations that
need support only during the business day, while others offer more comprehensive
service.
SALES AND MARKETING
We sell our products primarily through our direct sales force, consisting of 16
persons at August 31, 2000. To support the complex nature of our solution, our
direct sales force is organized into two-member teams consisting of one sales
representative and one sales engineer. Currently, our direct sales force focuses
primarily on domestic sales, although we intend to add additional sales
representatives in Europe, Latin America and Asia. We currently have 12 sales
offices, including offices in Boston, Atlanta, Dallas, Houston, New York,
Philadelphia, Los Angeles and London. In addition, as of August 31, 2000, we
have a team of six individuals involved in telesales from our headquarters in
Charlotte.
To date, we have targeted the financial services and life sciences vertical
markets. We intend to continue to leverage the highly configurable and adaptable
nature of our software to create industry-specific component packages that can
be targeted to the unique needs of clients within a particular industry. In
addition to our direct sales capabilities, we have established co-marketing
relationships with IBM and BEA Systems and a distribution and product
implementation relationship with Sybase. We intend to continue to pursue
relationships with leading software vendors and systems integrators.
A key aspect of our sales and marketing efforts is called proof of concept, in
which we develop a working prototype of our application mapped to several
elements of a potential client's business and data architecture and
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<PAGE> 43
deliver this prototype in approximately two or three weeks. While the proof of
concept is not intended to be deployed as a working application to a group of
users, we believe that it is an effective sales and marketing tool because it
demonstrates our ability to understand our clients' business model and translate
that understanding into a fully customized application.
Trade shows were our biggest source of sales leads in 1999. We believe that
trade shows present an opportunity to interact directly with our buying audience
and create brand awareness, and we intend to expand our trade show presence in
2000.
Businesses that license our software receive nonexclusive, perpetual licenses to
use our software for a specified number of users, or a license for an unlimited
number of users at a specific location. In addition, our clients typically
purchase professional services from us, including consulting and implementation
services, although they may use other consulting organizations. The term of
these consulting engagements varies depending on the complexity of the required
software customization and implementation process. Businesses that license our
software also usually purchase maintenance contracts, which provide software
upgrades and technical support typically over renewable 12-month terms.
CUSTOMERS
The following table is a representative selection of our customers who have
purchased software licenses for our YOUrelate or Jsales products:
<TABLE>
<S> <C>
AgriBank, FCB* Legg Mason Wood Walker*
Aluminium.com* Lodgian
Bear, Stearns McGraw-Hill Higher Education
BlueCross and BlueShield of Louisiana Micron Electronics
Educators Mutual Life Insurance Company* The Northern Trust Company
FedEx* Rainmaker Systems*
Hertz Seagate Technology*
Knight Securities* U S West Dex*
</TABLE>
---------------------------------------------
* Purchased YOUrelate.
To date, we have depended on a limited number of customers for a significant
portion of our revenues. In 1999, sales of products and services to one customer
accounted for 38.2% of our total revenues. In 1998, sales of products and
services to three different customers accounted for 22.1%, 21.6% and 14.0% of
our total revenues. For the six months ended June 30, 2000, sales of products
and services to two other customers accounted for 45.3% and 11.2% of our total
revenues. We believe that, while large orders from a limited number of customers
will continue to account for a substantial portion of our revenues in any fiscal
period, the particular customers are likely to change from period to period. We
do not believe that the specific customers that accounted for 10% or more of our
revenues in historical periods will account for 10% of our revenues in the
future.
RESEARCH AND DEVELOPMENT
We devote a substantial portion of our resources to developing new product
features, extending and improving our products and technology and researching
new technological initiatives in the market for Web-based relationship
management solutions. As an example of our technology initiatives, we are
developing an application to be released in 2000 that allows our software
product to interface with a variety of Web-enabled and wireless devices,
including
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<PAGE> 44
Palm, Windows CE and wireless application protocol enabled cellular devices. We
are also working on the following initiatives:
- support of additional wireless devices;
- computer telephony integration for use in call centers;
- localization of our solution for international markets;
- integration with office automation, groupware and e-mail solutions; and
- extension of our solution to new vertical markets.
As of August 31, 2000, we had 62 employees and contractors engaged in research
and development initiatives. Our research and development expenditures for 1999
and for the six months ended June 30, 2000, were approximately $3.2 million and
$2.3 million, respectively. We expect we will continue to commit significant
resources to research and development in the future.
COMPETITION
We currently compete with a number of companies offering products that include
elements of our product's functionality. We currently encounter competition
primarily from two types of competitors:
- traditional CRM vendors, such as Onyx, Oracle, Pivotal and Siebel; and
- vendors of e-business products, such as BroadVision, Firepond and Kana
Communications.
In addition, we sometimes compete with systems integrators who focus on
providing Web-based applications for their customers. We could also lose a sale
if the internal technology department of a potential client elects to develop
capabilities in-house that are similar to those offered by our product.
We expect that new competitors will continue to enter the market for e-business
relationship management software as the size and visibility of the market
opportunity increases. We also expect that competition will increase as a result
of software industry consolidations and the formation of alliances among
industry participants. We believe the primary competitive factors in our market
are:
- comprehensiveness of applications;
- adaptability, flexibility and scalability;
- adherence to open technology standards;
- capability for real-time interaction with customers, employees, partners,
vendors and suppliers;
- integration with a variety of communications media;
- ease of use;
- ease of implementation;
- customer service and support; and
- price.
INTELLECTUAL PROPERTY
Our success and ability to compete are substantially dependent upon our
technology and intellectual property. Trademarks, service marks, trade secrets,
copyrights and other proprietary rights are important to our success and
competitive position. While we rely on copyright, trade secret and trademark law
to protect our technology and
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<PAGE> 45
intellectual property, we believe that factors such as the technological and
creative skills of our personnel, new product and service developments and
frequent product and service enhancements are more essential to establishing and
maintaining an intellectual property leadership position.
As part of our effort to protect our intellectual property, we rely in part on
confidentiality agreements with employees and third parties, and protective
contractual provisions such as those contained in license agreements with
consultants, vendors and customers. However, all of our contractual arrangements
under which we have licensed our products provide our clients with access to all
or a portion of the source code for our software and allow them to modify all or
a portion of the software. Some of these contractual arrangements provide that
the client has exclusive rights to any modifications it creates. Each client
that has been granted these rights is prohibited by provisions in the applicable
license agreement from exploiting or providing to third parties any competing
products it may develop based on the licensed software. Each license agreement
has use restrictions prohibiting the client from using or disclosing to third
parties our confidential information, including the source code for our
software, as well as provisions acknowledging that we own the licensed software,
including the source code. The nature of our software is such that no
modification will operate on a stand-alone basis without the basic software.
Since any modification made by a client would need the basic software to
operate, no licensee may use a modification any more broadly than the permitted
use of the licensed software. Finally, each license limits use of the basic
software to the licensee's own internal business operations. No modification,
therefore, could be used competitively, but the client could challenge our right
to use its software modifications in our software with other clients in the
future.
Under a distribution agreement we have entered into, the source code of our
Jsales product has been placed in escrow to be released only upon a material
default under the agreement or our failure to continue doing business.
Furthermore, the source code to our YOUrelate product has been placed in escrow
pursuant to agreements with several of our clients, to be released only upon our
failure to continue doing business.
We currently hold several pending applications for trademark registrations in
the United States, including applications for YOUcentric and YOUrelate. In
addition, we hold a copyright on the source code to YOUrelate and a pending
application for the source code to various Java-based CRM applications.
EMPLOYEES
As of August 31, 2000, we had 148 employees and 51 independent contractors. Of
these 199 people, 62 are in research and development, 59 are in sales and
marketing, 50 are in professional services and customer support and 28 are in
general and administrative functions. None of our employees is subject to a
collective bargaining agreement. We believe that our relations with our
employees are good.
FACILITIES
Our corporate headquarters are located in Charlotte, North Carolina, where we
lease approximately 65,000 square feet of office space under a lease expiring in
September 2005. We also lease approximately 8,700 square feet of office space
under a sublease expiring in February 2004 and approximately 2,500 square feet
of office space under a lease expiring in February 2003, which until recently
housed our headquarters. We intend to sublease this space. We currently have 12
sales offices, including offices in Boston, Atlanta, Dallas, Houston, New York,
Philadelphia, Los Angeles and London.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from time
to time become a party to various legal proceedings arising in the ordinary
course of business.
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages, as of August 31, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas M. Fedell..................... 47 Chairman of the board of directors
Donald A. DeLoach.................... 39 President, chief executive officer and director
J. Blount Swain...................... 43 Chief financial officer
Robert E. Kear....................... 46 Executive vice president of corporate strategy, secretary
and director
Karl R. Johnson...................... 36 Chief technology officer and director
J. Wells Tiedeman.................... 32 Vice president of special projects
Mark D. Logan........................ 37 Senior vice president of worldwide sales
Robert J. Cummings................... 31 Vice president of professional services
Richard E. Field..................... 41 Vice president of engineering
Brian B. Ladyman..................... 33 Vice president of marketing
Timothy K. Armour*................... 51 Director
C. Toms Newby, III*+................. 33 Director
David J. Scanlan*+................... 29 Director
</TABLE>
---------------------------------------------
* Member of the compensation committee.
+ Member of the audit committee.
Thomas M. Fedell co-founded YOUcentric in October 1994 and has served as our
chairman of the board since April 2000. Mr. Fedell served as our president from
June 1996 to December 1999 and our chief executive officer from January 2000 to
April 2000. From October 1994 to June 1996, Mr. Fedell served as southeast
practice manager for professional services of Sybase, Inc., a global software
company.
Donald A. DeLoach has served as our president and a director since January 2000
and our chief executive officer since April 2000. From July 1999 to April 2000,
Mr. DeLoach served as our chief operating officer. From May 1994 to June 1999,
Mr. DeLoach served as vice president of North American sales and marketing of
Sybase, Inc.
J. Blount Swain has served as our chief financial officer since April 2000. From
September 1992 to April 2000, Mr. Swain served as vice president of finance and
chief financial officer of Closure Medical Corporation, a medical device
company. Mr. Swain is a certified public accountant.
Robert E. Kear co-founded YOUcentric and has served as our secretary and
director since October 1994 and as our executive vice president of corporate
strategy since June 1999. From October 1994 to June 1999, Mr. Kear served as our
vice president of product development.
Karl R. Johnson co-founded YOUcentric and has served as a director since October
1994 and as our chief technology officer since June 1999. From October 1994 to
June 1999, Mr. Johnson served as our vice president of technical architecture.
J. Wells Tiedeman co-founded YOUcentric and has served as our vice president of
special projects since January 2000 and a director from March 1995 to May 1999.
From January 1995 to January 2000, Mr. Tiedeman served as our vice president of
application development.
Mark D. Logan has served as our vice president of worldwide sales since April
1997. From December 1994 to April 1997, Mr. Logan held various sales positions
at Sybase, Inc.
Robert J. Cummings has served as our vice president of professional services
since January 2000 and as our director of professional services from September
1998 to January 2000. From February 1998 to August 1998,
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Mr. Cummings served as a project manager for ARC Partners, Inc., a management
consulting firm. From February 1994 to February 1998, Mr. Cummings served as a
systems project manager at M&M/Mars, Inc., a candy manufacturer. From February
1991 to February 1994, Mr. Cummings served as a systems consultant at Arthur
Andersen & Co.
Richard E. Field has served as our vice president of engineering since February
2000. From May 1981 to February 2000, Mr. Field served in a variety of positions
at Policy Management Systems Corporation, a software company, most recently as
general manager of commerce solutions.
Brian B. Ladyman has served as our vice president of marketing since August
2000. From November 1999 to August 2000, Mr. Ladyman served as the director of
corporate marketing at Primus Knowledge Solutions, Inc., an e-service software
company. From January 1998 to November 1999, Mr. Ladyman served as the senior
director of strategy for the worldwide consumer sector and also as a senior
marketing director at Oracle Corporation. Mr. Ladyman served as a manager and
associate of A.T. Kearney, a provider of management consulting services, from
August 1995 to January 1998.
Timothy K. Armour has served as a director since June 2000. Mr. Armour serves as
president of Morningstar, Inc., a position he has held since June 1999. From
April 1998 to June 1999, Mr. Armour served as chief operating officer of
Morningstar, Inc., a provider of information about mutual funds. From June 1992
to April 1998, Mr. Armour served as president of the mutual fund division of
Stein Roe & Farnham Incorporated.
C. Toms Newby, III has served as a director since May 1999. Mr. Newby joined
Technology Crossover Ventures, a venture capital firm, in April 1996 and has
been a general partner since July 1998. From July 1994 through April 1996, Mr.
Newby served as an associate at Montgomery Securities in the corporate finance
technology group. Mr. Newby serves as a director of eMachines, Inc., which sells
personal computers through retailers in the United States, and Mortgage.com
Inc., which offers home loans online. Mr. Newby also serves as a director of
several privately held companies in which entities affiliated with Technology
Crossover Ventures are investors.
David J. Scanlan has served as a director since March 2000. Mr. Scanlan joined
First Union Capital Partners in September 1996 and has served as a principal
since December 1999. From August 1994 to October 1996, Mr. Scanlan served as an
associate of First Union Leveraged Finance.
Under the terms of our preferred securities and an agreement that will terminate
upon completion of this offering:
- holders of our common stock were entitled to elect four directors, who
are currently Mr. Fedell, Mr. DeLoach, Mr. Kear and Mr. Johnson;
- holders of our Series A preferred stock were entitled to elect one
director, who is currently Mr. Newby;
- holders of our Series B preferred stock preferred stock were entitled to
elect one director, who is currently Mr. Scanlan; and
- holders of our common stock and our preferred stock were entitled to
elect one director, who is currently Mr. Armour.
There are no family relationships among any of our directors, or officers.
YOUCENTRIC 1999 EQUITY COMPENSATION PLAN
Our 1999 equity compensation plan provides for the grant of incentive stock
options, nonqualified stock options and restricted stock awards. This plan was
adopted by our directors in December 1999 and was amended in February 2000 to
provide additional shares of common stock for issuance under the plan. Our
shareholders approved this plan in March 2000. A total of 5,325,000 shares of
common stock are reserved for issuance under the 1999 equity compensation plan.
As of August 31, 2000, we had outstanding options to purchase an aggregate
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<PAGE> 48
of 5,169,350 shares of common stock under this plan at a weighted average
exercise price of approximately $2.27 per share. As of August 31, 2000, no
options under the plan have been exercised.
Officers, directors, employees and any consultants we retain are eligible to
participate in the 1999 equity compensation plan. The 1999 equity compensation
plan is administered by our compensation committee. Subject to the provisions of
this plan, our compensation committee may interpret this plan, prescribe, amend
and rescind rules under this plan, make all other determinations necessary or
desirable for the administration of this plan to select the officers, directors,
employees, and consultants who will receive awards and generally to determine
the terms and conditions of those awards.
The compensation committee determines the terms of stock option grants or
restricted stock awards under the 1999 equity compensation plan, including the
number of shares subject to the award, the exercise or purchase price, and the
vesting or exercisability of the award and any other conditions to which the
award is subject. Incentive stock options granted under the 1999 equity
compensation plan must have an exercise price of at least 100% of the fair
market value of the common stock on the date of grant. The compensation
committee may place conditions on restricted stock awards, such as continued
employment or the achievement of performance goals or objectives in a grant
document. Restricted stock may not be sold, assigned, transferred or pledged
except as specifically provided in the grant document.
Under the terms of most of our options to purchase common stock, in the event of
a change of control transaction, the acquiring or successor corporation may
either assume these options or grant replacement options. If the options are not
assumed or replaced, then options outstanding at the time of the change of
control will automatically become exercisable in full. Following any assumption
or replacement of an option, in the event of specified involuntary terminations
of an optionee's employment within 18 months following the change in control
transaction, the shares subject to the option will become exercisable in full.
See the section in this prospectus entitled "Related Party Transactions" for a
discussion of the material terms of options granted to our executive officers,
including terms providing for acceleration upon specified change of control
transactions.
YOUCENTRIC 2000 EQUITY COMPENSATION PLAN
We recently adopted our 2000 equity compensation plan under which 3,750,000
shares of common stock are authorized for issuance. Awards of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted
stock, stock awards, performance shares and other stock-based awards are
authorized under the 2000 equity compensation plan.
The 2000 equity compensation plan is administered by the compensation committee
of our board of directors. The compensation committee may grant stock
appreciation rights, either in connection with stock options or independently. A
stock appreciation right provides the holder with the right to receive from us a
distribution equal to the excess of the fair market value of a specified number
of shares of our common stock on the date such right is exercised over the
aggregate exercise price specified for the stock appreciation right. If the
stock appreciation right is connected to a stock option, the holder may
surrender the option in exchange for such a distribution. The distribution is
made, in the compensation committee's discretion, in shares of common stock
valued at fair market value on the exercise date, in cash or in a combination of
cash and common stock.
Generally, no person may be granted options or stock appreciation rights with
respect to more than 250,000 shares of our common stock in any calendar year.
However, for his initial year of service, a person may be granted options or
stock appreciation rights with respect to 1,000,000 shares of our common stock.
The compensation committee may grant restricted stock awards under the 2000
equity compensation plan. A restricted stock award will be subject to forfeiture
or a repurchase option in our favor in accordance with a vesting schedule
determined by the compensation committee. The purchase price of restricted stock
awarded under the 2000 equity compensation plan may be any amount, subject to
minimum consideration as may be required by applicable law. Generally, stock is
not transferable while it is subject to forfeiture or repurchase.
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<PAGE> 49
The compensation committee may grant stock awards under the 2000 equity
compensation plan in consideration of past or future services without a purchase
price. In addition, the compensation committee may grant performance shares
under the 2000 equity compensation plan. The compensation committee will
determine the purchase price (if any), performance period and performance goals
with respect to the grant of performance shares, and it shall determine the form
of settlement of performance shares, which may be in shares of our common stock,
in cash or in a combination of cash and our common stock.
The compensation committee may grant other awards under the 2000 equity
compensation plan, which awards are valued in whole or in part by reference to,
or are otherwise based on, our common stock, including without limitation,
convertible preferred stock, convertible debentures, exchangeable securities,
phantom stock and common stock awards or options valued by reference to book
value or performance.
YOUCENTRIC 2000 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Our 2000 non-employee directors stock option plan was adopted by our board of
directors in June 2000. We intend to obtain shareholder approval of this plan
prior to the completion of this offering. A total of 180,000 shares of our
common stock have been authorized for issuance under this plan. Of the shares
reserved for issuance, 120,000 remain available for future issuance as of August
31, 2000.
The 2000 non-employee directors stock option plan is administered by the
compensation committee of our board of directors. Each member of our board of
directors who is not an employee of the company and who is not affiliated with
an entity that invested in us prior to the completion of this offering will
automatically receive stock options under the 2000 non-employee directors stock
option plan. Each person who was or became a non-employee director on the
effective date of the 2000 non-employee directors stock option plan was
automatically granted on the effective date one option to purchase 45,000 shares
of our common stock and a second option to purchase 15,000 shares of our common
stock. Each person who becomes a non-employee director after the effective date
of 2000 non-employee directors stock option plan will be automatically granted
on the date he first becomes a non-employee director one option to purchase
45,000 shares of our common stock and a second option to purchase 15,000 shares
of our common stock. In addition, on the date of each annual shareholders
meeting, each person who is re-elected as a non-employee director on that date
will be automatically granted an option to purchase 15,000 shares of our common
stock. All stock options granted under the 2000 non-employee directors stock
option plan will be nonqualified stock options.
Options granted under the 2000 non-employee directors stock option plan are
subject to the following terms:
- the per share exercise price of any option granted after the date on
which we complete this offering will be equal to the fair market value of
the common stock on the option grant date;
- each 45,000 share option will vest and become exercisable as to 15,000
shares on each of the first, second, and third anniversaries of the
option grant date, as long as the non-employee director's membership on
our board of directors has not terminated prior to such date;
- each 15,000 share option will vest and become exercisable the first
anniversary of the grant date of the option, as long as the non-employee
director's membership on our board of directors has not terminated prior
to such date;
- generally, each option will have a ten-year term measured from the option
grant date; and
- generally, all outstanding options granted to a non-employee director
under the directors plan will become fully vested and exercisable in the
event of certain change in control transactions.
YOUCENTRIC EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan was adopted by our board of directors in August
2000. We intend to obtain shareholder approval of this plan immediately prior to
the completion of this offering. The employee stock purchase
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<PAGE> 50
plan will provide employees with the opportunity to buy our common stock with
potentially favorable tax treatment. A total of 3,000,000 shares of common stock
will be reserved for issuance under the employee stock purchase plan. The
employee stock purchase plan will become effective on January 1, 2001, subject
to the completion of this offering.
Each of our employees who has been employed for at least three months and is
employed for more than 30 hours per week and at least five months per year
generally is eligible to participate in the employee stock purchase plan.
However, any employee who would own 5% or more of the total combined voting
power or value of company stock immediately after the grant of an option to
purchase stock under the employee stock purchase plan may not participate in the
plan. An employee stock purchase plan participant may buy stock through
accumulated payroll deductions. These payroll deductions or direct payments may
not exceed 15% of the participant's compensation. No participant may purchase
more that $25,000 worth of stock in any calendar year. We will pay no interest
on the amounts in participant accounts and may use amounts credited to
participant accounts for any corporate purpose pending each applicable purchase
date. Employees will purchase shares at 85% of the lesser of the common stock's
fair market value on the first or last day of each purchase period. Purchase
periods last six months and are consecutive. Employees will be able to withdraw
from the employee stock purchase plan at any time.
The employee stock purchase plan will be administered by an administrator
appointed by the board of directors. The compensation committee of the board of
directors will serve as the administrator. The board of directors will be
authorized to amend or terminate the employee stock purchase plan at any time.
In the event of a merger or acquisition, if the surviving or acquiring entity
does not assume our obligations under the employee stock purchase plan, any
purchase period in progress will be terminated immediately before the merger or
acquisition.
COMPENSATION OF DIRECTORS
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. We may, in our discretion, grant
stock options and other equity awards to our non-employee directors from time to
time pursuant to our equity compensation plan.
Following the appointment of Mr. Armour to our board of directors in June 2000,
we granted him, under our directors stock option plan, options to purchase a
total of 60,000 shares of common stock at an exercise price of $4.67 per share.
BOARD COMMITTEES
The board of directors has established a compensation committee and an audit
committee. The compensation committee, which consists of Mr. Armour, Mr. Newby
and Mr. Scanlan, reviews executive salaries, administers our equity plans and
approves salaries, bonuses and other benefits received by our executive
officers. In addition, the compensation committee consults with our management
regarding our other benefit plans and compensation policies and practices.
The audit committee, which also consists of Mr. Newby and Mr. Scanlan, reviews
the professional services provided by our independent accountants, the
independence of our accountants from our management, our annual financial
statements and our system of internal accounting controls. The audit committee
also reviews other matters with respect to our accounting, auditing and
financial reporting practices and procedures as it may find appropriate or may
be brought to its attention.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee until April 2000. Prior to that time,
the entire board of directors performed the function of a compensation
committee. No member of our compensation committee is an officer or employee. No
interlocking relationships exist between our board of directors or compensation
committee and the
46
<PAGE> 51
board of directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
The table below sets forth, for the year ended December 31, 1999, the cash
compensation earned and shares underlying options granted to our chief executive
officer and each of the other four most highly compensated executive officers
who received annual compensation in excess of $100,000, collectively referred to
as the named executive officers. In accordance with the rules of the SEC, the
compensation set forth in the table below does not include medical, group life
or other benefits which are available to all of our salaried employees, and
perquisites and other benefits, securities or property which do not exceed the
lesser of $50,000 or 10% of the person's salary and bonus shown in the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------------- SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)(1)
--------------------------- --------- -------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Thomas M. Fedell.................. $125,400 $ -- $ -- -- $17,010
Chairman of the board
Donald A. DeLoach (2)............. 100,000 25,000 -- -- --
President and chief executive
officer
Robert E. Kear.................... 122,160 -- -- -- 16,524
Executive vice president of
corporate strategy
Karl R. Johnson................... 120,480 -- -- -- 16,272
Chief technology officer
Mark D. Logan..................... 100,000 143,631(3) 336,000(4) 2,077,920 12,750
Senior vice president of
worldwide sales
</TABLE>
---------------------------------------------
(1) Represents our contributions to our simplified employee pension plan for the
account of these officers.
(2) Mr. DeLoach joined us in July 1999 and became our chief executive officer in
April 2000.
(3) Consists of commissions earned on sales during the year ended December 31,
1999.
(4) Represents the value of a preferred stock award.
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<PAGE> 52
STOCK OPTIONS
The table below contains information concerning the grant of options to purchase
shares of our common stock to each of the named executive officers during 1999.
The percentage of total options granted to employees set forth below is based on
an aggregate of 2,377,620 shares subject to options granted to our employees in
1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
PERCENT
OF TOTAL VALUE OF
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED OPTIONS
SECURITIES GRANTED TO EXERCISE ANNUAL RATES OF STOCK APPRECIATION FOR BASED ON
UNDERLYING EMPLOYEES OF BASE OPTION TERM(1) MID-POINT
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------------------- OF OFFERING
NAME GRANTED(#) YEAR ($/SH) DATE 0%($) 5%($) 10%($) RANGE ($12.00)
---- ---------- ---------- -------- ---------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas M. Fedell...... -- -- -- -- -- -- -- --
Donald A. DeLoach..... -- -- -- -- -- -- -- --
Robert E. Kear........ -- -- -- -- -- -- -- --
Karl R. Johnson....... -- -- -- -- -- -- -- --
Mark D. Logan......... 2,077,920 87.4% -- 12/23/09 $14,208,355 $23,146,817 $36,860,173 $24,930,422
</TABLE>
---------------------------------------------
(1) The potential realizable value is calculated based on the term of the option
at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance. The potential realizable values
at 5% and 10% appreciation are calculated by assuming that the market value
on the date of grant appreciates at the indicated rate for the entire term
of the option and that the option is exercised at the exercise price and
sold on the last day of its term at the appreciated price.
FISCAL YEAR-END OPTION VALUES
The table below sets forth information for each of the named executive officers
with respect to the value of options outstanding as of December 31, 1999. The
named executive officers did not exercise any options to purchase shares of
common stock during the year ended December 31, 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas M. Fedell................................ -- -- -- $ --
Donald A. DeLoach............................... -- -- -- --
Robert E. Kear.................................. -- -- -- --
Karl R. Johnson................................. -- -- -- --
Mark D. Logan................................... -- 2,077,920 -- $14,208,355
</TABLE>
There was no public trading market for our common stock as of December 31, 1999.
Accordingly, as permitted by the rules of the SEC, we have calculated the value
of unexercised in-the-money options at fiscal year-end on the basis of the fair
market value of our common stock as of December 31, 1999, as determined by the
board of directors, less the aggregate exercise price.
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<PAGE> 53
RELATED PARTY TRANSACTIONS
SERIES A FINANCING
In May 1999, we sold a total of 2,613,846 shares of our Series A preferred
stock, currently convertible into 3,920,769 shares of common stock, to
investment partnerships affiliated with Technology Crossover Ventures for an
aggregate purchase price of approximately $5.0 million. Mr. Newby, one of our
directors, is a general partner of Technology Crossover Ventures.
In connection with this sale, these TCV partnerships also purchased shares of
Series A preferred stock from some of our executive officers and directors as
set forth in the table below:
<TABLE>
<CAPTION>
NUMBER OF PURCHASE
SHARES PRICE
--------- ----------
<S> <C> <C>
Thomas M. Fedell............................................ 432,600 $ 832,000
Robert E. Kear.............................................. 369,600 711,000
Karl R. Johnson............................................. 306,600 590,000
J. Wells Tiedeman........................................... 151,200 291,000
Mark D. Logan............................................... 201,600 388,000
--------- ----------
Total.................................................. 1,461,600 $2,812,000
========= ==========
</TABLE>
In connection with our sale of Series A preferred stock, we agreed to indemnify
Mr. Newby if he becomes a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or officer, or is or was serving at our request as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise. This indemnification will be against expenses,
including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by Mr. Newby in connection with such action,
suit or proceeding.
SERIES B FINANCING
In March and April 2000, we sold a total of 2,572,376 shares of our Series B
preferred stock for an aggregate purchase price of $30.9 million which are
currently convertible into 4,826,216 shares of our common stock. Investment
partnerships affiliated with Technology Crossover Ventures purchased 415,974
shares of Series B preferred stock, currently convertible into 780,437 shares of
our common stock, and First Union Investors, Inc. purchased 831,946 shares of
Series B preferred stock, currently convertible into 1,560,873 shares of our
common stock. Mr. Newby, one of our directors, is a general partner of
Technology Crossover Ventures. Mr. Scanlan, also one of our directors, is a
principal of First Union Investors, Inc.
REGISTRATION RIGHTS
In connection with our Series A and Series B preferred stock financing, we
granted demand and piggy-back registration rights to the holders of the shares
of common stock issuable upon the conversion of these preferred securities, as
well as to the placement agents for each of these financings, one of which
received a warrant to purchase common stock and the other of which received
common stock.
TRANSACTIONS WITH EXECUTIVE OFFICERS
In May 1999, we awarded shares of our Series A preferred stock to Mr. Logan and
Mr. Tiedeman. These shares were subsequently sold to the TCV partnerships for
$388,000 and $291,000 respectively. In connection with tax withholding
obligations relating to these stock awards, we paid $39,000 on behalf of Mr.
Logan and loaned him $88,000 to pay the remainder of his obligation and we paid
$2,000 on behalf of Mr. Tiedeman and loaned him
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<PAGE> 54
$12,000 to pay the remainder of his obligation. Mr. Logan and Mr. Tiedeman each
repaid his loan in full in March 2000. We have agreed to indemnify Mr. Logan and
Mr. Tiedeman against certain liabilities relating to these stock awards in an
amount not to exceed $875,000 for Mr. Logan and an amount not to exceed $125,000
for Mr. Tiedeman.
EQUITY AWARDS GRANTED TO EXECUTIVE OFFICERS
In April 1998, we awarded Mr. Logan 319,680 shares of our common stock and 8,960
shares of our Series A preferred stock.
In December 1999, we granted Mr. Logan and Mr. Tiedeman options to purchase
2,077,920 and 299,700 shares of our common stock, respectively, each at nominal
exercise prices. These options vest in full upon the completion of this
offering.
In March 2000, we granted Mr. Deloach the following:
- an option to purchase 300,000 shares of our common stock at an exercise
price of $4.00 per share, which vests in full on September 30, 2001. In
addition, this vesting schedule accelerates upon the occurrence of the
following events following the completion of this offering:
- 105,000 shares vest if the initial public offering price then exceeds
$16.03; and
- 105,000 shares vest upon the earlier to occur of the 181st day after
the completion of this offering or the completion of a secondary
public offering, if the trading price or offering price of our common
stock then exceeds $24.04; and
- an option to purchase 900,000 shares of our common stock at an exercise
price of $0.93 per share, which vests in three equal annual installments
beginning on July 1, 2000.
In addition, Mr. DeLoach's option to purchase:
- 300,000 shares of common stock becomes exercisable in full upon a change
in control transaction if the holders of our common stock receive value
in excess of $16.03 per share, unless this acceleration would result in
an excess parachute payment under the tax code to Mr. DeLoach, in which
event the vesting would continue according to the schedule set forth in
the option regardless of the continuation of his employment; and
- 900,000 shares of common stock provides that, following a change in
control transaction, vesting continues according to the schedule set
forth in the option regardless of the continuation of his employment.
In March 2000, we granted Mr. Cummings an option to purchase 45,000 shares of
our common stock at a nominal exercise price, which vests in full upon the
completion of this offering, and 105,000 shares of our common stock at an
exercise price of $0.37 per share, which vests in three equal annual
installments, beginning in September 1999.
In March 2000, we granted Mr. Field an option to purchase 60,000 shares of our
common stock at an exercise price of $1.23 per share, which vests in four equal
annual installments, beginning in February 2001.
In June 2000, we granted Mr. Armour options to purchase a total of 60,000 shares
of our common stock at an exercise price of $4.67 per share. Of these options,
an option to purchase 45,000 shares vests in three equal annual installments,
beginning in June 2001, and an option to purchase 15,000 shares fully vests in
June 2001.
In August 2000, we granted Mr. Swain an option to purchase 350,000 shares of our
common stock at an exercise price of $3.00 per share, which vests in three equal
annual installments beginning in April 2001. This option becomes exercisable in
full upon a change in control transaction. Alternatively, Mr. Swain may elect to
have his option continue to vest according to the schedule set forth in the
option regardless of the continuation of his employment.
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<PAGE> 55
In August 2000, we granted Mr. Ladyman an option to purchase 187,500 shares of
our common stock at an exercise price of $4.67, which vests in four equal annual
installments, beginning in August 2001.
BONUS ARRANGEMENTS WITH EXECUTIVE OFFICERS
We consider each of our executive officers for quarterly discretionary cash
bonuses. We have a bonus compensation arrangement with Mr. Deloach under which
he can receive a bonus each quarter of up to $75,000 based on our attainment of
quarterly revenue, expense, bookings and head count goals set by our
compensation committee. Under Mr. Swain's employment offer letter, we have
agreed to provide him with a cash bonus opportunity each quarter of up to
$20,000 based on our attainment of financial goals set by our compensation
committee or our president.
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<PAGE> 56
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership of
our common stock as of August 31, 2000 and as adjusted to reflect the sale of
the shares of common stock offered by this prospectus by:
- each person or group who beneficially owns more than 5% or more of our
common stock;
- each of the named executive officers;
- each director; and
- all of our executive officers and directors as a group.
Each shareholder's percentage of shares beneficially owned in the following
table is based on 27,101,711 shares of common stock outstanding as of August 31,
2000, and an additional 5,000,000 shares of common stock to be outstanding upon
the completion of this offering. To our knowledge, except as otherwise noted
below, the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them. In
computing each shareholder's percentage ownership, except as otherwise noted,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of August 31, 2000, are deemed
outstanding. Such shares, however, are not deemed outstanding for the purposes
of computing the percentage of ownership of any other person. Unless otherwise
indicated, the principal address of each of the shareholders named in the
following table who beneficially owns 5% or more of our outstanding common stock
is: 14045 Ballantyne Corporate Place, Suite 101, Charlotte, North Carolina
28277.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
SHARES BENEFICIALLY --------------------------------
BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
---------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Entities affiliated with Technology Crossover
Ventures(1)......................................... 7,019,607 25.9% 21.9%
Thomas M. Fedell(2)................................... 5,144,850 19.0 16.0
Donald A. DeLoach(3).................................. 300,000 1.1 *
Robert E. Kear(2)..................................... 4,395,600 16.2 13.7
Karl R. Johnson(2).................................... 3,646,350 13.5 11.4
J. Wells Tiedeman(2)(4)............................... 1,798,200 6.6 5.5
Mark D. Logan(2)(5)................................... 2,397,600 8.2 7.0
Timothy K. Armour..................................... -- -- --
C. Toms Newby, III(6)................................. 7,019,607 25.9 21.9
David J. Scanlan(7)................................... 1,560,873 5.8 4.9
All executive officers and directors as a group (13
persons)(8)......................................... 26,378,087 88.2 75.6
</TABLE>
---------------------------------------------
* Less than 1% of the outstanding common stock.
(1) Consists of shares of common stock beneficially owned as follows:
- 50,972 shares held by TCV III (GP);
- 242,112 shares held by TCV III, L.P.;
- 6,435,106 shares held by TCV III (Q), L.P.; and
- 291,417 shares held by TCV III Strategic Partners, L.P.
Technology Crossover Management III, L.L.C. ("TCM III") is the sole general
partner of each of these TCV partnerships and has sole investment control
with respect to each of these partnerships. The sole managing members of TCM
III are Jay C. Hoag and Richard H. Kimball and, as such, they may also be
deemed to share voting and dispositive control over the shares of common
stock held by these partnerships. Mr. Hoag and Mr. Kimball disclaim
beneficial ownership of these shares. The address for each of these TCV
partnerships, Mr. Hoag and Mr. Kimball is 575 High Street, Suite 400, Palo
Alto, CA 94301.
52
<PAGE> 57
(2) Shares of common stock held by each of these shareholders are subject to a
stock restriction agreement that we entered into with each of these
shareholders that permit us to repurchase some of these shares if the
shareholder resigns for any reason or is terminated by us under specified
circumstances. The stock restriction agreements provide that repurchase
rights lapse in equal monthly installments over a two-year period that began
May 13, 1999. As of August 31, 2000, 26.3% of each shareholder's shares
remain subject to repurchase rights under these agreements.
(3) Represents 300,000 shares of common stock issuable upon the exercise of an
outstanding stock option.
(4) Includes 299,700 shares of common stock issuable upon the exercise of an
outstanding stock option that becomes fully exercisable upon the completion
of this offering.
(5) Includes 2,077,920 shares of common stock issuable upon the exercise of an
outstanding stock option that becomes fully exercisable upon the completion
of this offering.
(6) Represents an aggregate of 7,019,607 shares of common stock beneficially
owned by investment partnerships managed by TCM III, which has sole
investment control with respect to all of the TCV partnerships. Mr. Newby is
a non-managing member of TCM III which is the sole general partner of the
limited partnerships that TCM III manages. Mr. Newby may be deemed to share
voting or dispositive power with respect to these shares but disclaims
beneficial ownership of these shares. Mr. Newby's address is 575 High
Street, Suite 400, Palo Alto, CA 94301.
(7) Represents an aggregate of 1,560,873 shares of common stock beneficially
owned by First Union Investors, Inc. Mr. Scanlan is a principal of First
Union Investors, Inc. Mr. Scanlan does not exercise sole or shared voting or
investment power with respect to these shares and disclaims beneficial
ownership of these shares. Mr. Scanlan's address is One First Union Center,
301 South College Street, 5th Floor, Charlotte, NC 28288.
(8) See footnotes (3) through (7) above. In addition, includes 114,999 shares of
common stock issuable upon the exercise of outstanding stock options that
become fully exercisable within 60 days of August 31, 2000.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, no par value per share, and
5,000,000 shares of preferred stock, no par value per share. As of August 31,
2000, after giving effect to the conversion of all shares of our preferred stock
into common stock, there were 27,101,711 shares of common stock outstanding held
by 41 shareholders of record, options to purchase an aggregate of 7,606,970
shares of common stock and a warrant to purchase an aggregate of 187,173 shares
of our common stock.
The following is a summary of the material features of our capital stock. For
more detail, please see our amended and restated certificate of incorporation
and amended and restated bylaws to be effective after the closing of this
offering, filed as exhibits to the registration statement of which this
prospectus is a part.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends,
if any, as may be declared by the board of directors out of funds legally
available to pay dividends. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled to receive ratably all assets after the
payment of our liabilities, subject to the prior rights of any outstanding
preferred stock. Holders of the common stock have no preemptive, subscription,
redemption or conversion rights. They are not entitled to the benefit of any
sinking fund. The outstanding shares of common stock are, and the shares offered
by us in this offering will be, when issued and paid for, validly issued, fully
paid and nonassessable. The rights, powers, preferences and privileges of
holders of common stock are subject to the rights of the holders of shares of
any series of preferred stock which we may designate and issue in the future.
PREFERRED STOCK
Following the closing of this offering, the board of directors will be
authorized, subject to any limitations prescribed by law, without further
shareholder approval, to issue up to an aggregate of 5,000,000 shares of
preferred stock. The preferred stock may be issued in one or more series and on
one or more occasions. Each series of preferred stock will have such number of
shares, designations, preferences, voting powers, qualifications and special or
relative rights or privileges as the board of directors may determine. These
rights and privileges may include, among others, dividend rights, voting rights,
redemption provisions, liquidation preferences, conversion rights and preemptive
rights. We presently do not have any intention to issue any shares of preferred
stock.
Our shareholders have granted the board of directors authority to issue the
preferred stock in order to eliminate delays associated with a shareholder vote
on specific issuances. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power or other rights of
the holders of common stock. In addition, the issuance of preferred stock could
make it more difficult for a third party to acquire us, or discourage a third
party from attempting to acquire us.
WARRANTS
We have outstanding a warrant to purchase an aggregate of 187,173 shares of
common stock having an exercise price of $0.80 per share that we issued in May
1999 to our placement agent in connection with the sale of our Series A
preferred stock. The warrant is currently exercisable in full and expires in May
2004. The warrant contains provisions providing for adjustments of the exercise
price and the number of shares of common stock issuable upon exercise of the
warrant in the event we make specified dilutive issuances of common stock in the
future. The holders of the shares of common stock issuable upon exercise of the
warrant have registration rights as discussed below. This warrant has a net
exercise provision under which the warrantholder may, in lieu of payment
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<PAGE> 59
of the exercise price in cash, surrender the warrant and receive a net amount of
shares based on the fair market value of our common stock at the time of
exercise of the warrant after deduction of the exercise price.
NORTH CAROLINA LAW AND CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND
BYLAWS; ANTI-TAKEOVER EFFECTS
Various provisions of our amended and restated articles of incorporation and our
amended and restated bylaws, which will be in effect immediately following the
completion of this offering and are summarized in the following paragraphs, may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders.
BOARD OF DIRECTORS VACANCIES; REMOVAL OF DIRECTORS. Our amended and restated
bylaws will authorize the board of directors to increase the size of the board
of directors up to 12 directors and to fill vacant directorships and will
provide that directors may be removed by the shareholders only for cause. These
provisions may prevent a shareholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies created by this removal with its own nominees.
SHAREHOLDER ACTION; SPECIAL MEETING OF SHAREHOLDERS. Under North Carolina law,
shareholders may act other than at duly called annual or special meetings of
shareholders only by unanimous written consent. Our amended and restated
articles of incorporation will provide that special shareholders' meetings may
be called only by the chairman of the board of directors or a majority of the
board of directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our amended and restated bylaws will provide that shareholders
seeking to bring business before an annual meeting of shareholders, or to
nominate candidates for election as directors at an annual meeting of
shareholders, must provide timely notice thereof in writing. To be timely, a
shareholder's notice must be delivered to or mailed and received at our
principal executive offices not less than 120 days prior to the first
anniversary of the date of our notice of annual meeting provided with respect to
the previous year's annual meeting of shareholders; except, that if no annual
meeting of shareholders was held in the previous year or the date of the annual
meeting of shareholders has been changed to be more than 30 calendar days from
the date contemplated at the time of the previous year's proxy statement, notice
by the shareholder, to be timely, must be so received not later than the close
of business on the 10th day following the date on which notice of the date of
the meeting is given to shareholders or made public, whichever occurs first.
Our amended and restated bylaws will also specify requirements as to the form
and content of a shareholder's notice. These provisions may preclude
shareholders from bringing matters before an annual meeting of shareholders or
from making nominations for directors at an annual meeting of shareholders.
AUTHORIZED BUT UNISSUED SHARES. Authorized but unissued shares of common and
preferred stock will be available for future issuance without shareholder
approval, subject to various limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate purposes in
addition to those discussed above, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued and unreserved common stock could make more
difficult or discourage an attempt to obtain control of the company by means of
a proxy contest, tender offer, merger or otherwise.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
Our amended and restated articles of incorporation and amended bylaws provide
for indemnification of our directors and officers to the fullest extent
permitted by North Carolina law. Our articles of incorporation, to the extent
permitted by North Carolina law, eliminate or limit the personal liability of a
director to us and our shareholders for monetary damages for breach of his duty
as a director. This indemnification may be available for
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<PAGE> 60
liabilities arising in connection with this offering. Our bylaws also provide
for the indemnification of employees, agents and other specified persons to the
fullest extent permitted by North Carolina law. Our bylaws obligate us, under
specified circumstances, to advance expenses to our directors, officers,
employees and agents in defending an action, suit or proceeding for which
indemnification may be sought. We can also indemnify someone serving at our
request as a director, officer, trustee, partner, employee or agent of one of
our subsidiaries or of any other organization against these liabilities.
Our bylaws also provide that we have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents against any liability asserted against that person or
incurred by that person in these capacities, whether or not we would have the
power to indemnify that person against these liabilities under North Carolina
law. We intend to obtain liability insurance covering all of our directors and
executive officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Union National
Bank.
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<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 32,101,711 shares of common stock
outstanding, assuming no exercise of outstanding options or warrants. Of these
shares, the 5,000,000 shares to be sold in this offering will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended, except that any shares purchased 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.
SALES OF RESTRICTED SHARES
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE NUMBER OF SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
------------------ ---------------------------- -------
<S> <C> <C>
On effectiveness 5,000,000 Freely tradeable; sold in offering
180 days 22,243,149 Lockup released; shares eligible for sale under
Rule 144, 144(k) or 701
Thereafter 4,858,562 Restricted securities held for less than one year
</TABLE>
In general, under Rule 144, a person, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
1% of the then outstanding shares of common stock, or approximately 321,000
shares immediately after this offering, or the average weekly trading volume in
the common stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed, as long as specified
requirements concerning availability of public information, manner of sale and
notice of sale have been satisfied. In addition, our affiliates must comply with
the restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of common stock which are not
restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned shares for at least two years may resell these shares without compliance
with the foregoing requirements. In meeting the one- and two-year holding
periods described above, a holder of shares can include the holding periods of a
prior owner who was not an affiliate. The one- and two-year holding periods do
not begin to run until the full purchase price or other consideration is paid by
the person acquiring the shares from the issuer or an affiliate. Rule 701
provides that currently outstanding shares of common stock acquired under our
employee compensation plans may be resold beginning 90 days after the date of
this prospectus by persons, other than affiliates, subject only to the manner of
sale provisions of Rule 144, and by affiliates under Rule 144 without compliance
with its one-year minimum holding period, subject to specified limitations.
LOCK-UP AGREEMENTS
Subject to specified exceptions, we and our executive officers and directors
have agreed that, without the prior written consent of U.S. Bancorp Piper
Jaffray, none of us will, during the period ending 180 days after the date of
this prospectus, (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock (regardless of whether such
shares or any such securities are then owned by such person or are thereafter
acquired), or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the common stock, regardless of whether any such transactions described in
clauses (1) or (2) are to be settled by delivery of such common stock or such
other securities, in cash or otherwise. In addition, for a period of 180 days
from the date of this prospectus, except as required by law, we have agreed that
our board of directors will not consent to any offer for sale, sale or other
disposition, or any transaction which is designed or could be expected, to
result in, the disposition by any person, directly or
57
<PAGE> 62
indirectly, of any shares of common stock without the prior written consent of
U.S. Bancorp Piper Jaffray. See the section in this prospectus entitled
"Underwriting."
STOCK OPTIONS
Following this offering, we intend to file registration statements under the
Securities Act to register up to 14,632,620 shares of common stock issuable upon
the exercise of outstanding stock options or reserved for issuance under our
equity plans. These registration statements are expected to become effective
upon filing.
REGISTRATION RIGHTS
After this offering, the holders of approximately 11,097,732 shares of common
stock and rights to acquire 187,173 shares of common stock will be entitled to
rights with respect to the registration of these shares under the Securities
Act. Under the terms of the agreement between us and the holders of these
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of the registration and are entitled to include shares of such common
stock therein. Additionally, these holders are also entitled to specified demand
registration rights under which they may require us on up to two occasions to
file a registration statement under the Securities Act, generally at our
expense, with respect to our shares of common stock, and we are required to use
our best efforts to effect that registration. These holders may also require us
to file an unlimited number of additional registration statements on Form S-3 at
our expense. All of these registration rights are subject to typical conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in the registration and our right not to
effect a requested registration within six months following an offering of our
securities on a Form S-1, including the offering made hereby. We also have
agreed to indemnify shareholders whose shares are included in a registration
statement from losses arising from violations by us of applicable securities
laws in connection with the registration.
58
<PAGE> 63
UNDERWRITING
The underwriters named below, acting through their representatives, U.S. Bancorp
Piper Jaffray Inc., Robertson Stephens, Inc., Dain Rauscher Incorporated and
Legg Mason Wood Walker, Inc., have each agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock listed opposite their names below. The underwriters are
committed to purchase and pay for all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ............................
Robertson Stephens, Inc. ...................................
Dain Rauscher Incorporated .................................
Legg Mason Wood Walker, Inc. ...............................
---------
Total............................................. 5,000,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of common
stock to the public at the public offering price located on the cover page of
this prospectus and to dealers at that price less a concession of not in excess
of $ per share, of which $ may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowance
to dealers may be reduced by the representatives. No reduction in this price
will change the amount of proceeds to be received by us as indicated on the
cover page of this prospectus.
The underwriters have advised us that they do not expect sales to discretionary
accounts to exceed % of the total number of shares offered.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of common stock at the same price per
share as we will receive for the 5,000,000 shares that the underwriters have
agreed to purchase. If the underwriters exercise the option in full, we will
sell 750,000 additional shares. To the extent that the underwriters exercise
this option, each of the underwriters will have a commitment to purchase
approximately the same percentage of additional shares that the number of shares
of common stock to be purchased by it shown in the above table represents as a
percentage of the 5,000,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those on
which the 5,000,000 shares are being sold. We will be obligated under this
option to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the 5,000,000 shares of common stock offered by this prospectus.
59
<PAGE> 64
The following table shows the underwriting fees to be paid to the underwriters
in connection with the offering. This information is presented assuming both no
exercise and full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
The expenses of the offering payable by us are estimated at $1.8 million. U.S.
Bancorp Piper Jaffray expects to deliver the shares of common stock to
purchasers on , 2000.
UNDERWRITING COMPENSATION. Several of the underwriters and their affiliates
purchased shares of our Series B preferred stock in a private placement that we
completed in April 2000. In addition, Robertson Stephens received shares of our
common stock in exchange for placement agent services that it provided to us in
connection with that private placement of the Series B shares. Under the rules
of the NASD, the underwriters' receipt of common stock and receipt and
conversion of the Series B shares is considered underwriting compensation. The
total underwriting compensation that we will pay to the underwriters, including
the items of compensation discussed above, as well as the underwriting discounts
and commissions, is equal to approximately $ , or $ if the
over-allotment option is fully exercised.
INDEMNITY. The underwriting agreement contains covenants of indemnity among the
underwriters and us against civil liabilities, including liabilities under the
Securities Act, and covenants requiring us to contribute to payments that the
underwriters may be required to make in respect of those liabilities.
LOCK-UP AGREEMENTS. Each of our executive officers, directors and all of our
other shareholders of record have agreed with the representatives, for a period
of 180 days after the date of this prospectus, not to offer to sell, contract to
sell or transfer any shares of common stock, options or warrants to purchase any
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock, without the prior written consent of U.S. Bancorp Piper
Jaffray.
We have agreed that during the 180-day lock-up period we will not, without the
prior written consent of U.S. Bancorp Piper Jaffray, consent to the disposition
of any shares held by shareholders subject to lock-up agreements before the
expiration of the lock-up period, or issue, sell, contract to sell, or dispose
of, any shares of common stock, any options or warrants to purchase any shares
of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock. However, the agreements provide
exceptions for (1) sales to underwriters pursuant to the underwriting agreement,
(2) the issuance of our common stock upon the exercise of outstanding options or
warrants; and (3) the issuance of options under existing stock option and
incentive plans, provided that those options do not vest before the expiration
of the lock-up period.
DIRECTED SHARES. We have requested that the underwriters reserve up to 15.0% of
the shares of common stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons
designated by us. In addition, in connection with our Series A preferred stock
financing in May 1999, we agreed to use our best efforts, subject to applicable
legal or regulatory limitations, to cause the managing underwriters of our
initial public offering to establish a directed share program whereby the
managing underwriters would offer the Series A preferred stock investors the
opportunity to purchase shares of our common stock in our initial public
offering. The number of shares to be offered to the Series A preferred stock
investors pursuant to the directed share program is determined by dividing $5.0
million by the per share initial public offering price (approximately 250,000
shares assuming an initial offering price of $12.00 per share), and is subject
to reduction under some circumstances. The Series A preferred stock investors
have no obligation to purchase any of the shares offered to them. The Series A
preferred stock investors have expressed interest in participating in the
directed share program. We intend that all offers to purchase shares pursuant to
the directed share program will be made in compliance
60
<PAGE> 65
with all federal and state securities laws, including Rule 134 of the Securities
Act of 1933, as amended, and all applicable rules and regulations promulgated by
the National Association of Securities Dealers, Inc.
LISTING. We have applied to have the shares being sold in the offering approved
for quotation on the Nasdaq National Market under the symbol "YOUC."
NO PRIOR PUBLIC MARKET. Before this offering, there has been no public market
for our common stock. Consequently, the initial public offering price for the
common stock offered by this prospectus will be determined through negotiations
between us and the representatives. Among the factors to be considered in these
negotiations will be prevailing market conditions, our financial information,
market valuations of other companies that we and the representatives believe to
be comparable to us, estimates of our business potential and the present state
of our development. There can be no assurance that the initial public offering
price of the common stock will correspond to the price at which the common stock
will trade in the public market subsequent to this offering or that an active
public market for the common stock will develop and continue after this
offering.
SYNDICATE SHORT SALES. The representatives have advised us that, on behalf of
the underwriters, they may make short sales of our common stock in connection
with this offering, resulting in the sale by the underwriters of a greater
number of shares than they are required to purchase pursuant to the underwriting
agreement. The short position resulting from those short sales will be deemed a
"covered" short position to the extent that it does not exceed the 750,000
shares subject to the underwriters' over-allotment option and will be deemed a
"naked" short position to the extent that it exceeds that number. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the trading price of the common stock in the
open market that could adversely affect investors who purchased shares in the
offering. The underwriters may reduce or close out their covered short position
either by exercising the over-allotment option or by purchasing shares in the
open market. In determining which of these alternatives to pursue, the
underwriters will consider the price at which shares are available for purchase
in the open market as compared to the price at which they may purchase shares
through the over-allotment option. Any naked short position will be closed out
by purchasing shares in the open market. Similar to the other stabilizing
transactions described below, open market purchases made by the underwriters to
cover all or a portion of their short position may have the effect of preventing
or retarding a decline in the market price of our common stock following this
offering. As a result, our common stock may trade at a price that is higher than
the price that otherwise might prevail in the open market.
STABILIZATION. The representatives have advised us that, under Regulation M
under the Securities Exchange Act of 1934, they may engage in transactions,
including stabilizing bids or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the shares of common
stock at a level above that which might otherwise prevail in the open market.
Specifically, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market and
may impose penalty bids. If penalty bids are imposed, selling concessions
allowed to syndicate members or other broker dealers participating in the
offering are reclaimed if shares of common stock previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. The magnitude or effect of any stabilization or other transactions
is uncertain. The representatives have advised us that stabilizing bids and open
market purchases may be effected on the Nasdaq National Market or otherwise, and
if commenced, may be discontinued at any time.
INTERNET ROADSHOW. We have been informed by U.S. Bancorp Piper Jaffray that it
will use the Internet site hosted and maintained by Yahoo!NetRoadshow in
connection with this offering. Yahoo!NetRoadshow is a provider of electronic
roadshow presentations. Yahoo!NetRoadshow will also make available a prospectus
in electronic format. Yahoo!NetRoadshow is not receiving an allocation of the
shares of common stock to be sold in this offering.
61
<PAGE> 66
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed upon
for us by Kilpatrick Stockton LLP, Charlotte, North Carolina. Hale and Dorr LLP,
Reston, Virginia, is acting as our special securities counsel in connection with
this offering. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Alston & Bird LLP, Atlanta, Georgia. As of
August 31, 2000, Kilpatrick Stockton LLP attorneys beneficially owned an
aggregate of 10,925 shares of our common stock and an attorney associated with
Hale and Dorr LLP beneficially owned 1,561 shares of our common stock.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and are included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock we propose to sell in this
offering. This prospectus, which constitutes part of the registration statement,
does not contain all of the information set forth in the registration statement.
For further information about us and the common stock we propose to sell in this
offering, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained in
this prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are not necessarily complete. If a
contract or document has been filed as an exhibit to the registration statement,
we refer you to the copy of the contract or document that has been filed. The
registration statement may be inspected without charge at the principal office
of the SEC in Washington, D.C. and copies of all or any part of which may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and
at the SEC's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can also be obtained at
prescribed rates by mail from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549 or by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
62
<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Deficiency...................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 68
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
YOUcentric, Inc.
Charlotte, North Carolina
We have audited the accompanying balance sheets of YOUcentric, Inc. (the
"Company") as of December 31, 1998 and 1999, and the related statements of
operations, shareholders' deficiency 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 14, 2000
F-2
<PAGE> 69
YOUCENTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, AS OF AS OF
------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 456 $ 2,471 $ 10,025 $ 10,025
Marketable securities..................................... -- -- 13,297 13,297
Accounts receivable (net of allowance of $200 at June 30,
2000).................................................. 1,819 5,663 5,399 5,399
Prepaid expense and other current assets.................. 5 766 2,789 2,789
Earned revenues in excess of billings..................... 278 -- -- --
Deferred contract costs................................... -- 90 330 330
------ -------- -------- --------
Total current assets................................. 2,558 8,990 31,840 31,840
Property and equipment, net................................. 266 830 1,551 1,551
------ -------- -------- --------
Total assets................................................ $2,824 $ 9,820 $ 33,391 $ 33,391
====== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Stock redemption and dividends payable.................... $ -- $ -- $ -- $ 8,636
Current maturities of capital lease obligations........... 45 106 122 122
Accounts payable.......................................... 523 2,236 2,989 2,989
Accrued payroll and related benefits...................... 219 696 598 598
Other accrued liabilities................................. 261 1,242 1,151 1,151
Deferred revenues......................................... 685 1,865 2,117 2,117
Billings in excess of earned revenues..................... 1,813 6,139 6,891 6,891
Income taxes payable...................................... 126 110 113 113
------ -------- -------- --------
Total current liabilities............................ 3,672 12,394 13,981 22,617
------ -------- -------- --------
Capital lease obligations................................... 46 81 79 79
------ -------- -------- --------
Deferred tax liability...................................... 5 28 515 515
------ -------- -------- --------
Redeemable convertible preferred stock:
Series A, no par value, liquidation preference $1.92 per
share, 4,159,446 shares authorized, issued and
outstanding at December 31, 1999 and June 30, 2000
(none pro forma)....................................... -- 18,963 25,159 --
------ -------- -------- --------
Series B, no par value, liquidation preference $12.02 per
share, 2,911,900 shares authorized, 2,572,376 shares
issued and outstanding at June 30, 2000 (none pro
forma)................................................. -- -- 28,597 --
------ -------- -------- --------
Shareholders' equity (deficiency):
Common stock, no par value, 50,000,000 shares authorized,
16,303,680 issued and outstanding at December 31, 1998,
16,003,980 issued and outstanding at December 31, 1999
16,036,326 issued and outstanding at June 30, 2000, and
27,101,711 issued and outstanding pro forma............ 120 381 14,934 74,562
Accumulated other comprehensive loss...................... -- -- (12) (12)
Accumulated deficit....................................... (1,019) (22,027) (49,862) (64,370)
------ -------- -------- --------
Total shareholders' equity (deficiency)........... (899) (21,646) (34,940) 10,180
------ -------- -------- --------
Total liabilities and shareholders' equity (deficiency)..... $2,824 $ 9,820 $ 33,391 $ 33,391
====== ======== ======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 70
YOUCENTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------
1997 1998 1999 1999 2000
------ ------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license, customization and implementation
revenues......................................... $1,280 $2,169 $ 3,085 $ 1,759 $ 4,470
Professional services and maintenance revenues...... 72 621 1,028 317 936
------ ------ -------- -------- --------
Total revenues................................... 1,352 2,790 4,113 2,076 5,406
------ ------ -------- -------- --------
Operating expenses:
Cost of software licenses, customization,
implementation, professional services and
maintenance...................................... 95 334 946 262 2,070
Sales and marketing................................. 401 572 3,027 874 4,458
Research and development............................ 315 1,116 3,246 1,319 2,325
General and administrative.......................... 679 1,385 3,433 1,274 3,760
Stock-based compensation*........................... -- 96 565 500 14,294
------ ------ -------- -------- --------
Total operating expenses......................... 1,490 3,503 11,217 4,229 26,907
------ ------ -------- -------- --------
Operating loss........................................ (138) (713) (7,104) (2,153) (21,501)
------ ------ -------- -------- --------
Other income (expense), net........................... -- (5) 105 14 355
------ ------ -------- -------- --------
Loss before income taxes.............................. (138) (718) (6,999) (2,139) (21,146)
Income tax expense.................................... (43) (128) (23) (4) (493)
------ ------ -------- -------- --------
Net loss.............................................. (181) (846) (7,022) (2,143) (21,639)
------ ------ -------- -------- --------
Accretion for preferred stock redemption
feature and preferred stock dividends............... -- -- (11,398) (8,476) (6,196)
------ ------ -------- -------- --------
Net loss attributable to common
shareholders........................................ $ (181) $ (846) $(18,420) $(10,619) $(27,835)
====== ====== ======== ======== ========
Basic and diluted net loss per
share attributable to common shareholders........... $(0.01) $(0.05) $ (1.15) $ (0.66) $ (1.74)
====== ====== ======== ======== ========
Basic and diluted weighted average
common shares outstanding........................... 19,923 16,004 16,004 16,004 16,024
====== ====== ======== ======== ========
Pro forma basic and diluted net loss per
share attributable to common shareholders
(unaudited)...................................... $ (1.11) $ (1.43)
======== ========
Pro forma basic and diluted weighted
average common shares outstanding (unaudited)....... 20,393 25,343
======== ========
*Stock-based compensation:
Cost of software licenses, customization,
implementation, professional services and
maintenance...................................... $ -- $ -- $ -- $ -- $ 1,845
Sales and marketing................................. -- 96 494 437 3,492
Research and development............................ -- -- 71 63 5,435
General and administrative.......................... -- -- -- -- 3,522
------ ------ -------- -------- --------
Total....................................... $ -- $ 96 $ 565 $ 500 $ 14,294
====== ====== ======== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 71
YOUCENTRIC, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS ACCUMULATED
---------------- (ACCUMULATED OTHER
SHARES AMOUNT DEFICIT) COMPREHENSIVE LOSS TOTAL
------ ------- ------------ ------------------ --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.............. 19,980 $ 70 $ 8 $ -- $ 78
Net loss.............................. -- -- (181) -- (181)
Share repurchase...................... (3,996) (46) -- -- (46)
------ ------- -------- ---- --------
Balance (deficiency), December 31,
1997.................................. 15,984 24 (173) -- (149)
Net loss.............................. -- -- (846) -- (846)
Stock awards.......................... 320 96 -- -- 96
------ ------- -------- ---- --------
Balance (deficiency), December 31,
1998.................................. 16,304 120 (1,019) -- (899)
Net loss.............................. -- -- (7,022) -- (7,022)
Contribution of shares by
shareholders....................... (300) -- -- -- --
Issuance of common stock options at
less than fair value............... -- 181 -- -- 181
Equity restructuring.................. -- -- (2,588) -- (2,588)
Issuance of stock warrant............. -- 80 -- -- 80
Accretion of Series A convertible
preferred stock redemption feature
and dividends...................... -- -- (11,398) -- (11,398)
------ ------- -------- ---- --------
Balance (deficiency), December 31,
1999.................................. 16,004 381 (22,027) -- (21,646)
------ ------- -------- ---- --------
Comprehensive loss:
Net loss (unaudited).................. (21,639) -- (21,639)
Unrealized loss on securities
available for sale (unaudited)..... -- -- -- (12) (12)
------ ------- -------- ---- --------
Total comprehensive loss
(unaudited)........................ -- -- (21,639) (12) (21,651)
Issuance of common stock options at
less than fair value (unaudited)... 14,294 14,294
Accretion of Series A convertible
preferred stock redemption feature
and dividends (unaudited).......... (6,196) (6,196)
Issuance of common stock
(unaudited)........................ 32 259 259
------ ------- -------- ---- --------
Balance (deficiency), June 30, 2000
(unaudited)........................... 16,036 $14,934 $(49,862) $(12) $(34,940)
====== ======= ======== ==== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 72
YOUCENTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1997 1998 1999 1999 2000
----- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(181) $ (846) $(7,022) $(2,143) $(21,639)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for credit losses............................. -- -- -- -- 200
Depreciation and amortization........................... 7 59 225 75 235
Deferred income taxes................................... 40 3 23 4 493
Stock-based compensation................................ -- 96 565 500 14,294
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable................................... (45) (1,607) (3,844) 618 64
Prepaids and other current assets..................... (5) -- (761) (308) (2,023)
Earned revenue in excess of billings.................. (90) (188) 278 278 --
Deferred contract costs............................... -- -- (90) (28) (240)
Accounts payable...................................... 32 472 1,713 75 753
Accrued liabilities................................... 189 292 1,458 44 (189)
Billings in excess of earned revenue.................. 282 1,518 4,326 694 752
Deferred revenues..................................... (121) 572 1,180 540 252
Income taxes payable.................................. (5) 130 (16) (21) 3
----- ------- ------- ------- --------
Net cash provided by (used in) operating
activities....................................... 103 501 (1,965) 328 (7,045)
----- ------- ------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (16) (186) (595) (232) (882)
Purchase of marketable securities......................... -- -- -- -- (13,315)
----- ------- ------- ------- --------
Net cash used in investing activities.............. (16) (186) (595) (232) (14,197)
----- ------- ------- ------- --------
Cash flows from financing activities:
Principal payments on capital leases...................... -- (23) (98) (44) (60)
Share repurchase.......................................... (46) -- -- -- --
Net proceeds from sale of preferred stock................. -- -- 4,673 4,673 28,856
----- ------- ------- ------- --------
Net cash provided by (used in) financing
activities....................................... (46) (23) 4,575 4,629 28,796
----- ------- ------- ------- --------
Net increase in cash and cash equivalents................... 41 292 2,015 4,725 7,554
Cash and cash equivalents:
Beginning of period....................................... 123 164 456 456 2,471
----- ------- ------- ------- --------
End of period............................................. $ 164 $ 456 $ 2,471 $ 5,181 $ 10,025
===== ======= ======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ -- $ 5 $ 17 $ 9 $ 7
===== ======= ======= ======= ========
Cash paid for income taxes................................ $ 9 $ -- $ 16 $ -- $ --
===== ======= ======= ======= ========
Supplemental disclosure of noncash investing and financing
activities:
Leased asset additions and related obligations............ $ -- $ 114 $ 194 $ 194 $ 74
===== ======= ======= ======= ========
Equity restructuring...................................... $ -- $ -- $ 2,588 $ 2,588 $ --
===== ======= ======= ======= ========
Accretion of preferred stock redemption feature and
dividends............................................... $11,398 $ 8,476 $ 6,196
======= ======= ========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 73
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. YOUcentric, Inc. (the "Company") develops, markets and
supports e-business relationship management software products. The Company's
customers principally consist of large, domestic companies who are end users of
its software products and services. The Company's products are based in large
part upon the Java programming language. Sales of the Company's product depend
on the continued acceptance of Java-based applications and continued development
support for Java.
REVENUE RECOGNITION. The Company generates revenues from licensing the rights
to use its software products directly to end-users and indirectly through
sublicense fees from resellers. The Company also generates revenues from sales
of professional consulting services, maintenance and support services performed
for customers that license its products. The Company recognizes revenue based on
the provisions of Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition (as amended by SOP No. 98-4 and SOP No. 98-9) and SOP No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.
Software license fee revenue is recognized upon persuasive evidence of an
arrangement, delivery of software to the customer, determination that there are
no significant post-delivery obligations and when collection of a fixed or
determinable license fee is considered probable. Implementation and
customization services are essential to the customer's use of the software and
are bundled with the sale of the software license. The entire arrangement is
recognized under the percentage-of-completion method and reflected in software
license, customization and implementation revenues in the statements of
operations. Percentage of completion is measured by the percentage of
implementation and customization hours incurred to date to estimated total
customization and implementation hours. This method is used because management
has determined that past experience has shown expended hours to be the best
measure of progress on these engagements.
Revisions in customization and implementation hour estimates are reflected in
the accounting period in which the required revisions become known. Anticipated
losses on contracts are charged to income in their entirety when such losses
become evident. Revenues recognized in excess of amounts billed are classified
under current assets as "earned revenues in excess of billings." Amounts billed
in excess of revenue recognized are classified under current liabilities as
"billings in excess of earned revenues."
For contracts that contain cancellation provisions, or have significant customer
acceptance criteria, revenues are deferred and recognized upon the expiration of
the cancellation period or upon customer acceptance. At December 31, 1999 and
June 30, 2000, the Company had deferred license, customization and
implementation revenues of $2,081,061 and $2,446,461, respectively, due to
significant customer acceptance or cancellation clauses, which are included in
"billings in excess of earned revenues" in the accompanying balance sheets. In
addition, at December 31, 1999 and June 30, 2000, the Company had deferred
maintenance revenues of $794,000 for maintenance services related to these
contracts which are included in "deferred revenues" in the accompanying balance
sheets. The Company does not offer return rights to its resellers or end users.
Commissions paid on contracts for which customer acceptance has not been
received or for which cancellation provisions have not expired are recorded as
prepaid expenses and are expensed upon the earlier of customer acceptance or the
expiration of the cancellation provision. Commissions paid on contracts
recognized under the percentage-of-completion method without such acceptance or
cancellation provisions are charged to expense ratably based on the percentage
of revenue earned on the respective contract.
Revenues from professional services not essential to the customers' use of the
software under time-and-materials contracts are recognized as services are
performed. Maintenance services are recognized ratably over the term of the
related agreements.
F-7
<PAGE> 74
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
During the six months ended June 30, 2000, the Company recognized sub-license
fees for software and authorization services to an end customer through a
sub-licensee. Because the Company's total arrangement with the sub-licensee
included the sale of the software and customization services to be provided to
the ultimate customer by the Company, the arrangement is being accounted for
using the percentage of completion method of accounting as required by SOP 97-2.
CASH AND CASH EQUIVALENTS. The Company invests its excess cash in deposits,
money market accounts, and high quality marketable debt securities. The Company
considers all highly liquid investments with a maximum original maturity of 90
days or less at the time of purchase to be cash equivalents.
MARKETABLE SECURITIES. Management determines the appropriate classification of
marketable securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has classified its marketable debt
securities as "available for sale." Such investments are recorded at fair value
with unrealized gains and losses, net of related tax effects, reported within
accumulated other comprehensive loss. Realized gains and losses on available for
sale securities are computed using the specific identification method.
DEFERRED CONTRACT COSTS. The Company defers contract costs, principally
salaries, related to contracts that have significant acceptance or cancellation
provisions prior to the customer accepting the software. As of December 31, 1999
and June 30, 2000, the Company had recorded deferred contract costs of $90,000
and $330,000, respectively, in the accompanying balance sheets.
PROPERTY AND DEPRECIATION. Expenditures for property and equipment are
capitalized at cost. Capital leases are recorded at the present value of the
future minimum lease payments at the date of acquisition. Depreciation is
provided on the straight-line basis over the estimated useful lives of the
assets, which range from three to five years. Capital leases are amortized over
the lesser of their estimated useful life or the lease term.
The Company reviews long-lived assets to be held and used by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition, and recognizes an impairment loss if the expected future cash flows
are less than the carrying amount of the asset. Long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less cost to sell.
No impairment of long-lived assets existed at December 31, 1998, December 31,
1999 and June 30, 2000.
Maintenance and repairs that do not improve or extend the life of assets are
expensed as incurred.
DEFERRED REVENUES. Deferred revenues generally relate to customer prepayments
for maintenance services which will be recognized over the maintenance period.
INCOME TAXES. The balance sheet includes federal and state taxes currently
payable and deferred taxes. Deferred taxes were determined utilizing the
asset/liability approach which gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax basis of assets and liabilities. This method gives immediate effect to
changes in income tax laws upon enactment. A valuation allowance is established
when necessary to reduce deferred tax assets to the amount more likely than not
to be realized.
ACCUMULATED OTHER COMPREHENSIVE LOSS. Accumulated other comprehensive loss is
presented net of income taxes and is comprised of unrealized gains and losses on
marketable debt securities available for sale.
COST OF SOFTWARE LICENSES, CUSTOMIZATION, IMPLEMENTATION, PROFESSIONAL SERVICES
AND MAINTENANCE. Cost of software licenses, customization, implementation,
professional services and maintenance consist primarily of salaries, consulting,
training and customer support personnel, cost of services provided by
third-party consultants
F-8
<PAGE> 75
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
and cost of product documentation and other production costs. The Company
maintains a dedicated department which provides these implementation,
customization, customer support and other services to customers.
The Company has not historically maintained separate records for the costs of
providing software licenses, customization, implementation, professional
services and maintenance. Therefore, amounts are not presented for the cost of
software licenses, customization and implementation, separately from the cost of
providing professional services and maintenance in the accompanying statements
of operations. The Company began capturing this information separately as of
July 1, 2000 and intends to disclose such information prospectively.
COMPUTER SOFTWARE DEVELOPMENT COSTS AND RESEARCH AND DEVELOPMENT EXPENSES. The
Company incurs software development costs associated with its licensed products
and accounts for software development costs based on the guidance in Statement
of Financial Accounting Standard ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed.
The Company has determined that technological feasibility occurs upon the
successful development of a working model, which happens late in the development
cycle and close to general release of the products. The development costs
incurred between the time technological feasibility is established and general
release of the product are not material.
ADVERTISING COSTS. The Company expenses all advertising costs as incurred.
Advertising costs totaled $41,000, $71,000 and $239,000 in 1997, 1998 and 1999,
respectively, and $331,000 for the six months ended June 30, 2000, and are
included in sales and marketing expenses in the accompanying financial
statements.
LIQUIDITY. The Company continues to incur losses from operations and had an
accumulated deficit of $22,027,000 and $49,862,000 at December 31, 1999 and June
30, 2000, respectively. The Company had a working capital deficit of $3,404,000
at December 31, 1999 and working capital of $17,857,000 at June 30, 2000. As a
result of its significant research and development, customer support, and
selling and marketing efforts, the Company has required substantial working
capital to fund its operations. To date, the Company has financed its operations
principally through its operations and private equity offerings. Management
believes that under its current business plan, the proceeds of these equity
offerings are sufficient to fund its operations and capital requirements through
at least the next 12 months. Any substantial inability to achieve the current
business plan could have a material adverse impact on the Company's financial
position, liquidity, or results of operations and may require the Company to
reduce expenditures to enable it to continue operations.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to a concentration of credit risk principally consist of cash
equivalents, marketable securities and accounts receivable. The Company places
its cash equivalents with high credit qualified financial institutions and, by
practice, limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable are limited
due to the dispersion across different industries and geographies of the
Company's customer base.
Revenues from two customers accounted for 45% and 11% of total revenues for the
six months ended June 30, 2000. Revenues from one customer accounted for 38% of
total revenues in 1999. Revenues from three customers accounted for 22%, 22% and
14% of total revenues in 1998. Revenues from three customers accounted for 47%,
13% and 12% of total revenues in 1997. These revenue concentrations were from
different customers in the six months ended June 30, 2000 and each of the three
years. In addition, the customer representing 45% of total revenues for the six
months ended June 30, 2000 accounted for 42% of total accounts receivable as of
June 30, 2000. Another customer accounted for 63% of total accounts receivable
as of December 31, 1999. The Company performs ongoing credit evaluations of its
customers' financial condition and the risk of loss with respect to its
F-9
<PAGE> 76
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
trade receivables is further mitigated by the fact that the Company's customer
base consists of well established companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and other accrued
liabilities approximate fair values for all periods presented.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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. Significant estimates relate to the calculation of revenue
earned on contracts accounted for under the percentage-of-completion method,
since this calculation is based on the percentage of actual labor hours incurred
to total estimated labor hours required to complete the contract.
STOCK-BASED COMPENSATION. SFAS No. 123, Accounting for Stock-Based
Compensation, requires the measurement of the fair value of employee and
director stock options or warrants to be included in the statement of operations
or disclosed in the notes to financial statements. The Company has determined
that it will continue to account for stock-based compensation for employees and
directors under Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and elect the disclosure-only alternative under
SFAS No. 123 (see Note 6). The Company accounts for options and warrants granted
to individuals other than employees and directors using the fair-value method
prescribed by SFAS No. 123.
SEGMENT REPORTING. The Company views its operations and manages its business as
one segment, providing customized software licenses and professional support and
maintenance services.
UNAUDITED INTERIM RESULTS. The accompanying balance sheet as of June 30, 2000,
the statements of operations and cash flows for the six months ended June 30,
1999 and 2000 and the statements of shareholders' deficiency for the six months
ended June 30, 2000 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of these periods.
The data disclosed in the notes to financial statements for these periods are
unaudited. These amounts are not necessarily indicative of future results.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS. Net loss per share
attributable to common shareholders is based on net loss attributable to common
shareholders divided by the weighted average shares outstanding during the
period. At December 31, 1999 and June 30, 2000, outstanding options and
warrants, representing 2,564,793 and 6,489,693 shares of common stock,
respectively, are not included in the calculation of diluted net loss per share
attributable to common shareholders since they are anti-dilutive.
During 1999, the Company recorded a dividend accretion equal to the greater of
the conversion or redemption feature of the Series A Preferred Stock (see Note
6). These dividends increase the net loss attributable to common shareholders.
PRO FORMA NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS. Pro forma
basic and diluted net loss per share attributable to common shareholders is
computed by dividing net loss, as adjusted for the charge for all compensatory
unvested stock options and warrants which vest at the initial public offering,
by the weighted average number of common shares outstanding for the period plus
the weighted average number of common shares resulting from the assumed
conversion of outstanding shares of Series A and B redeemable convertible
preferred stock on the date of original issuance, which is later than January 1,
1999. The pro forma per share data
F-10
<PAGE> 77
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
calculation also gives effect to the number of shares whose proceeds will be
used to pay the $8,000,000 dividend to the holders of the Series A redeemable
convertible preferred stock. Series B has an additional provision which
increases the number of common shares issued to the holders of Series B
preferred stock. Such provision provides that if the initial public offering
price per share in this offering is less than $16.03, the conversion price of
the Series B preferred stock will decrease to one-half of the initial public
offering price per share; however, if the initial public offering price is less
than $12.81 per share, the conversion price will not decrease below $6.41 per
share. As the conversion price of Series B preferred stock decreases, the
holders of these preferred securities receive a larger number of shares of
common stock upon conversion; provided, however, that due to the limitation on
the amount of the decrease, the Company will not be required to issue more than
approximately 967,652 additional shares of common stock to the Series B
stockholders regardless of the initial public offering price. For pro forma net
loss per share purposes, the Company has assumed an IPO price of $12.00 per
share resulting in an additional 967,652 shares of common stock to be issued to
holders of Series B which results in a conversion ratio of approximately 1 to
1.875 for Series B redeemable convertible preferred stock.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1999 2000
(IN THOUSANDS EXCEPT PER SHARE DATA) ------------ -----------
(UNAUDITED)
<S> <C> <C>
Net loss.................................................... $ (7,022) $(21,639)
Compensation charge for options which vest immediately as if
the initial public offering occurred as of the respective
date...................................................... (15,693) (14,508)
--------- --------
Pro forma net loss attributable to common shareholders...... $ (22,715) $(36,147)
========= ========
Basic and diluted weighted average common shares
outstanding............................................... 16,004 16,024
Weighted average of common shares resulting from the assumed
conversion of outstanding shares of Series A redeemable
convertible preferred stock............................... 3,965 6,239
--------- --------
Weighted average of common shares assumed to be issued in
payment of the $8,000,000 dividend due to Series A
redeemable convertible preferred shareholders............. 424 667
Weighted average of common shares resulting from the assumed
conversion of outstanding shares of Series B redeemable
convertible preferred stock including additional shares
assuming an offering price of $12.00...................... -- 2,413
--------- --------
Pro forma basic and diluted weighted average common shares
outstanding............................................... 20,393 25,343
========= ========
Pro forma basic and diluted net loss per share attributable
to common shareholders.................................... $ (1.11) $ (1.43)
========= ========
</TABLE>
UNAUDITED PRO FORMA INFORMATION. The unaudited pro forma balance sheet
information assumes that the initial public offering had actually occurred at
June 30, 2000 resulting in the conversion of each share of Series A and B
preferred stock into one and one half shares of common stock, an accrual for
accrued preferred dividends of approximately $636,000 as of June 30, 2000 and an
$8,000,000 conversion payment to preferred stockholders. Estimated proceeds from
the common shares to be issued as a result of such initial public offering are
excluded.
RECENT PRONOUNCEMENTS. SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities -- This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The new standard
requires that an entity
F-11
<PAGE> 78
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This standard
will become effective for the Company for the fiscal year 2001. The Company has
not completed an evaluation of the effect of SFAS No. 133 on its financial
position and results of operations, and therefore is unable to estimate the
effect of its adoption.
2. MARKETABLE SECURITIES (UNAUDITED)
Marketable securities at June 30, 2000 consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
Corporate commercial paper.................................. $ 4,096 $ 4,090
Medium and short term notes................................. 4,001 3,996
Euro dollar bonds........................................... 3,497 3,493
Taxable auction securities.................................. 800 800
Zero coupon bonds........................................... 442 440
Municipal bonds............................................. 479 478
------- -------
$13,315 $13,297
======= =======
</TABLE>
The following table sets forth certain data at June 30, 2000 with respect to
marketable securities (dollars in thousands):
<TABLE>
<S> <C>
Cost basis.................................................. $13,315
Fair value.................................................. 13,297
-------
Gross unrealized loss....................................... (18)
Deferred tax asset.......................................... 6
-------
Accumulated other comprehensive loss........................ $ (12)
=======
</TABLE>
At December 31, 1998 and 1999, the Company had no investments in marketable
securities. At June 30, 2000, the average maturity of the investments was
approximately 4.6 months. There were no gross realized gains or losses from sale
of securities in the periods presented.
F-12
<PAGE> 79
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1998 1999 2000
---- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software, including assets under
capital lease of $114, $308 and $382 at December 31, 1998,
and 1999 and June 30, 2000, respectively.................. $286 $ 891 $1,807
Office furniture and equipment.............................. 51 199 233
Leasehold improvements...................................... -- 36 42
---- ------ ------
337 1,126 2,082
Less:
Accumulated depreciation.................................. (50) (192) (373)
Accumulated amortization of property and equipment under
capital lease.......................................... (21) (104) (158)
---- ------ ------
Property and equipment, net................................. $266 $ 830 $1,551
==== ====== ======
</TABLE>
Depreciation and amortization expense relating to property and equipment totaled
$7,000, $59,000, $225,000 and $235,000 for the years ended December 31, 1997,
1998 and 1999 and the six months ended June 30, 2000, respectively, and is
included in general and administrative expense in the accompanying financial
statements.
4. LEASES
The Company leases certain property and equipment, automobiles and office space
under capital and operating lease arrangements. The following is a schedule by
years of future minimum lease payments under capital leases for the next three
years, together with the present value of the net minimum lease payments as of
December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000........................................................ $ 117
2001........................................................ 68
2002........................................................ 17
-----
Total minimum lease payments................................ 202
Less imputed interest....................................... (15)
-----
Present value of minimum lease payments..................... 187
Less current maturities..................................... (106)
-----
Long-term portion of capital lease obligations.............. $ 81
=====
</TABLE>
Interest expense attributable to these leases totaled $400, $5,000 and $17,000
for the years ended December 31, 1997, 1998 and 1999, respectively, and is
included in other income (expense), net in the accompanying financial
statements.
F-13
<PAGE> 80
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
OPERATING LEASES. Future minimum annual lease payments under operating leases
with noncancelable terms in excess of one year as of December 31, 1999 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000........................................................ $123
2001........................................................ 106
2002........................................................ 102
2003........................................................ 17
----
Total minimum lease payments................................ $348
====
</TABLE>
Rent expense under operating leases totaled approximately $40,000, $113,000 and
$336,000 in 1997, 1998 and 1999, respectively.
In June 2000, the Company entered into a lease for their new corporate
headquarters. This lease expires September 30, 2005. Estimated minimum lease
payments under this lease are $322,300, $1,306,400, $1,358,600, $1,413,000,
$1,469,500 and $1,136,000 for the years ended December 31, 2000, 2001, 2002,
2003, 2004 and 2005, respectively. The Company has a capital lease obligation
related to leasehold improvements at this facility with minimum lease payments
of $28,000 for the year ended December 31, 2000, $84,100 for each of the years
ended December 31, 2001, 2002, 2003 and 2004, and $63,100 for the year ended
December 31, 2005. The Company intends to sublease its previous headquarters and
currently does not anticipate any material losses resulting from this sublease.
5. INCOME TAXES
Income tax expense for the years ended December 31 is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal................................................... $ 2 $ 99 $--
State..................................................... 1 26 --
--- ---- ---
Total current.......................................... 3 125 --
--- ---- ---
Deferred tax expense:
Federal................................................... 32 2 19
State..................................................... 8 1 4
--- ---- ---
Total deferred......................................... 40 3 23
--- ---- ---
Total............................................. $43 $128 $23
=== ==== ===
</TABLE>
F-14
<PAGE> 81
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
For the years ended December 31, 1997, 1998 and 1999, the provision for income
taxes differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate to loss before income taxes as
a result of the following differences (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates................ $(20) (15.00)% $(243) (34.00)% $(2,379) (34.00)%
State tax, net of federal benefit....... (9) (6.59) (37) (5.12) (358) (5.12)
Meals and entertainment limitation...... (1) 0.47 3 0.36 20 0.29
Key man life insurance.................. -- -- 4 0.54 4 0.06
Common stock expense.................... -- -- -- -- 39 0.56
Valuation allowance..................... 100 72.69 401 55.82 2,687 38.40
Rate differential....................... (27) (19.75) -- -- -- --
Other................................... -- -- 0.15 10 0.14
---- ------ ----- ------ ------- ------
Total......................... $ 43 31.82% $ 128 17.75% $ 23 0.33%
==== ====== ===== ====== ======= ======
</TABLE>
Deferred income taxes result from differences in the recognition of revenue and
expense for tax and financial statement purposes. The cash method of accounting
is used for tax purposes, whereas the accrual method of accounting is used for
financial reporting purposes. The Company has recorded a valuation allowance for
all deferred tax assets generated in 1997, 1998 and 1999.
The approximate tax effect of temporary differences and net operating loss
carryforwards that give rise to the Company's deferred income tax assets and
liabilities at December 31, 1998 and 1999 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
Cash to accrual adjustment (primarily revenues recognized
for tax purposes but deferred for financial statements)... $ 501 $ 2,131
Net operating loss carryforwards............................ -- 1,057
----- -------
Gross deferred tax assets................................. 501 3,188
Less valuation allowance.................................... (501) (3,188)
----- -------
Net deferred tax assets..................................... -- --
Fixed assets................................................ (4) (21)
Capital lease asset......................................... (1) (7)
----- -------
Net deferred tax liability.................................. $ (5) $ (28)
===== =======
</TABLE>
6. EMPLOYEE BENEFIT PLAN
The Company had a Simplified Employee Pension Plan ("SEP") covering
substantially all full-time employees. The Company may make discretionary
contributions to each participant's account based upon a uniform percentage of
the participant's compensation at the lesser of 15% or $30,000. Participants are
immediately vested in the amount of the employer contributions and such
contributions are invested based on employee specified options. Company
contributions after fiscal 1999 will be made to the 401(k) plan discussed below
and all employee balances in the SEP will remain in this plan and are not
transferable to the 401(k) plan. Total expense under the SEP was $91,035,
$123,888 and $400,000 in 1997, 1998 and 1999, respectively.
F-15
<PAGE> 82
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
Effective January 1, 2000, the Company established a 401(k) plan in which all
employees who have met certain age and service requirements may participate.
Employees may participate in the 401(k) plan on the first day of the month
following their date of hire. Employee contributions are limited to a percentage
of their compensation and are matched 150% by the Company. Employer
contributions are quarterly and the participants vest immediately in such
contributions. In addition, the Company may make additional discretionary
contributions. Total expense under the 401(k) plan was $385,000 for the six
months ended June 30, 2000.
7. STOCKHOLDERS' DEFICIENCY
EQUITY RESTRUCTURING. In May 1999, the Company's Board of Directors authorized
an equity restructuring whereby each share of its common stock was converted
into 56 shares of newly created cumulative Series A Redeemable Convertible
Preferred Stock ("Series A Preferred Stock") and 444 shares of common stock for
shareholders of record on May 13, 1999. The issuance of the Series A Preferred
Stock has been treated in the accompanying financial statements as a dividend to
the existing common shareholders at its fair value of $1.28 per share
($2,589,000). All common share and per share information in the accompanying
financial statements has been restated to give retroactive recognition to the
equity restructuring for all periods presented.
STOCK SPLITS. On December 23, 1999 the Company's Board of Directors authorized
a stock split payable in the form of a dividend of three shares of the Company's
common stock for each share of common stock owned by shareholders of record on
December 23, 1999. On February 22, 2000, the Company's Board of Directors
authorized a stock split payable in the form of a dividend of three shares of
the Company's Series A Preferred Stock for each share of Series A Preferred
Stock owned by shareholders of record on February 22, 2000. On August 9, 2000,
the Company's Board of Directors authorized a stock split payable in the form of
a dividend of three shares of the Company's common stock for every two shares of
common stock owned by shareholders of record on August 9, 2000. All share and
per share information in the accompanying financial statements has been restated
to give retroactive recognition to the stock splits for all periods presented.
REDEEMABLE CONVERTIBLE PREFERRED STOCK - SERIES A. Subsequent to the May 1999
equity restructuring, the Company sold 2,613,846 shares and its shareholders
sold 1,545,600 shares of the Series A Preferred Stock to a private investor for
aggregate cash consideration of $8,000,000 ($1.92 per share). The Company's net
proceeds from the sale totaled $4,673,000 (net of offering costs of $434,000).
Dividends on the Series A Preferred Stock accrue annually and are cumulative at
a rate of $0.13463 per share. Such dividends must be paid before any other
dividends can be declared or paid on any other class of preferred stock or on
any class of common stock. In the event of liquidation, each share of Series A
Preferred Stock shall be entitled to an amount equal to the original issue price
and all accrued but unpaid cumulative dividends.
The Series A Preferred Stock has voting rights equal to one and a half shares of
common stock, and at any time at the option of the holder, can be converted into
one and a half shares of the Company's common stock. The Series A Preferred
Stock is automatically converted in the event of a qualified initial public
offering ("IPO") which meets certain valuation requirements, or a date specified
by written consent of a majority of the holders of Series A Preferred Stock. In
addition, at the earlier of an IPO, sale of the Company or May 2004, the holders
of Series A Preferred Stock also have the right to all accrued but unpaid
cumulative dividends and an amount equal to the original Series A Preferred
Stock issue price ($8,000,000) as adjusted for any stock splits.
If the Company has not closed a qualified IPO by May 2004, the Series A
Preferred Stock is redeemable at the option of the holder. At the time of
redemption, the Company must pay to the holders of Series A Preferred Stock an
amount equal to the original Series A Preferred Stock issue price, all accrued
but unpaid cumulative dividends,
F-16
<PAGE> 83
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
plus an amount equal to the fair market value of the common stock into which the
Series A Preferred Stock is convertible. The fair market value would be $6.84
per share and $9.33 per share at December 31, 1999 and June 30, 2000, or $43
million and $58.7 million, respectively.
Using the interest method, the Company will ratably accrete dividends to holders
of Series A Preferred Stock over the five year period to May 2004, based on the
most favorable potential outcome to the holders of Series A Preferred Stock of
either the redemption or conversion feature. At December 31, 1999, $11,398,000
has been accreted as preferred stock dividends in the accompanying balance
sheet. These dividends increase the net loss attributable to common shareholders
in 1999.
Following is a summary of the activity for Series A Preferred Stock during 1999
and the six months ended June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
SHARES AMOUNT
------ -------
<S> <C> <C>
Equity restructuring........................................ 1,345 $ 2,588
Preferred stock awards...................................... 200 384
Sale of Series A Preferred Stock (net of $434 of costs)..... 2,614 4,593
Accretion of Series A Preferred Stock redemption feature.... -- 11,398
----- -------
Balance December 31, 1999................................... 4,159 18,963
Accretion of Series A Preferred Stock redemption feature
(unaudited)............................................... -- 6,196
----- -------
Balance June 30, 2000 (unaudited)........................... 4,159 $25,159
===== =======
</TABLE>
REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES B. On April 7, 2000, the Company
completed the sale of 2,572,376 shares of Series B Preferred Stock to a group of
financial investors for cash consideration of $30,920,000 ($12.02 per share).
The Company's net proceeds from the sale totaled $28,856,000 (net of offering
costs of $2,064,000). Each share of Series B Preferred Stock is convertible into
one and a half shares of common stock (subject to certain adjustments in the
event of certain future share issuances). Other rights and preferences of the
shares of Series B Preferred Stock include a liquidation preference and a right
to participate in future equity offerings. The holders of the Series B Preferred
Stock are entitled to receive noncumulative dividends in preference to any
dividends on the common stock at the rate of $.8414 per share per annum, when
and as declared by the Board of Directors. The Series B Preferred Stock shall be
redeemed upon 45 days prior notice from the holders of a majority of the Series
B Preferred Stock to the Company, at any time after May 13, 2004. The redemption
price shall equal the original purchase price per share paid, plus any declared
but unpaid dividends. The Series B Preferred Stockholders shall also have the
right to appoint one director to the Company's Board of Directors.
The Series B Preferred Stock agreements provide that if the offering price at an
IPO does not exceed a specified price per share, the price on which the
conversion of the outstanding Preferred Stock into common stock is based will
decrease and, as a result, the holders of Series B Preferred Stock will be
entitled to additional shares of common stock.
STOCK CONTRIBUTION. During 1999, three shareholders returned 600 shares of
common stock to the Company to be used as stock awards for no consideration.
STOCK OPTIONS. In December 1999, the Company granted 2,377,620 stock options to
certain employees. These options have an exercise price of $0.0022 per share,
cliff vest and become exercisable 60 months from the date of grant, and expire
10 years from the date of grant. The common stock had a fair market value at the
date of grant of $6.84 per share. These options vest immediately upon the
occurrence of an IPO, and the entire unvested portion
F-17
<PAGE> 84
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
(approximately $15,693,000 at December 31, 1999) would be expensed at the
effective date of an IPO. No other options were granted in 1999.
In December 1999, the 1999 Equity Compensation Plan (the "1999 Equity Plan") was
adopted by the Board of Directors and received stockholder approval. A total of
5,325,000 shares of common stock have been reserved for issuance under the 1999
Equity Plan. Under the terms of the 1999 Equity Plan, the Company is authorized
to grant incentive stock options as defined under the Internal Revenue Code,
non-qualified stock options and restricted stock awards to employees, officers,
directors, and consultants of the Company. The 1999 Equity Plan is administered
by a Board of Directors committee. The committee selects the individuals to whom
awards will be granted and determines the award exercise price and other terms
of each award, subject to the provisions of the 1999 Equity Plan. Options
granted under the 1999 Equity Plan will expire on a date determined by the
committee, not to exceed 10 years.
During the six months ended June 30, 2000, the Company granted nonqualified
stock options under the 1999 Equity Plan to substantially all employees to
purchase an aggregate of 4,151,550 shares of the Company's common stock at a
weighted average price of $1.63 per share. These options generally vest from
three to four years from each respective employee's initial employment date;
however, certain of the options have acceleration clauses triggered by a
liquidity event (e.g. an initial public offering) or attainment of certain
performance measures.
During the six months ended June 30, 2000, the Company granted 160,050 stock
options to non-employee contractors. These options vest ratably over three to
four years, have a weighted average exercise price of $0.45 per share, a
weighted average grant date fair value of $11.78 per share and a contractual
remaining life of 9.75 years. Such options have been accounted for under the
provisions of SFAS 123 and EITF 96-18 by applying the Black-Scholes method using
the assumptions as of June 30, 2000 described above, and will be periodically
remeasured over the vesting period. In the six months ended June 30, 2000,
$935,633 was recorded as compensation expense related to these options.
In August 2000, the Company granted nonqualified stock options under the 1999
Equity Plan to certain employees to purchase an aggregate of 1,512,050 shares of
the Company's common stock at a weighted average exercise price of $4.34 per
share. These options generally vest from three to four years from each
employee's initial employment date.
2000 EQUITY COMPENSATION PLAN. In August, 2000, the 2000 Equity Compensation
Plan (the "2000 Equity Plan") was adopted by the Board of Directors and received
shareholder approval. A total of 3,750,000 shares of common stock have been
reserved for issuance under the 2000 Equity Plan. Under the terms of the 2000
Equity Plan, the Company is authorized to grant both incentive stock options
that qualify under the Internal Revenue Code and nonqualified stock options.
Incentive stock options can only be granted to the Company's employees and
nonqualified stock options to employees, officers, directors consultants and
advisors. The committee selects the individuals to whom awards will be granted
and determines the award exercise price and other terms of each award, subject
to the provisions of the 1999 Equity Plan. Options granted under the 1999 Equity
Plan will expire on a date determined by the committee, not to exceed 10 years.
No options have been granted under this plan.
2000 NON-EMPLOYEE DIRECTORS PLAN. In June, 2000, the 2000 Non-Employee
Directors Stock Option Plan (the "2000 Non-Employee Directors Plan") was adopted
by the Board of Directors pending shareholder approval. A total of 180,000
shares of common stock have been authorized for issuance under this plan. Of the
shares reserved for issuance, 120,000 remain available for future issuance as of
August 31, 2000.
The 2000 Non-Employee Directors Plan is administered by the compensation
committee of the Board of Directors. Each member of the Board of Directors who
is not an employee of the Company and who is not affiliated with an
F-18
<PAGE> 85
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
entity that invested in the Company prior to the completion of this offering
will receive stock options under the 2000 Non-Employee Directors Plan. Each
person who was or became a non-employee director on the effective date of the
2000 Non-Employee Directors Plan was automatically granted on the effective date
one option to purchase 45,000 shares of common stock and a second option to
purchase 15,000 shares of common stock. Each person who becomes a non-employee
director after the effective date of 2000 Non-Employee Directors Plan will be
automatically granted on the date he first becomes a non-employee director one
option to purchase 45,000 shares of common stock and a second option to purchase
15,000 shares of common stock. In addition, on the date of each annual
shareholders meeting, each person who is re-elected as a non-employee director
on that date will be automatically granted an option to purchase 15,000 shares
of common stock. All stock options granted under the 2000 Non-Employee Directors
Plan will be nonqualified stock options.
On June 16, 2000, the Company granted options to a director to purchase 60,000
shares at a price of $4.67 per share. These options vest over a period from one
to three years from the grant date and have acceleration clauses triggered by a
liquidity event (e.g. an initial public offering) or change in control. Options
granted under the 2000 Non-Employee Directors Plan shall expire upon the
ten-year anniversary of the grant date of the option.
The Company applies Accounting Principles Board Opinion 25 in accounting for its
stock option plans. Accordingly, compensation expense has been computed for
stock-based compensation for the difference between fair market value of the
stock at the date of grant and the exercise price of the option. Total expense
relating to the stock option grants for the year ended December 31, 1999 and the
six months ended June 30, 2000 was $181,000 and $14,294,000, respectively.
A summary of the Company's stock options as of December 31, 1998, December 31,
1999 and June 30, 2000, and changes during the years ended December 31, 1998 and
December 31, 1999 and the six months ended June 30, 2000, are presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Balance December 31, 1998................................... -- --
Options granted at less than fair market value............ 2,377,620 $0.0022
Options exercised......................................... -- --
Options forfeited......................................... -- --
---------
Balance December 31, 1999................................... 2,377,620 0.0022
Options granted at less than fair market value
(unaudited)............................................ 4,151,550 1.63
Options exercised (unaudited)............................. -- --
Options forfeited (unaudited)............................. 226,650 3.43
---------
Balance June 30, 2000 (unaudited)........................... 6,302,520 0.95
=========
Exercisable, June 30, 2000 (unaudited)...................... 608,375 0.29
=========
</TABLE>
The Company had no options granted, exercisable, forfeited or outstanding prior
to December 31, 1998, and no options outstanding at December 31, 1999 were
exercisable.
F-19
<PAGE> 86
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
The following table summarizes unaudited information about the stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL LIFE EXERCISE NUMBER OF EXERCISE
PRICE OPTIONS (YEARS) PRICE OPTIONS PRICE
----------- ---------- ----------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.002 2,377,620 9.5 $ 0.002 -- --
0.007 435,000 9.75 0.007 30,000 $0.01
0.140-0.260 442,500 9.75 0.224 355,000 0.22
0.327-0.500 564,000 9.75 0.428 208,000 0.41
0.647-0.793 82,500 9.75 0.687 15,000 0.70
0.933-1.227 1,401,750 9.75 1.014 -- --
3.100-3.333 115,500 9.75 3.291 -- --
4.000 778,650 9.75 4.000 375 4.00
4.667 60,000 10.0 4.667 -- --
8.013 45,000 9.75 8.013 -- --
---------- -------
6,302,520 608,375
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No. 123
for stock and option grants during the year ended December 31, 1999 and the six
month period ended June 30, 2000 using the Black-Scholes option pricing model
prescribed by SFAS No. 123, using the following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Expected option lives....................................... 5 yrs 3-4 yrs
Weighted average risk-free interest rate.................... 6.25% 6.65%
Weighted average fair value of options granted.............. $10.26 $ 9.61
</TABLE>
Expected volatility for the year ended December 31, 1999 was assumed to be 0% as
the Company was a nonpublic entity. At June 30, 2000 the Company is no longer
considered a nonpublic entity, as defined by SFAS No. 123, as a result of its
Form S-1 filing in April 2000. As such, the Company has used an assumed
volatility of 140% for the six month ended June 30, 2000 based on industry
comparables. In addition, the Company assumed no dividends in the calculation of
compensation cost under SFAS No. 123.
F-20
<PAGE> 87
YOUCENTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000 IS UNAUDITED)
If compensation cost had been determined for stock and option grants to
employees based on the provisions of SFAS No. 123, the Company's net loss and
net loss per share for the year ended December 31, 1999 and the six month period
ended June 30, 2000 would have increased to the pro forma amounts indicated
below (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Net loss:
As reported............................................... $(7,022) $(21,639)
Pro forma................................................. $(7,168) $(21,750)
Basic and diluted net loss per share attributable to common
shareholders:
As reported............................................... $ (1.15) $ (1.74)
Pro forma................................................. $ (1.16) $ (1.74)
</TABLE>
STOCK AWARDS. In 1998 and 1999, the Company awarded common and Series A
preferred stock to certain employees of the Company. Total compensation expense
related to these awards for the years ended December 31, 1998 and 1999 was
approximately $96,000 and $384,000, respectively.
COMMON STOCK WARRANT. In connection with the issuance of the Series A preferred
stock in May 1999, the Company issued to a financial broker for services
rendered, warrants to purchase 187,173 shares of common stock at $0.80 per
share. The warrants vested immediately and expire in May 2004. The estimated
fair value of the warrants at the time of issuance, based on the fair value of
the services received, was $80,000, and has been reflected as a deduction from
the preferred stock offering proceeds in the accompanying balance sheet. As of
December 31, 1999, these warrants were outstanding and exercisable in full.
8. RELATED PARTY TRANSACTIONS
During 1999, the Company paid withholding taxes relating to preferred stock
awards on behalf of two shareholders, and recorded employee receivables of
$127,000 in the accompanying financial statements at December 31, 1999. These
amounts were repaid to the Company in March 2000. The Company has a formal
agreement, to indemnify these shareholders against certain liabilities relating
to these stock awards up to $1,000,000.
In April 2000, the Company completed the sale of Series B Preferred Stock for
approximately $31 million. The private investment firm which purchased all of
the Company's Series A Preferred Stock in May 1999, also purchased 415,974
shares of the Series B Preferred Stock. One of the Company's directors is a
general partner in the private investment firm. Another investor purchased
831,946 shares of the Series B Preferred Stock. One of the Company's directors
is a principal with the investor.
F-21
<PAGE> 88
[Artwork for Inside Back Cover]
The YOUrelate Solution
[Diagram illustrating how:
- elements of "Our Clients' Business Vision," each shown as individual
circles labeled "Clients' business and selling processes," "Clients' data
model" and "Clients' unique ideas;"
are combined with
- elements of "Flexible YOUrelate Components," each shown as individual
circles labeled "Accounts," "Contacts," "Products," "Activities,"
"Forecasts" and "Opportunities;"
to create a structure resembling a molecule connecting all of the individual
circles into the Mass-Customized Software]
Mass-Customized Software
We employ principles of mass-customization to provide software adapted to the
unique aspects of our clients' evolving business models.
<PAGE> 89
5,000,000 SHARES
YOUCENTRIC, INC.
COMMON STOCK
(YOUCENTRIC LOGO)
--------------------------------
PROSPECTUS
--------------------------------
Until , 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 dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. BANCORP PIPER JAFFRAY
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
LEGG MASON WOOD WALKER
INCORPORATED
, 2000
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 19,734
NASD filing fee............................................. 7,975
Nasdaq National Market listing fee.......................... 62,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 550,000
Accounting fees and expenses................................ 400,000
Blue Sky fees and expenses (including legal fees)........... 2,500
Transfer agent and registrar fees and expenses.............. 15,000
Directors and officers insurance............................ 400,000
Miscellaneous............................................... 149,791
----------
Total............................................. $1,800,000
==========
</TABLE>
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation provide that our directors and officers shall not
be personally liable to us or our shareholders for monetary damages for breach
of fiduciary duty as a director or officer to the fullest extent permitted by
North Carolina law. Under Section 55-8-51 of the North Carolina Business
Corporation Act, we may indemnify a present or former director if he conducted
himself in good faith and reasonably believed, in the case of conduct in his
official capacity, that his conduct was in our best interest. In all other
cases, the director must have believed that his conduct was at least not opposed
to our best interest. In the case of any criminal proceeding, the director must
have had no reasonable cause to believe his conduct was unlawful. We may not
indemnify a director in connection with a proceeding by or in the right of the
company in which the director was adjudged liable to us or, in connection with
any other proceeding, whether or not involving action in his official capacity,
in which he was adjudged liable on the basis that personal benefit was
improperly received by him. Under North Carolina law, we may indemnify our
officers to the same extent as our directors and to such further extent as is
consistent with public policy. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
We currently intend to obtain liability insurance covering our executive
officers and directors against claims arising from certain acts or decisions by
them in their capacities as officers and directors of the company, subject to
certain exclusions and deductible and maximum amounts, which may extend to,
among other things, liabilities arising under the Securities Act.
The Underwriting Agreement (Exhibit 1.1) provides that the underwriters will
indemnify us, our directors and executive officers and other persons for certain
liabilities, including liabilities arising under the Securities Act of 1933.
II-1
<PAGE> 91
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, we have
issued and sold the following securities on the date and for the consideration
referenced below:
1. In May 1999, we issued and sold 4,159,446 shares of our Series A
preferred stock to four investment partnerships affiliated with Technology
Crossover Ventures in a private offering for an aggregate purchase price of
$5.0 million. In connection with this private offering, we also issued a
warrant to purchase an aggregate of 187,173 shares of common stock at an
exercise price of $0.80 per share to the placement agent for this
transaction.
2. In March and April 2000, we issued and sold 2,572,376 shares of our
Series B preferred stock to accredited investors in a private offering for
an aggregate purchase price of $30.9 million. In connection with this
private offering, we also issued 32,346 shares of common stock to the
placement agent for this transaction.
The issuances and sales of securities in the above transactions were made in
reliance on the exemptions from registration under the Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2) thereof or
Regulation D thereunder. The purchasers in each case represented their intention
to acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. Similar representations of investment intent were
obtained and similar legends imposed in connection with any subsequent transfers
of such securities. We believe that all recipients had adequate access, through
employment or other relationships, to information about us to make an informed
investment decision.
In addition, in December 1999 and March, June and August 2000, we granted
options to purchase an aggregate of 8,041,220 shares of common stock to
employees, consultants and a director with a weighted average exercise price of
$1.66 per share, including 5,603,600 options granted under the 1999 Equity
Compensation Plan, in reliance on the exemption from registration under the
Securities Act provided by Rule 701 and Section 4(2) of the Securities Act.
No underwriters were involved in the foregoing sales of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1* -- Amended and Restated Articles of Incorporation
3.2* -- Form of Amended and Restated Articles of Incorporation, to
be filed immediately following the closing of this
offering
3.3* -- Bylaws, as amended
3.4* -- Form of Amended and Restated Bylaws, to be effective upon
the closing of this offering
3.5* -- Third Amendment to Bylaws
4.1 -- Specimen common stock certificate
4.2 -- See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Articles of Incorporation and Bylaws of YOUcentric
defining the rights of holders of common stock
5.1* -- Opinion of Kilpatrick Stockton LLP
10.1* -- 1999 Equity Compensation Plan, as amended
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
10.2* -- Stock Option Agreement dated as of March 31, 2000 between
YOUcentric and Donald A. DeLoach for 600,000 shares
10.3* -- Stock Option Agreement dated as of March 31, 2000 between
YOUcentric and Donald A. DeLoach for 200,000 shares
10.4* -- Stock Option Agreement dated as of December 23, 1999,
between YOUcentric and Mark D. Logan, as amended
10.5* -- Stock Option Agreement dated as of December 23, 1999,
between YOUcentric and J. Wells Tiedeman, as amended
10.6* -- Stock Option Agreement dated as of March 31, 2000, between
YOUcentric and Robert J. Cummings
10.7* -- Amended and Restated Investors' Rights Agreement dated March
3, 2000
10.8* -- Office Lease dated November 11, 1997, as amended, between
YOUcentric and 6000 Fairview Associates, LLC
10.9* -- Office Sublease dated February 10, 1999 between YOUcentric
and United Dominion Industries, Inc.
10.10* -- Indemnification Agreement dated May 13, 1999 between
YOUcentric and C. Toms Newby, III
10.11* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Thomas M. Fedell
10.12* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Robert E. Kear
10.13* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Karl R. Johnson
10.14* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Mark D. Logan
10.15* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and J. Wells Tiedeman
10.16* -- Form of Employment Agreement between YOUcentric and each of
Thomas M. Fedell, Robert E. Kear, Karl R. Johnson, Mark
D. Logan, J. Wells Tiedeman and Donald A. DeLoach
10.17* -- Form of Proprietary Information and Inventions Agreement
between YOUcentric and each of Thomas M. Fedell, Robert
E. Kear, Karl R. Johnson, Mark D. Logan, J. Wells
Tiedeman and Donald A. DeLoach
10.18* -- Warrant dated May 13, 1999 issued by YOUcentric to Haas
Financial Advisors, Inc.
10.19* -- Office Lease dated April 27, 2000 between YOUcentric and BCI
Property Company No. 11
10.20* -- 2000 Non-Employee Directors Stock Option Plan
10.21* -- 2000 Equity Compensation Plan
10.22* -- Employee Stock Purchase Plan
10.23* -- Indemnification Agreement dated August 9, 2000 between
YOUcentric and Mark Logan
10.24* -- Indemnification Agreement dated August 9, 2000 between
YOUcentric and J. Wells Tiedeman
10.25* -- Amendment to Stock Option Agreement between YOUcentric and
Mark D. Logan
10.26* -- Amendment to Stock Option Agreement between YOUcentric and
J. Wells Tiedeman
10.27 -- Bonus Compensation Arrangement, effective April 1, 2000,
between YOUcentric and Donald A. DeLoach
10.28 -- Employment Offer Letter dated March 31, 2000, from
YOUcentric to J. Blount Swain
10.29 -- Second Amendment to the 1999 Equity Compensation Plan
10.30 -- Amendment to the 2000 Non-Employee Directors Stock Option
Plan
11.1* -- Statement re Computation of Per Share Earnings
23.1 -- Consent of Deloitte and Touche LLP
</TABLE>
II-3
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
23.2* -- Consent of Kilpatrick Stockton LLP (included in Exhibit 5.1)
24.1* -- Powers of Attorney
24.2* -- Power of Attorney for Timothy K. Armour
27.1* -- Financial Data Schedule (for SEC use only)
</TABLE>
---------------------------------------------
* Previously filed.
(b) Financial Statements:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the North Carolina Business
Corporation Act, the Amended and Restated Articles of Incorporation of the
registrant, the Underwriting Agreement, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this amended registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Charlotte, North Carolina on this
18th day of September, 2000.
YOUCENTRIC, INC.
By: /s/ DONALD A. DELOACH
--------------------------------------
Donald A. DeLoach
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board of September 18, 2000
----------------------------------------------------- Directors (Principal
Thomas M. Fedell Executive Officer)
/s/ DONALD A. DELOACH President and Chief Executive September 18, 2000
----------------------------------------------------- Officer and Director
Donald A. DeLoach
* Chief Financial Officer September 18, 2000
----------------------------------------------------- (Principal Financial and
J. Blount Swain Accounting Officer)
* Executive Vice President of September 18, 2000
----------------------------------------------------- Corporate Strategy and
Robert E. Kear Director
* Chief Technology Officer and September 18, 2000
----------------------------------------------------- Director
Karl R. Johnson
* Director September 18, 2000
-----------------------------------------------------
C. Toms Newby, III
* Director September 18, 2000
-----------------------------------------------------
David J. Scanlan
* Director September 18, 2000
-----------------------------------------------------
Timothy K. Armour
*By: /s/ DONALD A. DELOACH
-----------------------------------------------
Donald A. DeLoach
Attorney-in-fact
</TABLE>
II-5
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1* -- Amended and Restated Articles of Incorporation
3.2* -- Form of Amended and Restated Articles of Incorporation, to
be filed immediately following the closing of this
offering
3.3* -- Bylaws, as amended
3.4* -- Form of Amended and Restated Bylaws, to be effective upon
the closing of this offering
3.5* -- Third Amendment to Bylaws
4.1 -- Specimen common stock certificate
4.2 -- See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Articles of Incorporation and Bylaws of YOUcentric
defining the rights of holders of common stock
5.1* -- Opinion of Kilpatrick Stockton LLP
10.1* -- 1999 Equity Compensation Plan, as amended
10.2* -- Stock Option Agreement dated as of March 31, 2000 between
YOUcentric and Donald A. DeLoach for 600,000 shares
10.3* -- Stock Option Agreement dated as of March 31, 2000 between
YOUcentric and Donald A. DeLoach for 200,000 shares
10.4* -- Stock Option Agreement dated as of December 23, 1999,
between YOUcentric and Mark D. Logan, as amended
10.5* -- Stock Option Agreement dated as of December 23, 1999,
between YOUcentric and J. Wells Tiedeman, as amended
10.6* -- Stock Option Agreement dated as of March 31, 2000, between
YOUcentric and Robert J. Cummings
10.7* -- Amended and Restated Investors' Rights Agreement dated March
3, 2000
10.8* -- Office Lease dated November 11, 1997, as amended, between
YOUcentric and 6000 Fairview Associates, LLC
10.9* -- Office Sublease dated February 10, 1999 between YOUcentric
and United Dominion Industries, Inc.
10.10* -- Indemnification Agreement dated May 13, 1999 between
YOUcentric and C. Toms Newby, III
10.11* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Thomas M. Fedell
10.12* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Robert E. Kear
10.13* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Karl R. Johnson
10.14* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and Mark D. Logan
10.15* -- Stock Restriction Agreement dated May 13, 1999 between
YOUcentric and J. Wells Tiedeman
10.16* -- Form of Employment Agreement between YOUcentric and each of
Thomas M. Fedell, Robert E. Kear, Karl R. Johnson, Mark
D. Logan, J. Wells Tiedeman and Donald A. DeLoach
10.17* -- Form of Proprietary Information and Inventions Agreement
between YOUcentric and each of Thomas M. Fedell, Robert
E. Kear, Karl R. Johnson, Mark D. Logan, J. Wells
Tiedeman and Donald A. DeLoach
10.18* -- Warrant dated May 13, 1999 issued by YOUcentric to Haas
Financial Advisors, Inc.
10.19* -- Office Lease dated April 27, 2000 between YOUcentric and BCI
Property Company No. 11
10.20* -- 2000 Non-Employee Directors Stock Option Plan
10.21* -- 2000 Equity Compensation Plan
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
10.22* -- Employee Stock Purchase Plan
10.23* -- Indemnification Agreement dated August 9, 2000 between
YOUcentric and Mark Logan
10.24* -- Indemnification Agreement dated August 9, 2000 between
YOUcentric and J. Wells Tiedeman
10.25* -- Amendment to Stock Option Agreement between YOUcentric and
Mark D. Logan
10.26* -- Amendment to Stock Option Agreement between YOUcentric and
J. Wells Tiedeman
10.27 -- Bonus Compensation Arrangement, effective April 1, 2000,
between YOUcentric and Donald A. DeLoach
10.28 -- Employment Offer Letter dated March 31, 2000, from
YOUcentric to J. Blount Swain
10.29 -- Second Amendment to the 1999 Equity Compensation Plan
10.30 -- Amendment to the 2000 Non-Employee Directors Stock Option
Plan
11.1* -- Statement re Computation of Per Share Earnings
23.1 -- Consent of Deloitte and Touche LLP
23.2* -- Consent of Kilpatrick Stockton LLP (included in Exhibit 5.1)
24.1* -- Powers of Attorney
24.2* -- Power of Attorney for Timothy K. Armour
27.1* -- Financial Data Schedule (for SEC use only)
</TABLE>
---------------------------------------------
* Previously filed.
