<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 2000
REGISTRATION NO. 333-35402
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CORIO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7371 77-0492528
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
959 SKYWAY ROAD, SUITE 100
SAN CARLOS, CALIFORNIA 94070
(650) 232-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GEORGE KADIFA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CORIO, INC.
959 SKYWAY ROAD, SUITE 100
SAN CARLOS, CALIFORNIA 94070
(650) 232-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
HOWARD S. ZEPRUN, ESQ. STEVEN B. STOKDYK, ESQ.
CAINE T. MOSS, ESQ. SULLIVAN & CROMWELL
WILSON SONSINI GOODRICH & ROSATI 1888 CENTURY PARK EAST, SUITE 2100
PROFESSIONAL CORPORATION LOS ANGELES, CALIFORNIA 90067
650 PAGE MILL ROAD (310) 712-6600
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If 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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--------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted.
Subject to Completion. Dated June 30, 2000.
10,000,000 Shares
[CORIO LOGO]
CORIO, INC.
Common Stock
----------------------
This is an initial public offering of shares of common stock of Corio, Inc.
All of the shares of common stock are being sold by Corio.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $11.00 and $13.00. Corio has applied for quotation of its
common stock on the Nasdaq National Market under the symbol "CRIO."
See "Risk Factors" beginning on page 4 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Corio......................... $ $
</TABLE>
To the extent that the underwriters sell more than 10,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,500,000 shares from Corio at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares against payment on
, 2000.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
ROBERTSON STEPHENS
EPOCH PARTNERS
----------------------
Prospectus dated , 2000.
<PAGE> 3
DESCRIPTION OF GRAPHICS FOR FRONT INSIDE COVER
At the top right-hand margin of the page appears the Corio logo and, to the
right of the logo, the name "Corio." Below the Corio logo and name appears the
phrase, "The Next Generation ASP." Below this phrase is a graphic of a globe
transposed on a series of concentric circles traversed by spokes radiating from
the center of the inner circle. Extending from the bottom left-hand corner of
the page and extending halfway up and across the page is a rectangular graphic
depicting the first five characters of an URL address. Along the right side of
this rectangular graphic are ten rows of faint images of the Corio logo and
name.
DESCRIPTION OF GRAPHICS FOR FRONT GATEFOLD
Below the top of the front gatefold, beginning near the left margin of the
front gatefold and extending across to the right margin, is a thin black line.
Above this line and at the left margin of the front gatefold is the phrase,
"Corio is . . .". Below the thin black line and under the phrase "Corio is . . .
" is the following text: "A leading Application Service Provider (ASP) providing
hosted enterprise and e-business solutions." Below this phrase is box entitled
Corio Intelligent Enterprise, and contains the sentence "The Corio Intelligent
Enterprise is a suite of integrated software applications for enterprise
resource planning, customer relationship management and e-commerce." To the
right of the box is a graphic, entitled the "Corio Intelligent Enterprise", of a
man sitting at a desk before a large computer console on which appears an
enlarged graphical representation of the Corio Intelligent Enterprise. A cable
extends from the right side of the computer console and up the center of the
front gatefold to connect to the left side of another graphic entitled
"Application Management Center." This graphic depicts four people sitting at a
desk in front of a large computer console on which appears a globe, a pie chart,
a bar chart and indecipherable text. From the right side of this graphic extends
a cable that connects to a graphic entitled "Data Centers." Above the cable
between Application Management Center and Data Centers is the text "Secure
Network." This graphic depicts a man standing in front of four rectangular
structures. Below the "Application Management Center" and "Data Centers"
graphics is a box entitled "Application Management Center", and contains the
following text: Our Application Management Center manages and supports the
software applications, security, infrastructure, networks, hardware and data
centers 24 hours a day, seven days week."
DESCRIPTION OF GRAPHICS FOR BACK INSIDE COVER
Centered on the page is the Corio name and logo.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information appearing elsewhere in this prospectus, especially "Risk Factors"
and the financial statements and notes thereto.
CORIO, INC.
We are a leading enterprise application service provider, or ASP, based on
our number of customers and customer contracts. We provide to our customers
application implementation, integration, management and various upgrade services
and related hardware and network infrastructure. We implement, integrate and
manage the Corio Intelligent Enterprise, a suite of enterprise software
applications from leading vendors. Following the rapid implementation of
software applications, usually performed for a fixed fee, our customers pay a
predictable monthly service fee based largely on the number of applications used
and total users.
This approach enables our customers to:
- gain access to integrated applications that automate their internal
processes and their exchanges with suppliers, partners and customers;
- minimize the considerable up-front costs of licensing enterprise software
applications, of implementing them on their existing systems and of
integrating them with other applications, as well as the unpredictable
follow-on costs typically associated with managing customized, integrated
application suites;
- reduce the time it takes to implement software applications; and
- outsource their IT needs, receive customer support and maintain focus on
their core business competencies.
We offer software applications from PeopleSoft and SAP for enterprise
resource planning -- the management of various functions within a company,
including human resources, finance, manufacturing and sales; Siebel Systems for
customer relationship management -- the management of a company's relationship
with its customers; BroadVision, Commerce One, Moai and Requisite for
e-commerce; and Changepoint, Cognos, E.piphany and Portal Software for decision
support and other business intelligence capabilities as well as
industry-specific solutions. We leverage the capabilities of companies such as
Concentric Network to provide our customers leading data center and network
infrastructure technologies.
Our objective is to be the leading enterprise ASP worldwide. Key elements
of our strategy to achieve this objective include:
- offering a compelling value proposition to our customers by providing
them with reduced and more predictable IT costs and by reducing the time
it takes for our customers to benefit from software applications;
- leveraging our business model by providing standardized services to
numerous customers;
- maintaining our technology leadership position by continuing to invest in
research and development;
- working with leading network and data center providers to provide our
customers with state-of-the-art and secure network infrastructure;
- leveraging our strategic relationships to help build our customer base
and scale our services;
- broadening our service offerings; and
- continuing our commitment to customer satisfaction.
We were incorporated in Delaware in September 1998. Our principal executive
offices are located at 959 Skyway Road, Suite 100, San Carlos, California 94070,
and our telephone number at that location is (650) 232-3000. Our website is
located at www.corio.com. The information contained on our website does not
constitute part of this prospectus.
1
<PAGE> 5
THE OFFERING
Common stock offered by Corio.... 10,000,000 shares
Common stock to be outstanding
after this offering.............. 49,030,587 shares
Use of proceeds.................. For repayment of indebtedness, working
capital and general corporate purposes and,
potentially, for acquisition opportunities
that may arise.
Proposed Nasdaq National Market
symbol........................... CRIO
The number of shares to be outstanding upon completion of this offering is
based on 39,030,587 shares outstanding as of May 31, 2000. This number assumes
the conversion into common stock of all of our preferred stock including our
senior series E mandatorily redeemable preferred stock into common stock upon
completion of this offering at a price of $8.76 per share, representing a 27%
discount to an assumed per share public offering price of $12.00. The senior
series E preferred stock is convertible at a fixed 27% discount to the public
offering price. As a result, the number of common shares outstanding will be
more or less than 49,030,587, to the extent the per share offering price is more
or less than $12.00 per share. The number of shares to be outstanding after this
offering excludes:
- 9,279,937 shares of common stock subject to outstanding options as of May
31, 2000;
- 7,433,450 additional shares of common stock available for grant under our
1998 Stock Plan as of May 31, 2000;
- 1,000,000 shares of common stock reserved for issuance under our Employee
Stock Purchase Plan 2000; and
- up to 5,779,445 shares of common stock subject to outstanding warrants at
a weighted average exercise price of $5.89 per share.
2
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In the tables below:
- the 1998 statement of operations data represents the period from the date
of our acquisition of DSCI, or September 4, 1998, to December 31, 1998;
- pro forma net loss per share for the three months ended March 31, 2000 is
computed using the weighted-average number of shares of common stock
outstanding, including the pro forma effect of the automatic conversion
of our preferred stock into shares of our common stock. The weighted
average number of shares of common stock outstanding is determined as if
the preferred stock was converted on January 1, 2000, except for the
senior series E mandatorily redeemable preferred stock which was sold on
April 20, 2000 and is assumed to convert on March 31, 2000, assuming an
initial public offering price of $12.00. Pro forma common equivalents,
consisting of incremental common stock issuance upon the exercise of
stock options and warrants, as well as shares subject to repurchase
agreements, are not included in pro forma diluted net loss per share
because they would be antidilutive;
- the pro forma balance sheet data gives effect to the gross proceeds from
the sale of our senior series E mandatorily redeemable preferred stock in
April 2000 on an as if converted basis. Assuming an initial offering
price of $12.00, all outstanding shares of our preferred stock will
convert into 36,186,256 shares of common stock upon the closing of this
offering; and
- the pro forma as adjusted balance sheet data gives effect to the sale of
10,000,000 shares of common stock offered by us at an assumed initial
public offering price of $12.00 per share and the application of the net
proceeds from the offering, after deducting underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, THREE MONTHS ENDED
------------------- MARCH 31,
1998 1999 2000
------- -------- ------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Application management services.................. $ -- $ 746 $ 1,137
Professional services and other.................. 1,292 5,036 4,143
------- -------- --------
Total revenues................................ 1,292 5,782 5,280
Loss from operations............................... (3,130) (44,522) (28,566)
Net loss........................................... $(3,201) $(45,000) $(28,519)
======= ======== ========
Basic and diluted net loss per share............... $ (3.89) $ (38.96) $ (16.75)
======= ======== ========
Weighted-average shares............................ 823 1,155 1,703
======= ======== ========
Pro forma net loss and net loss per share
(unaudited):
Net loss as reported............................... $(28,519)
Series E beneficial conversion charge.............. (20,158)
--------
Pro forma net loss attributable to common
stockholders..................................... $(48,677)
========
Basic and diluted net loss per share............... $ (1.54)
========
Weighted-average shares............................ 31,668
========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 16,234 $ 70,734 $180,634
Working capital......................................... (3,680) 50,820 160,720
Total assets............................................ 50,038 104,538 214,438
Notes payable and capital lease obligations, less
current portion....................................... 7,471 7,471 7,471
Accumulated deficit..................................... (76,720) (76,720) (76,720)
Total stockholders' equity.............................. 15,192 69,692 179,592
</TABLE>
3
<PAGE> 7
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about risks, together with
the other information contained in this prospectus, before you decide whether to
buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition could suffer
significantly. In any such case, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND, BECAUSE FOR THE FORESEEABLE FUTURE WE EXPECT TO
INCREASE OUR INVESTMENT IN OUR BUSINESS FASTER THAN WE ANTICIPATE GROWTH IN OUR
REVENUES, WE EXPECT THAT WE WILL CONTINUE TO INCUR SIGNIFICANT OPERATING LOSSES
AND NEGATIVE CASH FLOW AND MAY NEVER BE PROFITABLE.
We have spent significant funds to date to develop and refine our current
services, to create an operations organization, consisting of application
management and customer support services personnel, to build a professional
services organization and to develop our sales and marketing resources. We have
incurred significant operating and net losses and negative cash flow and have
not achieved profitability. As of March 31, 2000, we had an accumulated deficit
of $76.7 million.
We expect to continue to invest significantly in our operations
organization and in research and development to enhance current services and
expand our service offerings. We also plan to continue to grow our professional
services organization and sales force and to spend significant funds to promote
our company and our services. We expect to continue to hire additional people in
all other areas of our company in order to support our growing business. In
addition, we expect to continue to incur significant fixed and other costs
associated with customer acquisitions and with the implementation and
configuration of software applications for customers. As a result of all of
these factors, to achieve operating profitability, excluding non-cash charges,
we will need to increase our customer base, to decrease our overall costs of
providing services, including the costs of our licensed technology and the costs
of customer acquisition, and to increase our number of users and revenues per
customer. We cannot assure you that we will be able to increase our revenues or
increase our operating efficiencies in this manner. Moreover, because we expect
to continue to increase our investment in our business faster than we anticipate
growth in our revenues, we expect that we will continue to incur significant
operating losses and negative cash flow for the foreseeable future and we may
never be profitable.
WE EXPECT TO INCUR SUBSTANTIAL ACCOUNTING CHARGES AS A RESULT OF WARRANTS HELD
BY CAP GEMINI ERNST & YOUNG WHICH WILL LIKELY RESULT IN SIGNIFICANT OPERATING
LOSSES OVER THE NEXT SEVERAL YEARS.
Even if we are able to generate revenues that exceed our operating costs,
we expect to incur substantial accounting charges over the next seven years
associated with warrants held by Cap Gemini Ernst & Young U.S. LLC, or CGEY.
Under the terms of a strategic alliance agreement with CGEY, CGEY holds four
warrants to purchase up to approximately 4.7 million shares of our common stock
at an exercise price of $6.50 per share upon consummation of this offering and
up to 2.3 million shares based on specific performance metrics achieved by CGEY
over the next three years. These warrants and other expenses related to our
strategic alliance with CGEY are likely to result in substantial expenses and
operating losses for us over the term of our agreement with them. Because of the
accounting policies applicable to these warrants, the charges associated with
these warrants will be measured and recorded each fiscal quarter in part using
the trading price of our common stock. Significant increases in our stock price
could result in non-cash accounting charges amounting to hundreds of millions of
dollars.
4
<PAGE> 8
OUR LIMITED HISTORY OF OFFERING ASP SERVICES TO CUSTOMERS AND THE FACT THAT WE
OPERATE IN A NEW INDUSTRY FOR APPLICATION SERVICES EXPOSE US TO RISKS THAT
AFFECT OUR ABILITY TO EXECUTE OUR BUSINESS MODEL.
We have offered our services for a relatively short period of time, and our
industry is new. Prior to September 1998, our predecessor company, DSCI, carried
on a different business. Accordingly, we have a limited operating history as a
provider of ASP services. We have a limited number of customers, have
implemented our services a limited number of times and only a portion of our
customers are operating on our system. Because our business model is new, it
continues to evolve. In the future, we may revise our pricing model for
different services, and our cost model for our license of third-party software
applications and other third-party services may also evolve. Changes in our
anticipated business and financial model could materially impact our ability to
become profitable in the future. An investor in our common stock must consider
these facts as well as the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as the market
for Internet-based software application services. Some of the risks and
difficulties relate to our potential inability to:
- acquire new customers;
- reduce costs associated with the delivery of services to our customers;
- expand and maintain our pipeline of sales prospects in order to promote
greater predictability in our period-to-period sales levels;
- acquire or license third-party software applications at a reasonable cost
or at a cost structure beneficial to us;
- complete successful implementations of our software applications in a
manner that is repeatable and scalable;
- integrate successfully software applications we manage with each other
and with our customers' existing systems;
- continue to offer new services that complement our existing offerings;
- increase awareness of our brand; and
- maintain our current, and develop new, strategic relationships.
We cannot assure you that we will successfully address these risks or
difficulties. If we fail to address any of these risks or difficulties
adequately, we will likely be unable to execute our business model.
BECAUSE WE PLAN TO EXPEND SIGNIFICANT SUMS TO GROW OUR BUSINESS, WE MAY BE
UNABLE TO ADJUST SPENDING TO OFFSET ANY FUTURE REVENUE SHORTFALL, WHICH COULD
CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE AND OUR STOCK PRICE TO FALL.
In order to promote future growth, we expect to continue to expend
significant sums in all areas of our business, particularly in our operations,
professional services, research and development and sales and marketing
organizations. Because the expenses associated with these activities are
relatively fixed in the short-term, we may be unable to adjust spending quickly
enough to offset any unexpected shortfall in revenue growth or any decrease in
revenue levels. As our quarterly results fluctuate, they may fall short of the
expectations of public market analysts or investors. If this occurs, the price
of our common stock may fall.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO THE NATURE OF OUR ASP
BUSINESS AND OTHER FACTORS AFFECTING OUR REVENUES AND COSTS, WHICH COULD CAUSE
OUR STOCK PRICE TO FALL.
Our financial results will also vary over time as our ASP business matures.
For each individual customer, in the early months of our engagement we typically
recognize professional services revenues associated with implementation of our
applications. We then recognize monthly fees from
5
<PAGE> 9
the customer, consisting of application management services revenues, over the
balance of the contractual relationship. As a result, for each customer we have
a high proportion of up front professional services revenues associated with
implementation. Since we have only offered ASP services since September 1998 and
our customer base has grown rapidly, professional services revenues associated
with implementation have been relatively high compared to monthly fees. We
expect that our financial results will continue to vary over time as monthly
fees increase as a proportion of total revenue. Changes in our revenue mix from
professional services revenues to application management services revenues could
be difficult to predict and could cause our quarterly results and stock price to
fluctuate.
Other important factors that could cause our quarterly results and stock
price to fluctuate materially include:
- the timing of obtaining, implementing and establishing connectivity with
individual customers;
- the loss of or change in our relationship with important customers;
- the timing and magnitude of expanding our operations and of other capital
expenditures;
- costs, including license fees, relating to the software applications we
use;
- changes in our pricing policies or those of our competitors;
- potential changes in the accounting standards associated with accounting
for stock or warrant issuances and for revenue recognition; and
- accounting charges associated with the warrants held by CGEY and a
software vendor, as well as potential accounting charges we may incur in
the future relating to stock or warrant issuances to future strategic
partners.
OUR FINANCIAL RESULTS COULD VARY OVER TIME AS OUR BUSINESS MODEL EVOLVES, WHICH
COULD CAUSE OUR STOCK PRICE TO FALL.
Our financial results could vary over time as our business and financial
model evolves. For example, we have historically included a broad range of
customer support in our fixed monthly fees, but may decide to bill customers for
support services in excess of specified limits. As another example, we may
determine to unbundle from our fixed monthly fee the cost of software licenses
and to require our customers to obtain licenses to applications directly from
third-party software providers. Any such changes to our business or financial
model would likely cause financial results to vary, which could cause our stock
price to fall.
In this regard, we are currently negotiating with two of our major
third-party software vendors to modify the pricing and other terms currently in
place with these vendors. We may agree to restructure our current pricing
arrangements with some of our third-party software providers to, for example,
pay more to the provider up-front in return for a pricing structure that we
believe is more beneficial to us overall. Any such new pricing structures may
not in fact be more beneficial to us and may ultimately hinder our ability to
become profitable.
WE DEPEND ON SOFTWARE VENDORS TO SUPPLY US WITH THE SOFTWARE NECESSARY TO
PROVIDE OUR SERVICES, AND THE LOSS OF ACCESS TO THIS SOFTWARE OR ANY DECLINE OR
OBSOLESCENCE IN ITS FUNCTIONALITY COULD CAUSE OUR CUSTOMERS' BUSINESSES TO
SUFFER, WHICH, IN TURN, COULD HARM OUR REVENUES AND INCREASE OUR COSTS.
We offer our customers software applications from third parties, such as
BroadVision, Commerce One, PeopleSoft, SAP and Siebel Systems, that we in turn
incorporate into the services we provide to customers. Our agreements with
third-party software vendors are non-exclusive, are for limited terms ranging
from two to five years and typically permit termination in the event of our
breach of the agreements. If we lose the right to use the software that we
license from third-parties, if the cost of licensing the software applications
becomes prohibitive, or if we change the vendors from whom we currently license
software, our customers' businesses could be significantly disrupted, which
could
6
<PAGE> 10
harm our revenues and increase our costs. Our financial results may also be
harmed if the cost structure we negotiate with the third-party software vendors
changes in a manner that is less beneficial to us compared to our current cost
structure with software vendors. We cannot assure you that our services will
continue to support the software of our third-party vendors, or that we will be
able to adapt our own offerings to changes in third-party software. In addition,
if our vendors were to experience financial or other difficulties, it could
adversely affect the availability of their software. It is also possible that
improvements in software by third-parties with whom we have no relationship
could render the software we offer to our customers less compelling or obsolete.
OUR LICENSES FOR THE THIRD-PARTY SOFTWARE WE USE TO DELIVER OUR SERVICES CONTAIN
LIMITS ON OUR ABILITY TO USE THEM THAT COULD IMPAIR OUR GROWTH AND OPERATING
RESULTS.
The licenses we have for the third-party software we use to deliver our
services typically restrict our ability to sell our services in specified
countries and to customers with revenue above or below specified revenue levels.
Our operating results and ability to grow could be harmed to the extent these
licenses prohibit us from selling our services to customers to which we would
otherwise sell our services, or in countries in which we would otherwise sell
our services.
POOR PERFORMANCE OF THE SOFTWARE WE DELIVER TO OUR CUSTOMERS OR DISRUPTIONS IN
OUR BUSINESS-CRITICAL SERVICES COULD HARM OUR REPUTATION, DELAY MARKET
ACCEPTANCE OF OUR SERVICES AND SUBJECT US TO LIABILITIES.
Our customers depend on our hosted software applications for their critical
systems and business functions, including enterprise resource planning, customer
relationship management, e-commerce and business intelligence. Our customers'
businesses could be seriously harmed if the applications we provide to them work
improperly or fail, even if only temporarily. Accordingly, if the software that
we license from our vendors or our implementation of such software performs
poorly, experiences errors or defects or is otherwise unreliable, our customers
would likely be extremely dissatisfied, which could cause our reputation to
suffer, force us to divert research and development and management resources,
cause a loss of revenues or hinder market acceptance of our services. It is also
possible that any customer disruptions resulting from failures in our
applications could force us to refund all or a portion of the fees customers
have paid for our services or result in other significant liabilities to our
customers.
WE MAY FAIL TO SUCCESSFULLY IMPLEMENT, HOST OR MANAGE ENTERPRISE SOFTWARE
APPLICATIONS DUE TO THE COMPLICATED NATURE OF THE SERVICES WE PROVIDE AND OUR
LIMITED EXPERIENCE IN PROVIDING THESE SERVICES, WHICH WOULD HARM OUR REPUTATION
AND SALES.
Implementations of integrated enterprise software applications can be
complicated, and we have limited experience to date completing implementations
of integrated software applications for our customers. We cannot assure you that
we will develop the requisite expertise or that we can convince customers that
we have the expertise required to implement, host or manage these applications.
In addition, because PeopleSoft software applications were our first application
offerings, our customers to date have primarily implemented our PeopleSoft
application offerings. We have limited experience installing many of the
applications we offer, particularly some of the applications we have recently
begun to offer. Our reputation will be harmed and sales of our services would
decline significantly if we are not able to complete successfully repeated
implementations of our enterprise software applications, including those
applications with which we have limited or no implementation, hosting or
management experience to date.
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<PAGE> 11
WE HAVE ONLY IMPLEMENTED OUR ORION TECHNOLOGY PLATFORM FOR A SMALL NUMBER OF
CUSTOMERS, AND IT MAY NOT ACHIEVE MARKET ACCEPTANCE, PROVIDE THE PERFORMANCE WE
ANTICIPATE OR GENERATE SIGNIFICANT REVENUE FOR US.
We have only implemented Orion, our technology platform, for a small number
of customers, and it may not be an effective means to integrate applications. In
addition, we are investing resources to continue to develop and improve this
platform. We cannot assure you that our Orion platform will achieve market
acceptance or will work in the manner we expect or that we will be able to
achieve a return on our investment.
IF OUR STRATEGIC ALLIANCE WITH CAP GEMINI ERNST & YOUNG DOES NOT GENERATE THE
BENEFITS WE EXPECT, WE MAY NOT BE ABLE TO GROW OUR BUSINESS AS EFFECTIVELY AS WE
ANTICIPATE AND MAY HAVE DIFFICULTY PROVIDING SYSTEMS INTEGRATION SERVICES TO OUR
CUSTOMERS.
Our agreement with Cap Gemini Ernst & Young U.S. LLC, or CGEY, provides for
exclusive client referrals from CGEY for emerging high-growth and middle-market
clients in the Americas. These limitations on exclusivity may limit our ability
to benefit from the marketing alliance. This strategic alliance will not be
considered a success if it does not generate a large number of customers for us
and does not grow our business. Moreover, this alliance may adversely affect our
ability to generate new customers through relationships with other systems
integration and consulting firms. Finally, it is possible that we may become
dependent on CGEY for implementation of our services and, if our relationship
with CGEY terminates, we may not be able to find systems integrators to replace
the services CGEY is expected to provide us.
OUR RELATIONSHIP WITH CGEY MAY CHANGE IN A MANNER ADVERSE TO OUR BUSINESS
THROUGH CIRCUMSTANCES BEYOND OUR CONTROL.
In April 2000, we entered into a strategic alliance with Ernst & Young on
behalf of its consulting division, E&Y Consulting. In May 2000, Ernst & Young
completed a sale of substantially all of E&Y Consulting to Cap Gemini. At the
time of completion of this sale, E&Y Consulting assigned to Cap Gemini all of
its rights and obligations pursuant to its strategic alliance with us. We cannot
assure you that CGEY, the combined company, will consider the relationship with
us as strategic as E&Y Consulting did, or that the incentives we negotiated with
E&Y Consulting will be appropriate for CGEY. Accordingly, it is possible that
CGEY will fail to devote substantial resources towards generating referrals to
us and engaging in joint marketing and sales activities. If CGEY fails to do so,
we may be forced to terminate our agreement and cancel some of the warrants held
by CGEY. Under these scenarios, we would again fail to realize the benefits we
expect from this alliance. Additionally, as the personal relationships between
the professional staff at E&Y Consulting and the auditing group of Ernst & Young
LLP change over time as a result of E&Y Consulting's acquisition by Cap Gemini,
we may lose some benefit from referrals from Ernst & Young LLP. As a result of
all of the foregoing, E&Y Consulting's acquisition by Cap Gemini could result in
our relationship with CGEY providing fewer benefits to us that we initially
anticipated, and the benefits as a whole may not be substantial.
ANY INABILITY TO EXPAND SUFFICIENTLY OUR ENTERPRISE SOFTWARE IMPLEMENTATION AND
SYSTEMS CONSULTING CAPABILITIES COULD HARM OUR ABILITY TO SERVICE OUR CUSTOMERS
EFFECTIVELY AND COULD HINDER OUR GROWTH.
A failure to maintain and expand relationships with third-party systems
integrators that we use to implement our services could harm our ability to
service our customers effectively. Because of our relationship with CGEY, we may
have difficulty retaining the services of other systems integrators, which we
may need if our alliance with CGEY terminates or if CGEY performs services in a
manner below our customers' expectations. In addition, if sales increase rapidly
or if we were to agree to undertake client relationships requiring particularly
large or complex implementations, our internal professional services personnel
may be unable to meet the demand for implementation services. In that case, if
we are unable to retain or hire highly-trained third-party systems integrators
and
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consultants to implement our services, we would be unable to meet customer
demands for our implementation and consulting services, which could hinder our
ability to grow our business. In addition, we typically contract with our
customers for implementation on a fixed price basis. As a result, unexpected
complexities in implementing software applications for our customers could
result in unexpected losses for us or increases in losses. Our business and
reputation could also be seriously harmed if third party systems integrators
were unable to perform their services for our customers in a manner that meets
customer expectations.
INCREASED DEMAND FOR CUSTOMIZATION OF OUR SERVICES BEYOND WHAT WE CURRENTLY
PROVIDE OR ANTICIPATE COULD REDUCE THE SCALABILITY AND PROFITABILITY OF OUR
BUSINESS.
Companies may prefer more customized applications and services than our
business model contemplates. Most of our customers have required some level of
customization of our services, and our customers may continue to require
customization in the future, perhaps to a greater extent than we currently
provide or anticipate. If we do not offer the desired customization, there may
be less demand for our services. Conversely, providing customization of our
services increases our costs and reduces our flexibility to provide similar
services to many customers. Accordingly, increased demand for customization of
our services could reduce the scalability and profitability of our business and
increase risks associated with completing software upgrades.
CONTINUED RAPID GROWTH WOULD STRAIN OUR OPERATIONS AND WOULD REQUIRE US TO INCUR
COSTS TO UPGRADE OUR INFRASTRUCTURE AND EXPAND OUR PERSONNEL.
We have rapidly expanded our operations since our current business started
in September 1998. The number of our employees increased from 58 at December 31,
1998, to 108 at June 30, 1999, to 279 at December 31, 1999 and to 456 at March
31, 2000. We expect our business to continue to grow in terms of headcount,
geographic scope, number of customers and the number of services we offer. We
cannot be sure that we will successfully manage our growth. In order to manage
our growth successfully, we must:
- improve our management, financial and information systems and controls;
- maintain a high level of customer service and support;
- expand our implementation and consulting resources internally and with
third-parties; and
- expand, train, manage and integrate our employee base effectively.
There will be additional demands on our customer service support, research
and development, sales and marketing and administrative resources as we try to
increase our service offerings and expand our target markets. The strains
imposed by these demands are magnified by our limited operating history. Any
delay in the implementation of, or disruption in the transition to, new or
enhanced systems and controls could harm our ability to accurately forecast
demand for our services, manage our sales cycle and implementation services and
record and report management and financial information on a timely and accurate
basis. Moreover, any inability to expand our service offerings and employee base
commensurate with the demand for our services could cause our revenues to
decline.
WE WILL NEED TO PERFORM SOFTWARE UPGRADES FOR OUR CUSTOMERS, AND ANY INABILITY
TO SUCCESSFULLY PERFORM THESE UPGRADES COULD CAUSE INTERRUPTIONS OR ERRORS IN
OUR CUSTOMERS' SOFTWARE APPLICATIONS, WHICH COULD INCREASE OUR COSTS AND DELAY
MARKET ACCEPTANCE OF OUR SERVICES.
Our software vendors from time to time will upgrade their software
applications, and at such time we will be required to implement these software
upgrades for our customers. For example, PeopleSoft, from whom we license a
substantial amount of software applications, has scheduled a new release of its
software in the third quarter of 2000. Implementing software upgrades can be a
complicated and costly process, particularly implementation of an upgrade
simultaneously across
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multiple customers, and we have not performed a software upgrade to date.
Accordingly, we cannot assure you that we will be able to perform these upgrades
successfully or at a reasonable cost. We may also experience difficulty
implementing software upgrades to a large number of customers, particularly if
different software vendors release upgrades simultaneously. If we are unable to
perform software upgrades successfully and to a large customer base, our
customers could be subject to increased risk of interruptions or errors in their
business-critical software, our reputation and business would likely suffer and
the market would likely delay the acceptance of our services. It will also be
difficult for us to predict the timing of these upgrades, the cost to us of
these upgrades and the additional resources that we may need to implement these
upgrades. Additionally, if we evolve our business model to charge customers for
the cost of software upgrades, we may lose prospective customers who choose not
to pay for these upgrades. Therefore, any such upgrades could strain our
development and engineering resources, require significant unexpected expenses
and cause us to miss our financial forecasts or those of securities analysts.
Any of these problems could impair our customer relations and our reputation and
subject us to litigation.
SECURITY RISKS AND CONCERNS MAY DECREASE THE DEMAND FOR OUR SERVICES, AND
SECURITY BREACHES WITH RESPECT TO OUR SYSTEMS MAY DISRUPT OUR SERVICES OR MAKE
THEM INACCESSIBLE TO OUR CUSTOMERS.
Our services involve the storage and transmission of business-critical,
proprietary information, and security breaches could expose us to a risk of loss
of this information, litigation and possible liability. Anyone who circumvents
our security measures could misappropriate business-critical proprietary
information or cause interruptions in our services or operations. In addition,
computer "hackers" could introduce computer viruses into our systems or those of
our customers, which could disrupt our services or make them inaccessible to
customers. We may be required to expend significant capital and other resources
to protect against the threat of security breaches or to alleviate problems
caused by breaches. Our security measures may be inadequate to prevent security
breaches, and our business and reputation would be harmed if we do not prevent
them.
IF WE ARE UNABLE TO ADAPT OUR SERVICES TO RAPIDLY CHANGING TECHNOLOGY, OUR
REPUTATION AND OUR ABILITY TO GROW OUR REVENUES COULD BE HARMED.
The markets we serve are characterized by rapidly changing technology,
evolving industry standards, emerging competition and the frequent introduction
of new services, software and other products. We cannot assure you that we will
be able to enhance existing or develop new services that meet changing customer
needs in a timely and cost-effective manner. For example, as software
application architecture changes, the software for which we have licenses could
become out of date or obsolete and we may be forced to upgrade or replace our
technology. For example, this is of particular concern with regard to our
enterprise resource planning, or ERP, software, including PeopleSoft and SAP.
The architecture of the software we currently use for ERP applications is not
designed to be hosted. We believe that future software will be written to be
hosted. Our existing software application providers may face competition from
new vendors who have written hostable software. It may be difficult for us to
acquire hostable ERP software from these new vendors and for our software
application providers to develop this software quickly or successfully. In
either event, the services we offer would likely become less attractive to our
customers, which could cause us to lose revenue and market share. Performing
upgrades may also require substantial time and expense and even then we cannot
be sure that we will succeed in adapting our business to these technological
developments. Prolonged delays resulting from our efforts to adapt to rapid
technological change, even if ultimately successful, could harm our reputation
within our industry and our ability to grow our revenues.
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THE EMERGING HIGH-GROWTH AND MIDDLE-MARKET COMPANIES THAT CURRENTLY COMPRISE OUR
CUSTOMER BASE MAY BE VOLATILE, WHICH COULD RESULT IN GREATER THAN EXPECTED
CUSTOMER LOSS OR AN INABILITY TO COLLECT FEES IN A TIMELY MANNER OR AT ALL.
Our current customer base consists of emerging high-growth and
middle-market companies and is comprised primarily of e-commerce and "dot-com"
companies. These companies may be more likely to be acquired, experience
financial difficulties or cease operations than other companies. In particular,
these companies may experience difficulties in raising capital needed to fund
their operations when required or at all. As a result, our client base will
likely be more volatile than that of competitors whose customers consist of more
mature and established companies. If we experience greater than expected
customer loss or an inability to collect fees from our customers in a timely
manner because of this volatility, our operating results could be seriously
harmed.
OUR APPLICATION MANAGEMENT AGREEMENTS ARE TYPICALLY LONG-TERM, FIXED-PRICE
CONTRACTS, WHICH MAY HINDER OUR ABILITY TO BECOME PROFITABLE.
We enter into agreements with our customers to provide application
management services for long periods, typically three to five years. Most of
these agreements are in the form of fixed-price contracts that do not provide
for price adjustments to reflect any cost overruns associated with providing our
services, such as potential increases in the costs of software applications we
license from third parties, the costs of upgrades or inflation. Furthermore, we
may be required to bundle implementation and application management services for
some of our customers for competitive reasons. As a result, unless we are able
to provide our services in a more cost-effective manner than we do today and
unless the number of users at individual customers increases to provide us
higher revenue levels per customer, we may never achieve profitability for a
particular customer. In addition, customers may not be able to pay us or may
cancel our services before becoming profitable for us.
OUR LONG-TERM, FIXED-PRICE APPLICATION MANAGEMENT CONTRACTS MAY HINDER OUR
ABILITY TO EVOLVE OUR BUSINESS AND TO ULTIMATELY BECOME PROFITABLE.
Our business is new and, accordingly, our business and financial models may
evolve as the understanding of our business evolves. We may be unable to adjust
our pricing or cost structure with respect to our current customers in response
to changes we make in our business or financial model due to the long-term,
fixed price nature of the application management agreements we have with our
customers. This potential inflexibility may result in our inability to become
profitable as rapidly as we would like or at all.
IF WE DO NOT MEET THE SERVICE LEVELS PROVIDED FOR IN OUR CONTRACTS WITH
CUSTOMERS, WE MAY BE REQUIRED TO GIVE OUR CUSTOMERS CREDIT FOR FREE SERVICE, AND
OUR CUSTOMERS MAY BE ENTITLED TO CANCEL THEIR SERVICE CONTRACTS, WHICH COULD
ADVERSELY AFFECT OUR REPUTATION AND HINDER OUR ABILITY TO GROW OUR REVENUES.
Our application management services contracts contain service level
guarantees that obligate us to provide our applications at a guaranteed level of
performance. If we fail to meet those service levels, we may be contractually
obligated to provide our customers credit for free service. If we were to
continue to fail to meet these service levels, our customers would then have the
right to cancel their contracts with us. These credits or cancellations could
harm our reputation and hinder our ability to grow our revenues.
IF WE CANNOT OBTAIN ADDITIONAL SOFTWARE APPLICATIONS THAT MEET THE EVOLVING
BUSINESS NEEDS OF OUR CUSTOMERS, THE MARKET FOR OUR SERVICES WILL NOT GROW AND
MAY DECLINE, AND SALES OF OUR SERVICES WILL SUFFER.
Part of our strategy is to expand our services by offering our customers
additional software applications that address their evolving business needs. We
cannot be sure, however, that we will be
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able to license these applications at a commercially viable cost or at all or
that we will be able to cost-effectively develop the applications in-house. If
we cannot obtain these applications on a cost-effective basis and, as a result,
cannot expand the range of our service offerings, the market for our services
will not grow and may decline, and sales of our services will suffer.
WE HAVE MANY COMPETITORS AND EXPECT NEW COMPETITORS TO ENTER OUR MARKET, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO INCREASE REVENUES, MAINTAIN OUR MARGINS OR
GROW OUR MARKET SHARE.
The market for our services is extremely competitive and the barriers to
entry in our market are relatively low. We currently have no patented technology
that would bar competitors from our market.
Our current and potential competitors primarily include:
- application service providers and business process outsourcers, such as
Applicast, AristaSoft, Breakaway Solutions, Interliant, NaviSite, Qwest
Cyber.Solutions, ReSourcePhoenix.com and USinternetworking;
- systems integrators, such as Andersen Consulting, Electronic Data Systems
and PricewaterhouseCoopers;
- Internet service providers and web hosting providers, such as Concentric
Network, DIGEX, Exodus Communications, Frontier Corporation, Genuity,
Worldcom and PSINet;
- software vendors, such as J.D. Edwards, Microsoft, Oracle, PeopleSoft,
SAP and Siebel Systems;
- major technology providers, such as Cisco Systems, IBM, Intel and Nortel
Networks;
- Internet portals, such as AOL, Excite@Home and Yahoo; and
- telecommunications companies.
Many of our competitors and potential competitors have substantially
greater financial, customer support, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than we do. We cannot be sure that we
will have the resources or expertise to compete successfully in the future. Our
competitors may be able to:
- develop and expand their network infrastructures and service offerings
more quickly;
- adapt to new or emerging technologies and changing customer needs faster;
- take advantage of acquisitions and other opportunities more readily;
- negotiate more favorable licensing agreements with software application
vendors;
- devote greater resources to the marketing and sale of their products; and
- address customers' service-related issues more effectively.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs or to reduce their application
service charges aggressively in an effort to increase market share. We cannot be
sure that we will be able to match cost reductions by our competitors.
Our competitors and other companies may form strategic relationships with
each other to compete with us. These relationships may take the form of
strategic investments, joint-marketing agreements, licenses or other contractual
arrangements, which arrangements may increase our competitors' ability to
address customer needs with their product and service offerings. We believe that
there is likely to be consolidation in our markets, which could lead to
increased price competition and other forms of competition that could cause our
business to suffer.
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WE MAY BE UNABLE TO DELIVER EFFECTIVELY OUR SERVICES IF OUR DATA CENTER
MANAGEMENT SERVICES PROVIDERS, COMPUTER HARDWARE SUPPLIERS OR SOFTWARE PROVIDERS
DO NOT PROVIDE US WITH KEY COMPONENTS OF OUR TECHNOLOGY INFRASTRUCTURE IN A
TIMELY, CONSISTENT AND COST-EFFECTIVE MANNER.
We depend on third-parties, such as Concentric Network, for our data center
management services and for key components of our network infrastructure. Our
contracts with these data center and network infrastructure providers are for a
fixed term and for a specified amount of services, which may be insufficient to
meet our needs as our business grows. We depend on suppliers such as Sun
Microsystems for our computer hardware and Active Software and Netegrity for our
software technology platform. If any of these relationships fail to provide
needed products or services in a timely and consistent manner or at an
acceptable cost, we may be unable to deliver effectively our services to
customers. Some of the key components of our infrastructure are available only
from sole or limited sources in the quantity and quality we demand. We do not
carry significant inventories of those components that we obtain from
third-parties and have no guaranteed supply arrangements for some of these
components.
SYSTEM FAILURES CAUSED BY US OR FACTORS OUTSIDE OF OUR CONTROL COULD CAUSE US TO
LOSE OUR CUSTOMERS AND SUBJECT US TO LIABILITY.
Our operations depend upon our ability and the ability of our third-party
data center and network services providers to maintain and protect the computer
systems on which we host our customers' applications. Any loss of customer data
or an inability to provide service for a period of time could cause us to lose
our customers and subject us to significant potential liabilities. We currently
use two data centers to house our hardware and to provide network services, but
each of our customers is serviced at a single site. While our data center and
network providers maintain back-up systems, a natural disaster or similar
disruption at their site could impair our ability to provide our services to our
customers until the site is repaired or back-up systems become operable. Each of
our data center providers, as well as our corporate headquarters, is located in
Northern California, near known earthquake fault zones. Our systems and the data
centers are also vulnerable to damage from fire, flood, power loss,
telecommunications failures and similar events.
IF WE ARE UNABLE TO RETAIN OUR EXECUTIVE OFFICERS AND KEY PERSONNEL, OR TO
INTEGRATE NEW MEMBERS OF OUR SENIOR MANAGEMENT THAT ARE CRITICAL TO OUR
BUSINESS, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE OUR
OBJECTIVES.
Our future success depends upon the continued service of our executive
officers and other key personnel. None of our executive officers or key
employees is bound by an employment agreement for any specific term. If we lose
the services of one or more of our executive officers or key employees, or if
one or more of them decides to join a competitor or otherwise compete directly
or indirectly with us, we may not be able to successfully manage our business or
achieve our business objectives.
In addition, most of the members of our senior management joined us in the
second half of 1999 and the beginning of 2000, including our Chief Executive
Officer and Chief Financial Officer. If our senior management is unable to
successfully become integrated and work together, our ability to manage our
business could be seriously harmed.
IF WE ARE UNABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING, TECHNICAL AND
OPERATIONS PERSONNEL, WE MAY BE UNABLE TO GROW OUR BUSINESS OR TO SERVICE OUR
CUSTOMERS EFFECTIVELY.
We need to expand substantially our sales operations and marketing efforts,
both domestically and internationally, in order to try to increase market
awareness and sales of our services. We will also need to increase our technical
staff in order to service customers and perform research and development.
Competition for qualified sales, marketing, technical and operations personnel
is intense as these personnel are in limited supply and in high demand,
particularly in Northern California, and
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we might not be able to hire and retain sufficient numbers of these personnel to
grow our business or to service our customers effectively.
ANY FUTURE ACQUISITIONS OF BUSINESSES, TECHNOLOGIES OR SERVICES MAY RESULT IN
DISTRACTION OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS.
We expect significant consolidation in our industry to occur. We may
acquire or make investments in complementary businesses, technologies or
services if appropriate opportunities arise. From time to time we may engage in
discussions and negotiations with companies regarding acquiring or investing in
their businesses, technologies or services. We cannot make assurances that we
will be able to identify suitable acquisition or investment candidates, or that
if we do identify suitable candidates, we will be able to make the acquisitions
or investments on commercially acceptable terms or at all. If we acquire or
invest in another company, we could have difficulty assimilating that company's
personnel, operations, technology or products and service offerings. In
addition, the key personnel of the acquired company may decide not to work for
us. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations. Furthermore, we may incur indebtedness or issue equity securities
to pay for any future acquisitions. The issuance of equity or convertible debt
securities could be dilutive to our existing stockholders.
ANY INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD REDUCE OUR
COMPETITIVE ADVANTAGE, DIVERT MANAGEMENT ATTENTION, REQUIRE ADDITIONAL
INTELLECTUAL PROPERTY TO BE DEVELOPED OR CAUSE US TO INCUR EXPENSES TO ENFORCE
OUR RIGHTS.
We cannot assure you that we will be able to protect or maintain our
intellectual property from infringement or misappropriation from others. In
particular, our business would be harmed if we were unable to protect our Orion
technology platform, our trademarks or our other software and confidential and
proprietary information. Agreements on which we rely to protect our intellectual
property rights and the trade secret, copyright and other laws on which we rely
may only afford limited protection to these rights. In addition, we currently
have no patents and no patent applications pending, which limits significantly
our ability to protect our proprietary rights in the event they are infringed.
Any infringement or misappropriation of our intellectual property could reduce
our competitive advantage, divert management attention, require us to develop
technology and cause us to incur expenses to enforce our rights.
ANY INFRINGEMENT CLAIMS INVOLVING OUR TECHNOLOGY OR THE APPLICATIONS WE OFFER
COULD COST A SIGNIFICANT AMOUNT OF MONEY AND COULD DIVERT MANAGEMENT'S ATTENTION
AWAY FROM OUR BUSINESS.
As the number of software applications used by our customers increases and
the functionality of these products further overlaps and integrates, software
industry participants may become increasingly subject to infringement claims. In
addition, we have agreed, and may agree in the future, to indemnify some of our
customers against claims that our services infringe upon the intellectual
property rights of others. Someone may claim that our technology or the
applications we offer infringes their proprietary rights. Any infringement
claims, even if without merit, can be time consuming and expensive to defend,
may divert management's attention and resources and could cause service delays.
Such claims could require us to enter into costly royalty or licensing
agreements. If successful, a claim of infringement against us and our inability
to modify or license the infringed or similar technology could adversely affect
our business. In addition, if our software vendors cease to offer their software
applications to us because of infringement claims against them, we would be
forced to license different software applications to our customers that may not
meet our customers' needs. This could result in a loss of customers and a
decline in our revenues.
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RISKS RELATED TO OUR INDUSTRY
WE CANNOT ASSURE YOU THAT THE ASP MARKET WILL BECOME VIABLE OR GROW AT A RATE
THAT WILL ALLOW US TO ACHIEVE PROFITABILITY.
Growth in demand for and acceptance of ASPs and their hosted business
software applications is highly uncertain. We cannot assure you that this market
will become viable or, if it becomes viable, that it will grow at a rate that
will allow us to achieve profitability. The market for Internet services,
private network management solutions and widely distributed Internet-enabled
application software has only recently begun to develop and is now evolving
rapidly. We believe that many of our potential customers are not fully aware of
the benefits of hosted and managed solutions. It is possible that these
solutions will never achieve market acceptance. It is also possible that
potential customers will decide that the risks associated with hiring ASPs to
implement and manage their critical systems and business functions outweigh the
efficiencies associated with the products and services we provide. Concerns over
transaction security and user privacy, inadequate network infrastructure for the
entire Internet and inconsistent performance of the Internet could also limit
the growth of Internet-based business software solutions.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF, OUR SERVICES, WHICH COULD CAUSE OUR REVENUES TO
DECLINE OR INCREASE OUR EXPENSES.
We offer our suite of software applications over networks, which subjects
us to government regulation concerning Internet usage and electronic commerce.
We expect that state, federal and foreign agencies will adopt and modify
regulations covering issues such as user and data privacy, pricing, taxation of
goods and services provided over the Internet, the use and export of
cryptographic technology and content and quality of products and services. It is
possible that legislation could expose us and other companies involved in
electronic commerce to liability or require permits or other authorizations,
which could limit the growth of electronic commerce generally. Legislation could
dampen the growth in Internet usage and decrease its acceptance as a
communications and commercial medium. If enacted, these laws, rules or
regulations could limit the market for or make it more difficult to offer our
services.
The taxation of commerce activities in connection with the Internet has not
been established, may change in the future and may vary from jurisdiction to
jurisdiction. One or more states or countries may seek to impose sales or other
taxes on companies that engage in or facilitate electronic commerce. A number of
proposals have been made at the local, state, national and international levels
that would impose additional taxes on the sale of products and services over the
Internet. These proposals, if adopted, could substantially impair the growth of
electronic commerce and could subject us to taxation relating to our use of the
Internet as a means of delivering our services. Moreover, if any state or
country were to assert successfully that we should collect sales or other taxes
on the exchange of products and services over the Internet, our customers may
refuse to continue using our services, which could cause our revenues to decline
significantly.
AS WE EXPAND OUR BUSINESS OUTSIDE THE UNITED STATES WE WILL BE SUBJECT TO
UNFAVORABLE INTERNATIONAL CONDITIONS AND REGULATIONS THAT COULD CAUSE OUR
INTERNATIONAL BUSINESS TO FAIL.
We plan to expand our business outside of the United States in the
foreseeable future and are presently exploring expansion opportunities in Korea,
Japan and the European Union. Conducting our business in these international
markets is subject to complexities associated with foreign operations and to
additional risks related to our business, including the possibility that the
scarcity of cost-effective, high-speed Internet access and the slow pace of
future improvements in access to the Internet will limit the market for hosting
software applications over the Internet or adversely affect the delivery of our
services to customers. Additionally, some countries outside of the United States
do not permit hosting applications on behalf of companies. The European Union
has adopted a privacy
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directive that regulates the collection and use of information. This directive
may inhibit or prohibit the collection and sharing of personal information in
ways that could harm us. The globalization of Internet commerce may be harmed by
these and similar regulations since the European Union privacy directive
prohibits transmission of personal information outside the European Union unless
the receiving country has enacted individual privacy protection laws at least as
strong as those enacted by the European Union privacy directive. The United
States and the European Union have not yet resolved this matter and they may not
ever do so in a manner favorable to our customers or us.
CHANGES IN ACCOUNTING STANDARDS COULD ADVERSELY AFFECT THE CALCULATION OF OUR
FUTURE OPERATING RESULTS.
The ASP industry is new, and we anticipate the ASP business model is likely
to evolve over time. As a result, the application of accounting standards to the
ASP industry is also likely to change. Changes in the application of accounting
standards could force us to defer revenue recognition over a longer period of
time than is our current practice, result in large write-offs or cause us to
modify our customer contracts. For example, the Securities and Exchange
Commission has recently requested that the Emerging Issues Task Force of the
Financial Accounting Standards Board address issues of accounting for
multiple-element revenue arrangements. We currently recognize revenue for
professional services as the services are performed. If accounting standards
were modified to require deferral of professional services revenue and
recognition of that revenue over the life of the application management services
contract, our reported revenues would be substantially reduced. These changes
could adversely affect our operating results or require us to restate our
financial statements. For detailed information regarding potential accounting
standards changes that could adversely affect our business, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS RELATED TO THIS OFFERING
INVESTORS WILL BE RELYING ON OUR MANAGEMENT'S JUDGMENT REGARDING THE USE OF
PROCEEDS FROM THIS OFFERING.
We do not have a definitive quantified plan with respect to the use of the
net proceeds of this offering and have not committed the substantial majority of
these proceeds to any particular purpose. Our management will have broad
discretion with respect to the use of the net proceeds from this offering and
investors will be relying on the judgment of our management regarding the
application of these proceeds. We have only made preliminary determinations as
to the amount of net proceeds to be used based upon our current expectations
regarding our financial performance and business needs over the foreseeable
future. These expectations may prove to be inaccurate, as our financial
performance may differ from our current expectations or our business needs may
change as our business and the industry we address evolve. As a result, the
proceeds we receive in this offering may be used in a manner significantly
different from our current allocation plans.
WE WILL LIKELY NEED OR DESIRE TO RAISE ADDITIONAL FINANCING IN THE FORESEEABLE
FUTURE TO FUND OUR OPERATIONS, WHICH MAY NOT BE AVAILABLE TO US ON FAVORABLE
TERMS OR AT ALL.
We anticipate that we will need to raise significant additional capital in
the future to fund continued operations. We expect that we will need additional
funding at some point after approximately eighteen months, and potentially
sooner depending on the risks and uncertainties associated with our business and
inherent in our rapidly growing and evolving industry. We may also desire to
raise additional financing at times when we believe terms are favorable and it
is advantageous to our growth strategy. We expect that we could require
additional financing to:
- fund continued business expansion;
- fund additional marketing expenditures and development of sales
resources;
- develop new and enhance existing services;
16
<PAGE> 20
- enhance our operating infrastructure;
- hire additional personnel;
- respond to competitive pressures; and
- acquire complementary businesses or technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, it will reduce the percentage ownership of our stockholders. In
addition, the equity may be issued at lower prices per share than that of this
offering and these newly-issued securities may have rights, preferences or
privileges senior to those of existing stockholders, including those acquiring
shares in this offering. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If we raise additional funds
through the issuance of debt securities, these new securities would have rights,
preferences and privileges senior to those of the holders of our common stock.
The terms of these securities could also impose restrictions on our operations.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our operations, take advantage of unanticipated
opportunities, develop or enhance our products and services or otherwise respond
to competitive pressures would be significantly limited.
MARKET PRICES OF INTERNET AND TECHNOLOGY COMPANIES HAVE BEEN HIGHLY VOLATILE,
AND THE MARKET FOR OUR STOCK MAY BE VOLATILE AS WELL.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies generally, and
Internet-related software companies particularly, have been extremely volatile.
Recent initial public offerings by technology companies have been accompanied by
exceptional share price and trading volume changes in the first days and weeks
after the securities were released for public trading. Investors may not be able
to resell their shares at or above the initial public offering price. In the
past, following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted against
that company. Such litigation could result in substantial costs to us and a
diversion of our management's attention and resources.
NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE TANGIBLE NET
BOOK VALUE OF THEIR SHARES.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of our common stock. The net tangible book
value of a share of common stock purchased at an assumed initial public offering
price of $12.00 per share will be only $3.62. Additional dilution may be
incurred if holders of stock options, whether currently outstanding or
subsequently granted, exercise their options or if warrantholders exercise their
warrants to purchase common stock.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in the
market after this offering or the perception that such sales could occur. Upon
completion of this offering, based upon shares outstanding as of May 31, 2000,
we will have 48,310,524 shares of our common stock, which number includes
preferred stock that will be converted into common stock upon completion of this
offering and assumes exercise of options outstanding as of May 31, 2000
outstanding. All of the shares we are selling in this offering may be resold in
the public market immediately. Another 23,515,732 shares are subject to lock-up
agreements and will become available for resale in the public market beginning
180 days after the date of this prospectus. In specified circumstances, the 180
day restriction will terminate as to 15% of the shares subject to the
restriction after 90 days and 20% of such shares after 120 days. As restrictions
on resale end, our stock price could drop significantly if the holders of these
restricted shares sell them or are perceived by the market as intending to sell
them. These
17
<PAGE> 21
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. See "Shares Eligible
for Future Sale."
MANY SIGNIFICANT CORPORATE ACTIONS WILL BE CONTROLLED BY OUR OFFICERS, DIRECTORS
AND AFFILIATED ENTITIES REGARDLESS OF THE OPPOSITION OF OTHER INVESTORS OR THE
DESIRE OF OTHER INVESTORS TO PURSUE AN ALTERNATIVE CAUSE OF ACTION.
Our executive officers, directors and entities affiliated with them will,
in the aggregate, beneficially own approximately % of our common stock
following this offering. If they were to act together, these stockholders would
be able to exercise control over most matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control of our company, which could cause
our stock price to drop. These actions may be taken even if they are opposed by
the other investors, including those who purchase shares in this offering.
DELAWARE LAW AND OUR CHARTER, BYLAWS AND CONTRACTS PROVIDE ANTI-TAKEOVER
DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF US, EVEN IF AN
ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our certificate of incorporation, bylaws and contracts and of
Delaware law could delay, defer or prevent an acquisition or change of control
of us, even if an acquisition would be beneficial to our stockholders, and this
could adversely affect the price of our common stock.
- Our bylaws limit the ability of our stockholders to call a special
meeting and do not permit stockholders to act by written consent.
- We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became
an interested stockholder, unless the business combination is approved in
a prescribed manner.
- Several members of our senior management have contracts with us that
provide for the acceleration of the vesting of their stock options upon
termination following a change of control.
- Our certificate of incorporation permits our board to issue shares of
preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of shares
of preferred stock could adversely affect the price of the common stock.
- Additional provisions of our certificate of incorporation that may serve
to delay or prevent an acquisition include a staggered board, advance
notice procedures for stockholders to nominate candidates for election as
directors, authorization of our board to alter the number of directors
without stockholder approval and lack of cumulative voting.
THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN SINCE IT HAS NOT BEEN PUBLICLY
TRADED, AND OUR STOCK MAY BE ILLIQUID, RESULTING IN MORE VOLATILITY.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
18
<PAGE> 22
------------------------
Except as otherwise specified, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- gives effect to our two-for-one stock split in July 1999; and
- gives effect to conversion of all outstanding shares of preferred stock
into 36,186,256 shares of common stock upon consummation of this
offering, assuming an offering price of $12.00 per share.
Corio, the Corio logo, Orion and other marks relating to our services are
our trademarks or service marks. All other trademarks or service marks appearing
in this prospectus are the property of their respective holders.
19
<PAGE> 23
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve inherent
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. We use words such as "may," "will,"
"should," "expect," "anticipate," "estimate," "seek," "project," "believe,"
"plan," "intend," "future," "strategy" and other similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements. Our actual results may differ materially from those
anticipated in these forward-looking statements. Factors that could contribute
to differences include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this prospectus.
You should rely only on the information contained in this prospectus when
making a decision about whether to invest in our common stock. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of our common stock only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of when this prospectus or any shares of our common
stock is delivered.
20
<PAGE> 24
USE OF PROCEEDS
The net proceeds to us from the sale of the 10,000,000 shares being offered
by us at an assumed initial public offering price of $12.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $120 million, or
approximately $138 million if the underwriters' over-allotment option is
exercised in full.
The size of the offering has been determined primarily based upon our
desire to raise a sufficient amount of capital to afford to us significant
business flexibility in the future.
The principal purposes of this offering are to:
- create a public market for our common stock;
- facilitate future access by us to public equity markets; and
- enhance our ability to use our stock to make future acquisitions due to
the fact that our shares will be publicly traded.
We intend to use a portion of the net proceeds of this offering to repay in
part outstanding indebtedness to Comdisco of approximately $3.9 million under a
loan and security agreement and approximately $7.1 million under various capital
leases and other debt. Indebtedness under the loan and security agreement has
been accruing interest at a fixed rate of 11.5% and matures through 2003, and
indebtedness under the capital leases accrue interest at rates ranging from 7.5%
to 11.5% and mature at various dates through 2003. We expect to use the
remainder of the net proceeds for working capital and general corporate
purposes, including increased spending on sales and marketing, operations,
professional services, research and development, expansion of our operational
and administrative infrastructure and the leasing of additional facilities. In
addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, product lines or products. We expect
that our current cash balances and existing debt arrangements, together with the
proceeds from this offering, will be sufficient to meet our cash requirements
for the next twelve months.
Based on our current business model, we expect that over the next twelve to
eighteen months we will spend approximately 20% of the net proceeds of this
offering to fund losses related to providing applications management services,
40% on sales and marketing, 15% on research and development and 25% on general
and administrative costs. These figures are subject to change, however,
depending upon our rate of revenue growth, overall financial performance and
evolving business needs. Additionally, these expectations may prove to be
inaccurate, as our financial performance may differ from our current
expectations or our business needs may change as our business model and the
industry we address evolve. As a result, the proceeds we receive from this
offering may be used in a manner significantly different from our current
allocation plans. Therefore, we will have broad discretion in the way we use the
net proceeds.
Pending use, we intend to invest the net proceeds in short-term,
interest-bearing, investment grade securities, certificates of deposit or direct
or guaranteed obligations of the U.S. government.
DIVIDEND POLICY
The payment of dividends is within the discretion of our board of
directors. Our ability to pay any future dividends will depend on our earnings,
operating and financial condition, projected capital requirements, and
restrictions under our credit facilities. However, we have never declared or
paid any cash dividends on shares of our capital stock and do not intend to do
so at any time in the foreseeable future.
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<PAGE> 25
CAPITALIZATION
The table below sets forth the following information as of March 31, 2000:
- our actual capitalization;
- our pro forma capitalization after giving effect to the gross proceeds
from the sale of our senior series E mandatorily redeemable preferred
stock in April 2000 and the conversion of all outstanding shares of
preferred stock into 36,186,256 shares of common stock upon completion of
this offering assuming an initial public offering price of $12.00 per
share; and
- our pro forma capitalization as adjusted to reflect the receipt of net
proceeds from our sale of 10,000,000 shares of common stock at an assumed
initial public offering price of $12.00 per share in this offering, less
assumed underwriting discounts and commissions and estimated offering
expenses payable by us.
<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable and capital lease obligations, less current
portion................................................... $ 7,471 $ 7,471 $ 7,471
Stockholders' equity:
Preferred stock: $0.001 par value, 33,127,000 shares
authorized, 29,964,795 shares issued and outstanding,
actual; 44,127,000 shares authorized, none issued and
outstanding, pro forma; and 10,000,000 shares authorized,
none issued and outstanding, pro forma as adjusted........ 30 -- --
Common stock: $0.001 par value, 50,000,000 shares
authorized; 2,657,695 shares issued and outstanding,
actual; 138,000,000 shares authorized; 38,843,951 shares
issued and outstanding, pro forma; and 200,000,000 shares
authorized, 48,843,951 shares issued and outstanding, pro
forma as adjusted......................................... 3 39 49
Additional paid-in capital.................................. 113,355 167,849 277,739
Deferred stock compensation................................. (21,476) (21,476) (21,476)
Accumulated deficit......................................... (76,720) (76,720) (76,720)
-------- -------- --------
Total stockholders' equity............................. 15,192 69,692 179,592
-------- -------- --------
Total capitalization................................... $ 22,663 $ 77,163 $187,063
======== ======== ========
</TABLE>
This table does not include:
- 9,972,073 shares of common stock subject to outstanding options as of
March 31, 2000 at a weighted average exercise price of $1.82 per share;
- 6,927,950 additional shares of common stock available for grant under our
1998 Stock Plan as of March 31, 2000; and
- up to 5,779,445 shares of common stock subject to outstanding warrants at
a weighted average exercise price of $5.89 per share.
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<PAGE> 26
DILUTION
Our pro forma net tangible book value as of March 31, 2000, after giving
effect to the sale of our senior series E mandatorily redeemable preferred stock
on April 20, 2000 and the automatic conversion of our preferred stock upon the
closing of this offering assuming an initial public offering price of $12.00,
was $66.7 million, or $1.72 per share of common stock. Net tangible book value
per share is determined by dividing our tangible book value by the number of
outstanding shares of common stock at that date. After giving effect to the sale
of the 10,000,000 shares of our common stock offered hereby at an assumed
initial public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses, our pro
forma net tangible book value at March 31, 2000 would have been $176.6 million,
or $3.62 per share. This represents an immediate increase in pro forma net
tangible book value to existing stockholders of $1.90 per share and an immediate
dilution to new investors of $8.38 per share. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share............... $1.72
Increase per share attributable to new investors.......... 1.90
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.62
------
Net tangible book value dilution per share to new
investors................................................. $ 8.38
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by the
existing stockholders and by the new public investors based upon an assumed
initial public offering price of $12.00 per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 38,843,951 80% $125,550,000 51% $ 3.23
New public investors......... 10,000,000 20 120,000,000 49 12.00
---------- --- ------------ ---
Total...................... 48,843,951 100% $245,550,000 100%
========== === ============ ===
</TABLE>
The above discussion and tables assume no exercise of stock options or
warrants outstanding as of March 31, 2000. To the extent that any of these
options or warrants are exercised, there will be further dilution to the new
public investors. See "Capitalization," "Management -- Compensation Plans" and
Notes 9, 10, 11 and 15 of the notes to our financial statements.
23
<PAGE> 27
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read together with
the financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
information contained in this prospectus. The statements of operations data set
forth below with respect to the year ended September 30, 1997, the period from
October 1, 1997 to September 4, 1998, the period from September 1, 1998 to
December 31, 1998, and for the year ended December 31, 1999, and the balance
sheet data as of December 31, 1998 and 1999 are derived from our financial
statements that have been audited by KPMG LLP, independent auditors, included
elsewhere in this prospectus. The statements of operations data for the years
ended September 30, 1995 and 1996 and the three months ended March 31, 1999 and
2000 and the balance sheet data as of September 30, 1996, 1997 and September 4,
1998 are derived from unaudited financial statements.
In the tables below:
- we have determined that, due to the application of purchase accounting,
the accounts of DSCI prior to our acquisition of DSCI effected September
4, 1998, are not comparable to ours;
- the statement of operations data for DSCI in 1998 represents the period
from October 1, 1997 to the date of our acquisition of DSCI, or September
4, 1998;
- our statement of operations data in 1998 represents the period from our
inception, or September 1, 1998, to December 31, 1998;
- the balance sheet data for DSCI in 1996 and 1997 is in each case as of
September 30; and
- the balance sheet data for DSCI in 1998 is as of September 4.
<TABLE>
<CAPTION>
DSCI CORIO
---------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31,
------------------------ ------------------ ------------------
1995 1996 1997 1998 1998 1999 1999 2000
------ ------ ------ ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Application management services.................. $ -- $ -- $ -- $ -- $ -- $ 746 $ 35 $ 1,137
Professional services and other.................. 4,146 5,876 5,682 4,280 1,292 5,036 826 4,143
------ ------ ------ ------- ------- -------- ------- --------
Total revenues................................. 4,146 5,876 5,682 4,280 1,292 5,782 861 5,280
Costs and Expenses:
Application management services.................. -- -- -- -- -- 6,297 868 5,901
Professional services and other.................. 1,817 2,311 2,521 2,185 1,039 7,755 928 5,471
Research and development......................... -- -- -- -- 93 3,192 267 2,233
Sales and marketing.............................. -- -- -- -- 461 11,930 600 9,593
General and administrative....................... 1,936 3,727 3,011 3,437 2,092 10,416 1,783 4,750
Amortization of stock-based compensation:
Application management services................ -- -- -- -- -- 229 26 140
Professional services and other................ -- -- -- -- 1 427 15 267
Research and development....................... -- -- -- -- 3 923 57 640
Sales and marketing............................ -- -- -- -- 1 2,769 3 1,534
General and administrative..................... -- -- -- -- 2 4,176 43 2,676
Amortization of intangibles...................... -- -- -- -- 730 2,190 547 641
------ ------ ------ ------- ------- -------- ------- --------
Total operating expenses....................... 3,753 6,038 5,532 5,622 4,422 50,304 5,137 33,846
------ ------ ------ ------- ------- -------- ------- --------
Income (loss) from operations...................... 393 (162) 150 (1,342) (3,130) (44,522) (4,276) (28,566)
Interest and other income.......................... 52 145 107 76 7 541 68 367
Interest and other expense......................... (4) (34) (180) (189) (78) (1,019) (165) (320)
------ ------ ------ ------- ------- -------- ------- --------
Net income (loss) before income tax provision...... 441 (51) 77 (1,455) (3,201) (45,000) (4,373) (28,519)
Income taxes....................................... 176 -- -- -- -- -- -- --
------ ------ ------ ------- ------- -------- ------- --------
Net income (loss).................................. $ 265 $ (51) $ 77 $(1,455) $(3,201) $(45,000) $(4,373) $(28,519)
====== ====== ====== ======= ======= ======== ======= ========
Basic and diluted net loss per share............... $ (3.89) $ (38.96) $ (4.39) $ (16.75)
======= ======== ======= ========
Shares used in computation, basic and diluted...... 823 1,155 996 1,703
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
CORIO
-----------------------------
DSCI DECEMBER 31,
--------------------------- ----------------- MARCH 31,
1996 1997 1998 1998 1999 2000
------- ------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 699 $284 $ 501 $ 1,019 $37,177 $16,234
Total assets................................................ 1,035 966 986 10,006 61,596 50,038
Notes payable and capital lease obligations, less current
portion................................................... -- -- -- 1,586 7,335 7,471
Total stockholders' equity (deficit)........................ 178 256 (1,200) 3,069 36,484 15,192
</TABLE>
24
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
We were established in September 1998 to provide integrated software
applications that meet companies' evolving information technology, or IT,
requirements. Since inception, we have devoted our efforts to developing our
service architecture, creating our corporate infrastructure, building technical,
operations and sales organizations and establishing strategic business
relationships.
DSCI
In September 1998, we acquired all of the capital stock of Data Systems
Connectors, Inc., or DSCI, a predecessor company of ours that provided
professional services. As of December 31, 1999, we had substantially completed
the contracts originally entered into by DSCI.
REVENUES
Our revenues consist of Corio application management services revenues and
professional services revenues. In addition to including revenues from our
professional services activities, professional services revenues include
revenues from DSCI consulting services and resale of software and related
maintenance by DSCI, or DSCI activities.
APPLICATION MANAGEMENT SERVICES REVENUES. Revenues from application
management services consist of monthly fees from ongoing services and are
recognized ratably as earned over the contract term, which is typically three to
five years. We also recognize customer prepayments for application management
services revenues over the contract term. We price our application management
services based on various factors, such as the number and type of applications
being licensed, the number of users covered by a contract and the frequency of
access to our applications. The monthly fee for our application management
services is typically fixed for the life of the contract, subject to increases
in the event a customer requires additional applications, increases its number
of users or increases frequency of use. Application management services revenues
comprised 13% of our total revenues for the year ended December 31, 1999 and 22%
of our total revenues for the three months ended March 31, 2000. Although we
have historically provided a broad range of customer support in our fixed
monthly fees, we may decide to bill customers for support services in excess of
specified limits. If this occurs, the revenues would be recorded as application
management services revenues.
PROFESSIONAL SERVICES AND OTHER REVENUES. Revenues from professional
services consist of fees derived from providing implementation, consulting,
training and related services for our customers, as well as DSCI activities. We
generally recognize revenues from the delivery of professional services using
the percentage-of-completion method of contract accounting as we perform the
services. We typically perform these professional services pursuant to fixed-fee
contracts for consulting, training and implementation of applications. We record
losses resulting from fixed-fee contracts at the time the losses become known.
Professional services and other revenues comprised 87% of our total revenues for
the year ended December 31, 1999 and 78% of our total revenues for the three
months ended March 31, 2000.
25
<PAGE> 29
We anticipate that, for the foreseeable future, professional services
revenues will constitute the majority of our total revenues. For customers that
engage us to perform implementation services, we typically recognize
professional services revenues as we implement our applications. We then
recognize monthly fees from the customer, consisting of application management
services revenues, over the related application management service contractual
term. Since we have only offered ASP services since September 1998 and our
customer base has grown rapidly, professional services revenues associated with
implementation have been relatively high compared to monthly fees for
application management services. We anticipate that application management
services revenues will grow as a percentage of revenues as our customer base
grows.
We record payments received in advance of revenue recognition as deferred
revenues. Our deferred revenues were $3.0 million at March 31, 2000 and $1.9
million at December 31, 1999. Deferred revenues at March 31, 2000 included $1.8
million of professional services revenues that will be recognized under the
percentage-of-completion method of contract accounting and $1.2 million of
prepaid application management services revenues that will be recognized ratably
as earned over the term of the contract. We sometimes invoice for an advance
payment from customers under professional services engagements, and our current
payment terms under each type of arrangement is net 30 days.
CAP GEMINI ERNST & YOUNG
In April 2000, we entered into a seven year strategic alliance with Ernst &
Young on behalf of its consulting division, E&Y consulting. In May 2000, Ernst &
Young completed a sale of substantially all of E&Y Consulting to Cap Gemini,
S.A., a leading European management consulting and information technology
services group. At the time of completion of this sale, E&Y Consulting assigned
to Cap Gemini all of its right and obligations pursuant to its strategic
alliance with us, including the right to execute warrants we issued to Ernst &
Young on behalf of E&Y Consulting. The consulting business previously conducted
by E&Y Consulting is now being carried out by Cap Gemini Ernst & Young U.S. LLC,
which now refers to itself as CGEY. Pursuant to our agreement with CGEY, CGEY
has agreed, for two years following the agreement, to designate and use us as
its exclusive ASP for companies in North and South America that have less than
$1 billion of annual net revenues. CGEY has agreed that, during this period, it
will not offer the ASP services that we offer. CGEY has further agreed that for
five years following the initial two year exclusivity period, CGEY will
designate us as its "Preferred ASP Partner." In return, we have issued CGEY the
warrants discussed below, and have agreed to certain other obligations. CGEY and
we have also agreed to work together to engage in joint marketing and
promotional activities.
As part of this agreement and in connection with Cap Gemini's acquisition
of E&Y Consulting, CGEY has been assigned and now holds four warrants to
purchase up to 7,000,000 shares of our common stock at an exercise price of
$6.50 per share. CGEY may exercise the first of these warrants to acquire
4,666,666 shares of our common stock during the 90 day period following this
offering. The second, third and fourth warrants become exercisable,
respectively, upon the achievement of target volume revenues resulting from
referrals by CGEY in each of our 2000, 2001 and 2002 fiscal years. The second,
third and fourth warrants may be exercised to acquire up to 933,333, 933,333 and
466,667 shares of our common stock, respectively. The warrants are subject to
cancellation or repurchase in whole or in part under circumstances such as if
CGEY breaches a material provision of the agreement. The agreement itself may be
terminated prior to the end of the seven year term by consent of the parties or
unilaterally by a parting in the event the other party defaults in the
performance of a material provision of the agreement, subject to a cure period.
We will account for warrants issued to CGEY using the fair value method in
accordance with EITF Issue No. 96-18, using the Black-Scholes valuation model.
The expenses relating to all of the warrants will be recorded as sales and
marketing expenses.
26
<PAGE> 30
These warrants and other expenses related to the strategic alliance with
CGEY are likely to result in substantial expenses throughout the term of our
agreement with CGEY. Because of the accounting policies applicable to these
warrants, the charges associated with the warrants will be measured in part upon
the changes in the fair value of our stock. Accordingly, significant increases
in our stock price could result in non-cash accounting charges amounting to
hundreds of millions of dollars.
STOCK-BASED COMPENSATION
We have granted stock options to our officers and employees at prices
deemed to be below the estimated fair value of the underlying stock. As a
result, we recorded deferred stock-based compensation of $23.5 million for the
year ended December 31, 1999 and $11.8 million for the three months ended March
31, 2000. Such amount represents, for employee stock options, the difference at
the grant date between the exercise price of each stock option granted and the
fair market value of the underlying common stock. This amount is being
amortized, using the graded vesting method, over the vesting period of the
granted options.
OTHER NON-CASH ITEM
If we close our initial public offering before December 31, 2000, we will
record a charge to net loss attributable to common stockholders of approximately
$20.2 million for the beneficial conversion feature inherent in the senior
series E mandatorily redeemable preferred stock. If we close our initial public
offering after December 31, 2000, the charge for the beneficial conversion
feature will increase to approximately $29.3 million. The beneficial conversion
feature is equal to the difference between the price of the senior series E
mandatorily redeemable preferred stock and the estimated fair value of our
common stock into which the senior series E mandatorily redeemable preferred
stock is convertible. The beneficial conversion feature is similar to a dividend
on preferred stock that increases net loss to arrive at net loss attributable to
common stockholders.
INVESTMENT IN OPERATIONS
We have incurred substantial costs since inception in all areas of our
business, including application management services, professional services and
other, research and development, sales and marketing and general and
administrative activities, in order to support our long-term growth strategy.
Our full-time employees increased from 279 at December 31, 1999 to 456 at March
31, 2000. As a result of these investments, we have incurred net losses in each
fiscal quarter since inception in September 1998 and, as of March 31, 2000, we
had an accumulated deficit of $76.7 million. We expect to continue to invest
significantly in our operations organization to support the application
management services we provide to our existing and future customers and in
research and development to enhance current services and to expand our service
offerings. We also plan to continue to grow our professional services
organization and sales force and to spend significant funds in marketing to
promote our company and our services. We expect to continue to hire additional
personnel in all other areas of our company in order to support our anticipated
growth. In addition, we expect to continue to rapidly expand our base of
customers, and, for the foreseeable future, we expect to incur significant fixed
and other costs associated with customer acquisition and with the implementation
and configuration of the software applications they license from us. As a result
of all of these factors, to achieve operating profitability, excluding non-cash
charges, we will need to increase our customer base, to decrease our overall
costs of providing services, including the costs of our technology and the costs
of customer acquisition, and to increase our number of users and revenues per
customer.
Based on our current business model, we expect that over the next twelve to
eighteen months we will spend approximately 20% of the net proceeds of this
offering to fund losses related to providing applications management services,
40% on sales and marketing, 15% on research and development and 25% on general
and administrative costs. Additionally, these figures are subject to
27
<PAGE> 31
change, however, depending upon our rate of revenue growth, overall financial
performance and evolving business needs. These expectations may prove to be
inaccurate, as our financial performance may differ from our current
expectations or our business needs may change as our business model and the
industry we address evolve.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our statement of
operations data as a percentage of total revenues. The data for DSCI in 1998
represents the period from October 1, 1997 to the date of our acquisition of
DSCI, or September 4, 1998. Our data in 1998 represents the period from our date
of inception, or September 1, 1998 to December 31, 1998.
<TABLE>
<CAPTION>
CORIO
DSCI ----------------------------------
--------------------- THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
--------------------- DECEMBER 31, MARCH 31,
SEPTEMBER 30, -------------- --------------
1997 1998 1998 1999 1999 2000
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Application management services.................. -- -- -- 13% 4% 22%
Professional services and other.................. 100% 100% 100% 87 96 78
--- --- ---- ---- ---- ----
Total revenues................................. 100 100 100 100 100 100
--- --- ---- ---- ---- ----
Costs and Expenses:
Application management services.................. -- -- -- 109 101 112
Professional services and other.................. 44 51 80 134 108 104
Research and development......................... -- -- 7 55 31 42
Sales and marketing.............................. -- -- 36 206 70 182
General and administrative....................... 53 80 162 180 207 90
Amortization of stock-based compensation:
Application management services................ -- -- -- 4 3 3
Professional services and other................ -- -- -- 7 2 5
Research and development....................... -- -- -- 16 7 12
Sales and marketing............................ -- -- -- 48 -- 29
General and administrative..................... -- -- 1 72 5 50
Amortization of intangibles...................... -- -- 57 38 63 12
--- --- ---- ---- ---- ----
Total operating expenses....................... 97 131 343 869 597 641
--- --- ---- ---- ---- ----
Income (loss) from operations...................... 3 (31) (243) (769) (497) (541)
Interest and other income.......................... 1 2 1 9 8 7
Interest and other expense......................... (3) (5) (6) (18) (19) (6)
--- --- ---- ---- ---- ----
Net income (loss).................................. 1% (34)% (248)% (778)% (508)% (540)%
=== === ==== ==== ==== ====
</TABLE>
28
<PAGE> 32
FOUR MONTHS ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1999.
The increases in revenues and expenses discussed below for the year ended
December 31, 1999 as compared to the period from September 1, 1998 through
December 31, 1998 are attributable, in part, to the fact that we are comparing a
twelve month period to a four month period.
REVENUES
Total revenues increased to $5.8 million for the year ended December 31,
1999 from $1.3 million for the period from September 1, 1998 through December
31, 1998. For the year ended December 31, 1999, one customer accounted for 19%
of total revenues and a second customer accounted for 18% of total revenues. For
the period from September 1, 1998 through December 31, 1998, one customer
accounted for 43% of our total revenues and a second customer accounted for 11%
of total revenues.
DSCI revenues were $4.3 million for the period from October 1, 1997 through
September 4, 1998 and $5.7 million for the year ended September 30, 1997. For
the period from October 1, 1997 through September 4, 1998, one customer
accounted for 33% of total revenues, and a second customer accounted for 32% of
total revenues. For the year ended September 30, 1997, one customer accounted
for 40% of total revenues, and a second customer accounted for 24% of total
revenues.
APPLICATION MANAGEMENT SERVICES REVENUES. Revenues from our application
management services, which commenced in January 1999, were $746,000 for the year
ended December 31, 1999. At December 31, 1999, we had a balance of $896,000 for
deferred application management services revenues from a customer who prepaid a
portion of its contract. These deferred revenues will be recognized as the
related services are provided over the life of the contract.
PROFESSIONAL SERVICES AND OTHER REVENUES. Our professional services and
other revenues were $5.0 million for the year ended December 31, 1999 and $1.3
million for the period from September 1, 1998 through December 31, 1998. At
December 31, 1999, we had a balance of $992,000 for deferred professional
services revenues resulting from customer deposits that we typically require in
advance of commencing work on professional services engagements.
COSTS AND EXPENSES
APPLICATION MANAGEMENT SERVICES EXPENSES. Expenses for application
management services consist primarily of personnel costs associated with
application management and client services activities, third-party license and
support fees, costs of our data center and network providers and depreciation
and lease costs for equipment. Application management services expenses also
include amortization of deferred costs associated with warrants issued to a
service provider.
Application management services expenses, excluding non-cash stock-based
compensation of $229,000, were $6.3 million for the year ended December 31,
1999. Amortization of deferred costs for warrants issued to a service provider
in 1999 was $52,000 and will be $210,000 in 2000 for these warrants. Application
management services expenses have exceeded our application management services
revenues as we have invested in this portion of our business in anticipation of
future increases in contract volume. We anticipate that this trend will continue
for the foreseeable future.
PROFESSIONAL SERVICES AND OTHER EXPENSES. Expenses for professional
services and other expenses consist of compensation and related overhead costs
for personnel engaged in providing implementation, consulting, training and
related services as well as costs for third parties contracted to provide such
services. In addition, for all periods through September 4, 1998, there were
software royalty expenses related to the distribution of software products to
DSCI's customers.
Professional services and other expenses, excluding non-cash stock-based
charges of $427,000, were $7.8 million for the year ended December 31, 1999 and
$1.0 million for the period from
29
<PAGE> 33
September 1, 1998 through December 31, 1998. Of the total professional services
expenses for 1999, approximately $4.0 million were for personnel costs and $1.7
million were for subcontractors to perform services under professional services
engagements. There were 69 professional services employees at December 31, 1999.
Professional services expenses have exceeded our professional services revenues,
as we have invested in our consulting organization in anticipation of future
increases in contract volume. We expect to continue making significant
investments to expand our professional services infrastructure. We anticipate
that professional services margins will fluctuate from period to period due to
fluctuations in professional services revenues, since many of the costs of
providing professional services do not vary proportionately with the associated
revenues. Professional services revenues will fluctuate due to a number of
factors, such as the degree to which our customers use independent systems
integrators instead of our professional services for implementation, consulting
and training. In addition, since we implement our services on a fixed fee basis,
if we incur more costs than we expect in implementations, our profitability will
suffer. In the past, for example, some of our early fixed fee engagements
required more resources than we initially anticipated at the time we entered
into the contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of compensation and related personnel costs, fees associated with
contractors and other costs related to the design, development, testing and
enhancement of our services. Research and development expenses, excluding
stock-based compensation of $923,000, increased to $3.2 million for the year
ended December 31, 1999 from $93,000 for the period from September 1, 1998
through December 31, 1998. Research and development expenses as a percentage of
total revenues were 55% for 1999 and 7% for the period from September 1, 1998
through December 31, 1998. The increase in research and development expenses
largely reflects growth in the number of research and development personnel from
2 at December 31, 1998 to 44 at December 31, 1999. The increase in research and
development expenses also reflects our continuing efforts to add enhancements to
our existing service offerings and to develop new technologies for integrating
applications. We expect that the absolute dollar amount of research and
development expenses will continue to increase as we make additional investments
in our technology and service capabilities and increase the level of integration
of our service offerings.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of compensation and related costs for sales and marketing personnel,
including commissions and marketing program costs, and other related expenses
and amortization of costs associated with warrants issued to a software vendor
in connection with a remarketing agreement. Sales and marketing expenses,
excluding stock-based compensation of $2.8 million, increased to $11.9 million
for the year ended December 31, 1999 from $461,000 for the period from September
1, 1998 through December 31, 1998. Sales and marketing expenses, as a percentage
of total revenues were 206% for the year ended December 31, 1999 and 36% for the
period from September 1, 1998 through December 31, 1998. The increase in sales
and marketing expenses in 1999 was attributable to increased compensation,
commissions and other related costs associated with hiring additional sales
representatives, sales and marketing management and marketing personnel. The
number of employees in sales and marketing increased from 10 at December 31,
1998 to 80 at December 31, 1999. Increased spending on new customer lead
generation activities, advertising and tradeshows, and on market research and
collateral items also contributed to the increase in sales and marketing
expenses. In addition, the year ended December 31, 1999 includes $127,000
related to amortization of costs associated with warrants issued to a software
vendor. For the year 2000, charges for amortization of these warrants will
depend, in part, on the software vendor's achievement of specified performance
milestones. We expect that the absolute dollar amount of sales and marketing
expenses will continue to increase as we expand our sales force and marketing
efforts to capitalize on the growth of our market and as we continue to increase
and expand our operations. In addition, we anticipate recognizing substantial
sales and marketing expenses associated with our strategic alliance with Cap
Gemini Ernst & Young entered into in April 2000, as well as potentially
significant sales and marketing charges associated with the warrants issued to
Cap Gemini Ernst & Young.
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<PAGE> 34
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of compensation and related costs for general and
administrative personnel, as well as amortization of deferred costs associated
with fees paid to one of our software vendors. General and administrative
expenses, excluding stock-based compensation of $4.2 million, increased to $10.4
million for the year ended December 31, 1999 from $2.1 million for the period
from September 1, 1998 through December 31, 1998. General and administrative
expenses as a percentage of total revenues were 180% for the year ended December
31, 1999 and 162% for the period from September 1, 1998 through December 31,
1998. General and administrative expenses include costs related to our internal
information technology and systems architecture, finance, executive management,
human resources, legal and training activities. In addition, the year ended
December 31, 1999 includes approximately $1.8 million of expenses related to
amortization of fees paid to a software vendor for a non-competition agreement
and preferred partner status. There may be similar charges for this relationship
in the year 2000. We expect that the absolute dollar amount of general and
administrative expenses will continue to increase as we expand our operations
and incur the incremental costs associated with being a public company.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. We granted stock options
to our officers and employees at prices deemed to be below the fair value of the
underlying stock. The difference between the fair value of the underlying stock
at the date the options were granted and the exercise price of the granted
options was $23.5 million at December 31, 1999. This amount is being amortized,
using the graded vesting method, over the vesting period of the granted options.
Accordingly, our results from operations will include a non-cash compensation
expense at least through 2003. We recognized $8.5 million of this expense during
the year ended December 31, 1999.
AMORTIZATION OF INTANGIBLES. In September 1998, we acquired DSCI at a price
in excess of the fair value of the net tangible assets acquired, resulting in
goodwill and other intangibles totaling $6.6 million. Such intangibles are being
amortized over a 36-month period, which resulted in amortization expense of $2.2
million for the year ended December 31, 1999 and $730,000 for the period from
September 1, 1998 through December 31, 1998.
INTEREST AND OTHER EXPENSE. Net interest and other expense was $478,000 for
the year ended December 31, 1999 and $71,000 for the period from September 1,
1998 through December 31, 1998. Net interest and other expense for the year
ended December 31, 1999 resulted primarily from the interest expense from our
subordinated debt facility and capital equipment loans and leases offset by
interest generated from funds raised in private placements of our preferred
stock in 1999. Net interest and other expense for the period from September 1,
1998 through December 31, 1998 resulted primarily from interest expense from a
loan payable to a stockholder and capital equipment lease obligations offset by
interest earned on the proceeds from the September 1998 private placements of
our preferred stock.
INCOME TAXES. Since inception, we have incurred net losses for federal and
state tax purposes and have not recognized any material tax provision or
benefit. As of December 31, 1999, we had net operating loss carryforwards of
approximately $33.0 million for federal income tax purposes and approximately
$16.5 million for state income tax purposes, which expire in varying amounts
beginning in 2018 for federal tax purposes and 2004 for state tax purposes.
Federal and state tax laws impose significant restrictions on the utilization of
net operating loss carryforwards in the event of an ownership change, as defined
in Section 382 of the Internal Revenue Code. See Note 7 of the notes to our
financial statements for additional information regarding these carryforwards.
We have placed a valuation allowance against our net deferred tax assets due to
the uncertainty of the realization of these assets.
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<PAGE> 35
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Total revenues increased to $5.3 million for the three months ended March
31, 2000 from $861,000 for the three months ended March 31, 1999. For the three
months ended March 31, 2000 and 1999, no single customer accounted for 10% or
more of total revenues.
APPLICATION MANAGEMENT SERVICES REVENUES. Revenues from our application
management services were $1.1 million for the three months ended March 31, 2000
and $35,000 for the three months ended March 31, 1999. At March 31, 2000, we had
a balance of $1.2 million for deferred application management services revenues
from a customer who prepaid a portion of its contract. These deferred revenues
will be recognized as the related services are provided over the life of the
contract.
PROFESSIONAL SERVICES AND OTHER REVENUES. Our professional services and
other revenues were $4.1 million for the three months ended March 31, 2000 and
$826,000 for the three months ended March 31, 1999. At March 31, 2000, we had a
balance of $1.8 million for deferred professional services revenues resulting
from customer payments that we required in advance of commencing our
professional services work.
COSTS AND EXPENSES
APPLICATION MANAGEMENT SERVICES EXPENSES. Application management services
expenses, excluding stock-based compensation were $5.9 million for the three
months ended March 31, 2000 and $868,000 for the three months ended March 31,
1999. The largest component of the increase was the growth in personnel costs of
$2.2 million. Other significant components of the increase included $1.5 million
for third-party license and support fees, costs of our data center and network
providers and depreciation and lease costs for equipment. In addition,
amortization of deferred costs for warrants issued to a service provider in 1999
was $52,000 for the three months ended March 31, 2000 and zero for the three
months ended March 31, 1999.
PROFESSIONAL SERVICES AND OTHER EXPENSES. Professional services and other
expenses, excluding stock-based compensation were $5.5 million for the three
months ended March 31, 2000 and $928,000 for the three months ended March 31,
1999. The largest component of the increase was the growth in personnel costs of
$3.5 million. Other significant components of the increase included $914,000 for
subcontractors to perform services under professional services engagements and
$574,000 for travel-related expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses, excluding
stock-based compensation were $2.2 million for the three months ended March 31,
2000 and $267,000 for the three months ended March 31, 1999. Research and
development expenses as a percentage of total revenues were 42% for the three
months ended March 31, 2000 and 31% for the three months ended March 31, 1999.
The largest component of the increase was the growth in personnel costs of $1.6
million.
SALES AND MARKETING EXPENSES. Sales and marketing expenses, excluding
stock-based compensation were $9.6 million for the three months ended March 31,
2000 and $600,000 for the three months ended March 31, 1999. Sales and marketing
expenses as a percentage of total revenues were 182% for the three months ended
March 31, 2000 and 70% for the three months ended March 31, 1999. The largest
component of the increase was the growth in personnel costs of $4.6 million.
Other significant components of the increase included $1.3 million in spending
on new customer lead generation activities, advertising and tradeshows, and on
market research and other items and $518,000 related to amortization of costs
associated with warrants issued to a software vendor.
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<PAGE> 36
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $4.8 million for the three months ended March 31, 2000 and $1.8 million for
the three months ended March 31, 1999. General and administrative expenses as a
percentage of total revenues were 90% for the three months ended March 31, 2000
and 207% for the three months ended March 31, 1999. The largest component of the
increase was the growth in personnel costs of $1.2 million. Other significant
components of the increase included $690,000 in professional services and
$430,000 in facility related costs.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. Amortization of deferred
stock-based compensation was $5.3 million for the three months ended March 31,
2000 and $144,000 for the three months ended March 31, 1999. The increase in
amortization resulted from amortization of deferred stock-based compensation
related to stock options granted through March 31, 2000. For the three months
ended March 31, 2000, we issued stock awards to employees with deemed aggregate
intrinsic value of $11.8 million compared to $477,000 for the three months ended
March 31, 1999.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $641,000 for
the three months ended March 31, 2000 and $547,000 for the three months ended
March 31, 1999. The increase in amortization resulted from a decrease in the
expected period of benefit which increased the periodic amortization.
INTEREST AND OTHER INCOME AND EXPENSES. Net interest and other income was
$47,000 for the three months ended March 31, 2000 and net interest and other
expense was $(97,000) for the three months ended March 31, 1999. The increase
was a result of increased interest and other income to $367,000 for the three
months ended March 31, 2000 from $68,000 for the three months ended March 31,
1999, offset in part by an increase in interest and other expense to $320,000
from $165,000 for the comparable periods.
INCOME TAXES. Since inception, we have incurred net losses for federal and
state tax purposes and anticipate losses for the foreseeable future. We have
therefore not recognized any material tax provision or benefit of income taxes
for the three months ended March 31, 2000 and 1999.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
the five quarters ended March 31, 2000, as well as application management and
professional services and other revenues expressed as a percentage of total
revenues for the periods indicated. The unaudited quarterly financial statements
have been prepared on the same basis as the audited financial statements
contained in this prospectus and include all adjustments, consisting only of
normal recurring adjustments, that we considered necessary for a fair
presentation of the information when read together with our audited financial
statements and related notes. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Application management services....... $ 35 $ 50 $ 128 $ 533 $ 1,137
Professional services and other....... 826 1,104 898 2,208 4,143
------- ------- -------- -------- --------
Total revenues...................... 861 1,154 1,026 2,741 5,280
------- ------- -------- -------- --------
Costs and Expenses:
Application management services....... 868 1,152 1,446 2,831 5,901
Professional services and other....... 928 1,014 2,288 3,525 5,471
Research and development.............. 267 429 894 1,602 2,233
Sales and marketing................... 600 1,251 4,150 5,929 9,593
General and administrative............ 1,783 2,158 2,703 3,772 4,750
Amortization of stock-based
compensation:
Application management services..... 26 26 47 130 140
Professional services and other..... 15 14 55 342 267
Research and development............ 57 177 141 548 640
Sales and marketing................. 3 299 697 1,770 1,534
General and administrative.......... 43 108 2,278 1,748 2,676
Amortization of intangibles........... 547 547 548 548 641
------- ------- -------- -------- --------
Total operating expenses............ 5,137 7,175 15,247 22,745 33,846
------- ------- -------- -------- --------
Loss from operations.................... (4,276) (6,021) (14,221) (20,004) (28,566)
Interest and other income............... 68 110 109 254 367
Interest and other expense.............. (165) (243) (285) (326) (320)
------- ------- -------- -------- --------
Net loss................................ $(4,373) $(6,154) $(14,397) $(20,076) $(28,519)
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Application management services........ 4% 4% 12% 19% 22%
Professional services and other........ 96 96 88 81 78
--- --- --- --- ---
Total revenues....................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
The general trends discussed in the comparisons of operating results for
the three months ended March 31, 2000 and for the year ended December 31, 1999
apply to the comparison of results of operations for our five most recent
quarters ended March 31, 2000. The significant increases in both application
management and professional services revenues from September 30, 1999 to
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<PAGE> 38
March 31, 2000 were due to performance of work for new customers and increased
revenues from some of our pre-existing customers. The increase in amortization
of stock based compensation from June 30, 1999 to September 30, 1999 was due to
options granted to new personnel during the quarter ended September 30, 1999.
You should not rely on quarter-to-quarter comparisons of our results of
operations as indicators of future performance due to our limited operating
history, the early stage of our market and the factors discussed in the section
entitled "Risk Factors" above. In particular, because our base of customers and
the number of new customers in each quarter are still relatively small, the loss
of a few key customers in any quarter could result in a significant decrease in
revenues for that quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations and funded our capital expenditures since
inception through the private sale of equity securities, supplemented by loan
facilities and equipment leases. Aggregate net proceeds through April 30, 2000
from private equity financings total $125.6 million. As of March 31, 2000, we
had $16.2 million in cash and cash equivalents and a working capital deficiency
of $3.7 million.
Net cash used in operating activities was $13.4 million for the three
months ended March 31, 2000, $20.4 million in the year ended December 31, 1999,
and $776,000 for the period from September 1, 1998 through December 31, 1998.
For those periods, net cash used in operating activities was primarily used to
fund ongoing operations including increases in accounts receivable offset by
increases in accounts payable, accrued liabilities and deferred revenues.
Net cash used in investing activities was $8.1 million for the three months
ended March 31, 2000. Investing activities consisted primarily of purchases of
computer equipment of $3.0 million, furniture and fixtures of $2.5 million and
leasehold improvements of $1.6 million for the completion of our new
headquarters facility in San Carlos, California. In addition, we purchased
$268,000 in computer software and capitalized $275,000 in payroll and payroll
related costs for employees directly associated with computer software developed
for internal use. Net cash used in investing activities was $12.2 million in the
year ended December 31, 1999. Investing activities consisted primarily of
purchases of computer software of $12.0 million and the capitalization of
$355,000 of payroll-related costs for employees directly associated with
software developed for internal use. Cash used in investing activities was
offset by a decrease in other assets. Net cash used in investing activities was
$2.2 million for the period from September 1, 1998 through December 31, 1998.
Investing activities consisted primarily of the purchase of DSCI along with
capital expenditures.
Accounts receivable are recorded when amounts are billed in accordance with
the contract terms or as services are performed under non-cancelable contractual
services arrangements.
Our net accounts receivable balance at December 31,1999 totaled $2.9
million. This included $1.0 million in December pre-billed services fees
collected in January 2000. Revenue recognized under this arrangement was
$190,000 at December 31, 1999. At December 31, 1999 only 1% of our outstanding
receivables were greater than 60 days old. At December 31, 1999, our days sales
outstanding for accounts receivable was 99 days.
Our net accounts receivable balance at March 31, 2000 totaled $5.0 million.
At March 31, 2000 only 10% of our outstanding receivables were greater than 60
days old. At March 31, 2000, our days sales outstanding for accounts receivable
was 88 days. By June 23, 2000 we had collected 83% of this outstanding balance.
Trade receivables are due under normal credit terms of net 30 days.
Net cash provided by financing activities was $568,000 for the three months
ended March 31, 2000, $68.8 million in the year ended December 31, 1999, and
$4.0 million for the period from September 1, 1998 through December 31, 1998.
Financing activities consisted primarily of the proceeds from the issuance of
preferred stock, loans, and exercise of stock options offset by repayments on
loans and capital leases. In 1998, we raised $4.0 million in proceeds through
the
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<PAGE> 39
private sale of our series A preferred stock, and in 1999 we raised $66.1
million in proceeds through the private sale of our series B and C preferred
stock. In April 2000, we raised $54.5 million in gross proceeds through the
private sale of our senior series E mandatorily redeemable preferred stock.
In December 1998, we entered into a $4.0 million financing arrangement with
Comdisco, Inc. These borrowings bear an average annual interest rate of
approximately 11.5% and are payable in 42 monthly installments through 2003. We
have also entered into capital lease agreements with Comdisco to finance up to
$4.0 million of capital expenditures. Interest accrues under the terms of these
agreements at an average rate of approximately 8.75% per year based on the
outstanding utilized capital lease line. Borrowings under the capital lease are
payable in 42 monthly installments through 2003. As of March 31, 2000, we had
drawn $4.0 million under the loan agreement and $4.0 million under the capital
lease agreement. In connection with these financings, in December 1998 we issued
to Comdisco warrants to purchase a total of 655,713 shares of our series A
preferred stock at an exercise price of $1.24 per share.
In December 1998, we also entered into a three-year guarantee subordinated
loan and security agreement with Comdisco in the amount of $350,000. The purpose
of this agreement was to provide a lease guarantee to the lessor of our
principal facility. In the event of a draw down under the guarantee by lessor,
the loan shall become payable in 24 equal monthly installments of principal and
interest, with interest accruing at a rate of 14% per year. In connection with
this agreement, we issued to Comdisco warrants to purchase 25,500 shares of our
series A preferred stock at an exercise price of $1.24 per share. In December
1999, we entered into a reimbursement and security agreement with Comdisco in
the amount of $7.0 million to acquire a letter of credit. This letter of credit
provides a lease guarantee to the landlord of our new headquarters facilities
and may be reduced if we satisfy conditions specified in the agreement. In
connection with this agreement, we issued to Comdisco a warrant to purchase
shares of our series C preferred stock at an exercise price of $6.50 per share.
This warrant does not become exercisable unless we successfully consummate this
offering, whereby the warrant is exercisable through December 2006, or 3 years
from the date of the offering, whichever is earlier. If we consummate this
offering prior to June 30, 2000, this warrant is exercisable for 43,077 shares
of series C preferred stock; and if we consummate this offering between July 1,
2000 and September 30, 2000, this warrant is exercisable for 64,615 shares of
series C preferred stock.
During 1999, we entered into a revolving loan agreement with a commercial
bank for an amount not to exceed 80% of eligible accounts receivable or $3.0
million. There were no borrowings under this agreement, which expired on January
31, 2000.
In March 2000, we entered into a volume purchase agreement to purchase up
to $6.0 million of equipment through September 2001.
In April 2000, we sold 5,450,000 shares of senior series E mandatorily
redeemable preferred stock at a price of $10 per share, for aggregate gross
proceeds to us of $54.5 million. Assuming we consummate this offering before
January 1, 2001, the senior series E mandatorily redeemable preferred stock
converts to common stock upon this offering at 73% of the price per share of our
common stock in this offering. We expect to record a beneficial conversion
adjustment estimated at $20.2 million which will increase net loss to derive net
loss attributable to common stockholders in connection with the issuance of
these securities. The beneficial conversion adjustment will be recorded in the
period during which we consummate this offering. Also in April 2000, we entered
into an equipment lease line of credit for up to $5.0 million with Finova
Capital Corporation. In connection with this line of credit, we issued to Finova
a warrant to purchase up to $100,000 of our common stock at a price per share
equal to 90% of the price per share of our common stock in this offering.
We have executed a ten year build-to-suit lease for a facility in San
Carlos, California that will require minimum payments of $2.2 million in 2000
and $3.5 million in 2001.
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As we execute our strategy, we expect significant increases in our
operating expenses, especially in application management services, professional
services, sales and marketing and research and development. We expect that our
current cash balances and existing debt arrangements, together with the proceeds
from this offering, will be sufficient to meet our cash requirements for the
next 12 months. We expect that we will need or desire to raise additional funds
in order to support more rapid expansion, develop new or enhanced services or
technologies, respond to competitive pressures, acquire complementary businesses
or respond to unanticipated requirements. We cannot be sure that additional
funding, if needed, will be available on acceptable terms or at all. If adequate
funds are not available, we may be required to curtail significantly or defer
one or more of our operating goals or programs. If we succeed in raising
additional funds through the issuance of equity securities, the issuance could
result in substantial dilution to existing stockholders. If we raise additional
funds through the issuance of debt securities or preferred stock, these new
securities would have rights, preferences and privileges senior to those of the
holders of our common stock. The terms of these securities could also impose
restrictions on our operations.
FOREIGN CURRENCY AND MARKET RISK
We develop and market our services primarily in the United States. As we
expand our operations outside of the United States, our financial results could
be affected by factors such as changes in foreign currency rates or weak
economic conditions in foreign markets. Because all of our revenues are
currently denominated in U.S. dollars, a strengthening of the dollar could make
our services less competitive in international markets.
INTEREST RATE RISK
We have an investment portfolio of money market funds. In view of the
nature and mix of our total portfolio, a 10% movement in market interest rates
would not have a significant impact on the total value of our portfolio as of
March 31, 2000. Our interest expense is not sensitive to changes in the general
level of U.S. interest rates because all of our debt arrangements are based on
fixed rates of interest.
ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. We plan to adopt SFAS No.
133 during fiscal 2001. To date, we have not engaged in any derivative or
hedging activities.
In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin, or SAB, No. 101. SAB No. 101 summarized certain of
the SEC Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB No. 101, and any resulting
change in accounting principles that a registrant would have to report, is
effective no later than our fiscal quarter ending June 30, 2000. We do not
expect the application of SAB No. 101 to have a material effect on our financial
position or results of operations.
In December 1999, the SEC wrote a letter to the FASB requesting that the
Emerging Issues Task Force, or EITF, address the issue of accounting for
multiple-element revenue arrangements. In general, these arrangements are
defined as the delivery of substantive products, services, or rights at the
outset of the arrangement and generally involve either a fixed fee or a fixed
fee combined with a continuing payment stream. The continuing payment stream
generally corresponds to the continuing performance and may be fixed, variable
based upon future performance, or a combination of fixed and
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variable payments. This issue is applicable only to the portion of the fee that
is fixed or determinable because only that portion is eligible for current
revenue recognition. The SEC requested that the EITF provide technical
accounting guidance on the following two issues relating to the accounting for
multiple-element revenue arrangements:
- what causes the arrangement to be treated as a multiple element
arrangement and when is it appropriate to segment the elements for
purposes of revenue recognition; and
- even if a deliverable is deemed to be a separate component for which
separate revenue recognition would normally be appropriate, are there
conditions that should preclude recognition of revenue allocable to a
delivered component of an arrangement until other undelivered components
are delivered or performed.
Subsequently, the EITF raised Issue 00-A, "Accounting for Multiple-Element
Revenue Arrangements" to be deliberated upon at a future meeting. Any changes in
technical accounting guidance resulting from these EITF deliberations could
result in substantial changes in the timing of our recognition of future
revenues.
In March 2000, the EITF reached a consensus on the issues in Issue 00-03,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. The Task Force determined that a software element covered by
SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. Arrangements that do not give the
customer such an option are service contracts and are outside the scope of 97-2.
We believe our current revenue recognition policies and practices are consistent
with existing industry practice and with EITF Issue No. 00-3.
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BUSINESS
OVERVIEW
We are a leading enterprise application service provider, or ASP, based on
our number of customers and customer contracts. We implement, integrate and
manage the Corio Intelligent Enterprise, a suite of enterprise software
applications from leading vendors, which we offer to our customers over a secure
network. This suite of applications is designed to accommodate the requirements
of rapidly growing as well as larger, more mature companies. We enable our
customers to avoid the significant upfront costs of licensing enterprise
software applications, of implementing them on their existing system and of
integrating them with other applications, as well as the unpredictable and often
even greater ongoing application management costs. Following the rapid
implementation of software applications, usually performed for a fixed fee, our
customers pay a predictable monthly service fee based largely on the number of
applications used and total users. By providing application implementation,
integration, management and various upgrade services and related hardware and
network infrastructure, we reduce the information technology, or IT, burdens of
our customers, enabling them to focus on their core businesses and react quickly
to dynamic market conditions.
We offer software applications from PeopleSoft and SAP for enterprise
resource planning -- the management of various functions within a company,
including human resources, finance, management and sales; Siebel Systems for
customer relationship management -- the management of a company's relationship
with its customers; BroadVision, Commerce One, Moai and Requisite for
e-commerce; and Changepoint, Cognos, E.piphany and Portal Software for decision
support and other business intelligence solutions as well as for
industry-specific solutions. We leverage the capabilities of companies such as
Concentric Network to provide our customers leading data center and network
infrastructure technologies.
INDUSTRY BACKGROUND
We believe the application software industry is being transformed by three
fundamental forces:
- the emergence of secure Internet Protocol, or IP, networks and increased
bandwidth to enable a new model for delivering software applications;
- the proliferation of emerging high-growth and middle-market companies
that require rapid and cost-effective deployment of IT infrastructure and
business processes; and
- new e-commerce business models that are driving the need for rapid
deployment of e-commerce applications in both established and emerging
businesses.
Traditionally, organizations have installed, operated and maintained
enterprise software applications internally. The initial cost of these
applications is typically significant, and the time required to implement and
customize them is often lengthy. According to the Standish Group, the
implementation of enterprise software applications often takes twice as long as
planned. Moreover, the ongoing costs of operating these applications, including
upgrading, training and management expenses, are often significantly greater
than the original capital outlay and may increase over time. Emerging
high-growth and middle-market companies have had difficulty purchasing these
systems because of the costs and time associated with implementing and managing
enterprise software applications. The emergence of the Internet, the increased
communications bandwidth and the re-writing of enterprise software to be
delivered over IP networks are transforming the way enterprise software
applications are being provided to customers. Instead of in-house installations,
these applications are beginning to be hosted by third parties, in which the
hosting company maintains the applications on an off-site server typically in a
data center and delivers the applications to customers over the Internet as a
service. These new technologies and the resulting shift in the delivery model
are reducing the total cost of ownership and implementation times of enterprise
software applications,
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facilitating access to applications that industry analysts consider to be the
best in their class for emerging high-growth and middle-market companies.
Analysts refer to these superior software applications as "best-of-breed"
applications.
We believe that the recent proliferation of emerging high-growth and
middle-market companies has created a significant market opportunity for
Internet-hosted software applications. For many of these companies, particularly
those engaged in e-commerce activities, minimizing the cost of business
applications and accelerating their implementation time are considered necessary
for success. The IT infrastructure and business processes of emerging
high-growth and middle-market companies are generally more standardized than
those of larger companies, allowing these companies to accept software
functionality without extensive customizations. In addition, competitive
pressures have led to a renewed focus on core competencies, with many businesses
concluding that IT capabilities are not among them. In response to these
factors, many emerging high-growth and middle-market companies are adopting
hosted applications rather than performing in-house installations.
Finally, new e-commerce business models have increased demand for
e-commerce software applications. E-commerce applications range from electronic
store fronts and electronic procurement systems to business-to-business
exchanges connecting communities of buyers and sellers across entire supply
chains. These applications are designed to be Internet-hosted and may be
deployed quickly. The appeal of these e-commerce applications has extended
beyond emerging high-growth and middle-market companies to larger enterprises,
as enterprises of all sizes recognize the need to adopt and rapidly deploy
e-commerce applications for their businesses.
The application service provider, or ASP, industry arose recently as a
result of the changing forces in the application software industry. Gartner
Group estimates that the ASP market will grow from $900 million in 1998 to
approximately $23 billion by 2003. The initial ASP model offers a simple value
proposition -- access to an application over a network for a monthly fee.
Customers need only pay for the use of the applications, while the ASP assumes
responsibility for implementing and managing the applications. Using an ASP,
businesses can thus avoid the significant up-front costs and risks of deploying
sophisticated packaged software applications, and can access experienced IT
personnel that they would otherwise need to recruit and retain themselves.
The ASP industry is less than two years old but is already evolving.
Although first generation ASPs relieve companies of some of the burden and
expense of deploying and maintaining stand-alone software applications,
companies still experience protracted implementation times, difficulties
customizing and integrating software applications and costly upgrade and
maintenance cycles. First generation ASPs simply outsource the existing
application process with little innovation, merely shifting the process of
integrating, implementing and managing enterprise applications from the customer
to a third party. In addition, by hosting applications in their own data
centers, first generation ASPs have limited ability to scale their business
rapidly and respond quickly to the needs of their customers for additional
network requirements. We believe that there is a significant opportunity for a
company that provides the benefits of the initial ASP model while addressing
these shortcomings, including lack of integration, excessive customization and
the high cost of application management, by providing improved business
processes for customers and a more compelling customer value proposition.
THE CORIO SOLUTION
We provide integrated, best-of-breed software applications over a secure
network for a monthly fee. Our services provide customers the following business
benefits:
BUSINESS PROCESS INTEGRATION. Through Orion, our technology platform, we
integrate and implement a suite of software applications, such as e-commerce,
customer relationship management and enterprise resource planning applications.
Orion also allows us to offer our integrated suite of applications on a hosted
basis and to integrate these applications with customers' existing
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applications. By enabling this business process integration, our solution helps
companies quickly streamline both their internal processes and their exchanges
with suppliers, partners and customers.
LOWER AND MORE PREDICTABLE COSTS. Our customers gain access to
best-of-breed applications hosted over a secure network often without the
significant up-front costs and unpredictable follow-on software upgrade and
support costs associated with internally-operated IT systems. Following rapid
implementation of our applications, typically for a fixed fee, our customers pay
a predictable monthly fee. Our customers only pay for the services they need and
can modify these services as their needs change, allowing them flexibility and
scalability in addressing their evolving IT requirements. Compared with the cost
of implementing and maintaining enterprise applications in-house, we project
that our customers can achieve a 30% or greater cost reduction over the term of
their contract with us.
ACCESS TO BEST-OF-BREED APPLICATIONS. Through our relationships with our
third-party software providers, we provide our customers access to sophisticated
enterprise applications. We offer software from leading vendors such as
BroadVision, Commerce One, Moai, PeopleSoft, SAP and Siebel Systems. The
applications we offer from these vendors are designed to accommodate the
requirements of rapidly growing companies as well as the needs of larger, more
mature companies. By gaining rapid access to these best-of-breed applications,
our customers are able to avoid the risks and costs associated with replacing
less sophisticated applications as they outgrow them.
ACCELERATED TIME TO BENEFIT. We can typically complete a standard
implementation of our services in 2 to 14 weeks. This allows our customers to
avoid the longer implementation times frequently experienced with installing and
integrating customized, sophisticated applications. Our services enable
customers to achieve their desired benefits quickly by reducing the time
required to establish or augment their IT capabilities.
FOCUS ON CORE BUSINESS. We reduce the IT burdens of companies by providing
application implementation, management and various upgrade services and related
hardware and network infrastructure. By providing our customers with software,
hardware and network management capabilities, we enable companies to focus on
their core business.
OUTSTANDING SERVICE AND SUPPORT. We are dedicated to providing our
customers industry-leading customer service and support. Our highly-talented IT
professionals manage our services and provide support to our customers. We
assign to each customer a support team composed of software application experts,
network engineers, hardware engineers and customer support specialists. We also
assign a member of our senior management team to each customer to ensure high
levels of customer satisfaction.
THE CORIO STRATEGY
Our objective is to be the leading enterprise ASP worldwide. Key elements
of our strategy include:
OFFER A COMPELLING VALUE PROPOSITION. We will continue to offer to current
and potential customers an opportunity to host their application and e-commerce
needs on a cost-effective basis. As part of our sales process, we work with
prospective customers to develop a total cost of ownership analysis specific to
that customer. We believe that we will be able to continue to grow our customer
base by offering a quantified, compelling value proposition of reduced and more
predictable IT costs and an accelerated time to benefit.
LEVERAGE OUR "ONE-TO-MANY" BUSINESS MODEL. Our business is based on
providing an array of standardized services to numerous customers. We believe
that we will be able to achieve the economies of scale inherent in this
"one-to-many" model by being able to reduce the costs we incur in delivering our
services. We intend to continue to develop implementation templates, innovative
application management tools and integration models that can be used for
numerous applications across a variety of companies and industries. We believe
this strategy enables us to leverage our IT
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resources to deliver cost-effectively high standards of service and support. By
continually reducing our costs of providing service, we believe we can build a
profitable business over the long term.
MAINTAIN OUR TECHNOLOGY LEADERSHIP POSITION. We believe we have established
a technology leadership position in the ASP market, and we intend to maintain
this position by continuing to enhance our technology platform. We will continue
to invest in research and development to bring new services to market, to
develop new application features and to enhance our technology that automates
and integrates various software functions.
WORK WITH LEADING DATA CENTER MANAGEMENT AND NETWORK SERVICES PROVIDERS. We
intend to continue to outsource our data center management and a portion of our
network service needs to leading providers. We currently engage Concentric
Network and others to provide these services. We believe this is a key
competitive differentiator for us, enabling us to focus on our core business
while providing our customers access to leading data centers and networks
capable of accommodating customers' growth. By engaging data center management
and network service providers, we are able to forego the significant fixed
capital costs associated with building data centers and managing network
infrastructure.
LEVERAGE OUR STRATEGIC RELATIONSHIPS. We intend to leverage our current
strategic relationships, and to enter into new strategic relationships, in order
to expand our customer base and scale our services. We recently entered into a
strategic alliance with Cap Gemini Ernst & Young U.S. LLC, or CGEY, whereby CGEY
will refer its customers to us and engage in joint-marketing and sales
activities. In addition, we have established co-marketing and sales arrangements
with other systems integrators and with our software vendors. As our customer
base grows, we intend to expand and strengthen our relationships with systems
integrators and other service providers in order to expand our service offerings
and to increase our implementation capacity.
BROADEN OUR SERVICE OFFERINGS. We believe that we can increase customer
demand for our services by expanding our service offerings. We continue to
invest in developing and integrating additional services that address the
evolving IT needs of our customers. We intend to broaden our relationships with
our existing software vendors and to establish new relationships with additional
software application providers. In addition, based on our knowledge of the
application needs of different markets, we have developed and intend to further
develop standard application suites for specific markets. By expanding our
service offerings and addressing industry-specific needs of our customers, we
believe we will attract new customers and deepen our relationships with existing
customers.
CONTINUE OUR COMMITMENT TO CUSTOMER SATISFACTION. We are committed to
customer satisfaction throughout our organization, and we endeavor to provide
our customers with the highest quality service offerings. In order to accomplish
this, we expect to invest substantial time and effort in enhancing our services.
Our commitment to customer satisfaction enables us to leverage existing
customers to serve as reference accounts for prospective customers.
SERVICES
Our service offerings consist of application management services and
professional services. Application management services are ongoing services we
provide to our customers in connection with the operation of the Corio
Intelligent Enterprise, a suite of best-of-breed software applications that is
available over a secure network. Our professional services include our
implementation of the Corio Intelligent Enterprise and other consulting and
training services.
APPLICATION MANAGEMENT SERVICES
Our application management services consist of hosting services for our
hosted applications. As of March 31, 2000, our application management services
team consisted of 91 employees. We price our application management services
based on various factors, such as the number and type of applications being
licensed, the number of users covered by a contract and the frequency of access
to our applications. The monthly fee for our application management services is
typically fixed for the life of the contract, subject to increases in the event
a customer requires additional applications, increases its number of users or
increases frequency of use. Most of our customer agreements have three to five
year terms.
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BUSINESS INTELLIGENCE
& INDUSTRY-
SPECIFIC SOLUTIONS
E-COMMERCE
CUSTOMER RELATIONSHIP
MANAGEMENT
ENTERPRISE RESOURCE PLANNING
Hosted Applications
We provide our services through our Corio Intelligent Enterprise which is
designed to provide our customers enterprise resource planning, customer
relationship management and e-commerce capabilities as well as industry-specific
applications. Set forth below are the services we offer through the Corio
Intelligent Enterprise, the software vendors from whom we obtain the constituent
applications and the functionality each application provides.
<TABLE>
<C> <S> <C> <C>
-------------------------------------------------------------------------------------------------------
CORIO SERVICES SOFTWARE VENDORS FUNCTIONALITY
------------------------------------------------------------------------------------------------------------------
Corio Financials PeopleSoft SAP Provides general ledger, accounts receivable,
accounts payable, employee expense, projects, asset
management, cash management, investment management,
fund management, enterprise management and management
accounting.
-------------------------------------------------------------------------------------------------------
Corio Human Resources PeopleSoft SAP Enables benefit and personnel administration,
compensation management, employee training and event
management, human resources cost controls, employee
development and evaluation, recruiting and staffing
capabilities.
-------------------------------------------------------------------------------------------------------
Corio Manufacturing SAP Provides sales and operations planning, materials
requirements planning, demand management, production
control, production costing and quality management.
-------------------------------------------------------------------------------------------------------
Corio Distribution PeopleSoft SAP Provides sales support, order management, service
management, billing, materials management,
requisitions, purchasing, inventory management,
shipping and warehouse management functionality.
------------------------------------------------------------------------------------------------------------------
Siebel Sales Siebel Systems Provides opportunity management, sales and pipeline
analysis, and account and activity management
capabilities.
-------------------------------------------------------------------------------------------------------
Siebel Product Siebel Systems Facilitates sales force processes, including product
Configurator configuration, price quoting and availability
information.
-------------------------------------------------------------------------------------------------------
Siebel Service Siebel Systems Automates and facilitates customer service processes
for inbound transactions.
-------------------------------------------------------------------------------------------------------
Siebel Call Center Siebel Systems Automates and facilitates personnel management
processes for all inbound and outbound telephonic
sales, service and marketing needs.
------------------------------------------------------------------------------------------------------------------
Corio e-Store BroadVision Enables personalized Internet shopping, with support
for product catalog, dynamic pricing, quote
generation, shopping cart, configuration, payment and
settlement.
-------------------------------------------------------------------------------------------------------
Corio Commerce One Permits online requisitions of goods and services,
e-Procurement workflow and approval, price updates, purchase order
submissions, freight estimates and tracking and tax
capabilities.
-------------------------------------------------------------------------------------------------------
Corio e-Market BroadVision Software, services and hosting offering for
Commerce One Moai business-to- business net market makers. Includes
Requisite multi-vendor catalog aggregators, auction sites and
trading exchanges.
------------------------------------------------------------------------------------------------------------------
Corio Business Cognos E.piphany Enables critical decision support capabilities
Intelligence through data access, reporting, analysis and
forecasting.
-------------------------------------------------------------------------------------------------------
Corio Professional Changepoint Automates and facilitates a variety of professional
Services Automation services delivery processes, such as contact
management, resource and project management, time and
expense administration, client billing and support
management.
-------------------------------------------------------------------------------------------------------
Corio Billing Portal Software Supports Internet service usage measurement and
customer care and billing capabilities.
------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to hosting services for customers, we also offer e-mail and
messaging services to our customers, hosted by Critical Path.
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To address the challenges of integrating our hosted applications, we have
developed our Orion technology platform. Orion enables us to offer our customers
the Corio Intelligent Enterprise on a hosted and integrated basis, providing
customized functionality enhancements and various upgrade services. We currently
offer our customers integration among Corio Financials with PeopleSoft, Corio
Human Resources with PeopleSoft, Corio Distribution with PeopleSoft, Corio
Professional Services Automation and Siebel Systems' Customer Relationship
Management software. We are in the process of developing integration
capabilities among the other services we offer and have recently begun offering
BroadVision, Moai, Requisite and SAP.
The pricing of the license fees payable by us for hosted software to
third-party software vendors typically depends on factors such as the number and
type of our customers' users. We are currently negotiating with two of our major
third-party software vendors to modify the pricing and other terms currently in
place with these vendors. We may agree to restructure our current pricing
arrangements with some of our third-party software providers to, for example,
pay more to the provider up-front in return for a pricing structure that we
believe is more beneficial to us overall.
Hosting Services
We host and manage each of the services that we offer through the Corio
Intelligent Enterprise and are responsible to our customers for these services,
regardless of whether we have developed or licensed the underlying technology.
We guarantee service levels for customers of at least 99% availability,
excluding scheduled downtime. To maintain this level of service, we have
configured our hosted applications and infrastructure for capacity and
performance and incorporated into our system a sophisticated backup recovery
process. We have also engineered automated upgrade and testing tools that
increase our efficiency, reduce our costs and improve our ability to scale our
operations. We provide these hosting services through our application management
center, which manages and supports the software applications, security
infrastructure, networks, hardware and data centers which operate 24 hours a
day, seven days a week.
Our hosting services include the following:
CUSTOMER SUPPORT. Our client services organization is the first point of
contact for our customers. Within client services, our customer support
specialists work with our experts in software applications, hardware and data
center management to respond to customer inquiries. We also assign a member of
our senior management team to each customer to ensure high levels of customer
satisfaction.
APPLICATION MANAGEMENT. The vendors of software applications incorporated
into the Corio Intelligent Enterprise periodically release minor modifications,
or patches, and upgrades for their software applications. Our application
management experts use our automated tools and test scripts to review, test and
assess each modification or upgrade released by our vendors to determine the
compatibility and stability of each modification or upgrade, and then they
incorporate appropriate changes into the Corio Intelligent Enterprise and make
them available to our customers.
SECURITY MANAGEMENT. The secure transmission of information over
telecommunication networks is a key requirement for our business. We have
implemented an effective information security protection program to minimize
risk to the confidentiality, integrity and availability of our customers'
mission critical applications and data. Our data protection program is built
around a pervasive, multi-layer security model that includes: strong network
perimeter defenses, aggressive real-time monitoring, detection and response
capability, security enabled at the host and application levels, continuous
vulnerability management, physical and operational security and the use of
proven security policy management practices.
INFRASTRUCTURE MANAGEMENT. Our customers' data resides on servers that we
own, located in secure cages in the data centers we use. Our infrastructure
management personnel are responsible for all aspects of our infrastructure
requirements, including hardware procurement, installation and
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configuration. To support our "one-to-many" business model, our infrastructure
management personnel can configure our servers to support multiple customers. To
maintain the integrity and confidentiality of data in our shared hosting
environments, we ensure rigid partitioning of each customer's information.
DATA CENTER AND NETWORK MANAGEMENT. We engage Concentric Network and others
to offer our customers state-of-the-art data centers and network management. To
maximize network availability, our application management personnel has, with
Concentric Network and others, designed our network architecture to ensure a
redundancy of network hardware, facilities infrastructure and telecommunications
circuits. Our application management center personnel also ensure that our
services support multiple network models and offer our customers a number of
connectivity options, including dedicated T1 lines and VPNs.
PROFESSIONAL SERVICES
Our professional services, which include initial implementation and ongoing
support services, are provided both by our professional services personnel and
by third-party systems integrators. We have established a professional services
team to implement the Corio Intelligent Enterprise quickly and efficiently. As
of March 31, 2000, our professional services team consisted of 139 employees
located throughout the United States. We organize our professional services team
by geographic location and application expertise.
We typically perform professional services pursuant to fixed fee contracts
for consulting, training and implementation of applications. Our professional
services team supports a number of implementation methodologies and programs:
FASTLANE. FastLane is an implementation methodology in which a
multi-disciplined team of our IT professionals works with a group of customers
to implement the Corio Intelligent Enterprise. By coordinating the simultaneous
implementation of our services for multiple customers, FastLane captures
customer requirements early in the sales cycle and leverages our
industry-specific implementation and configuration templates. The results are
implementation periods of weeks rather than the months traditional
implementation approaches typically require.
EXPRESS. Express is an implementation methodology that enables us to
accelerate a customer's transition from its existing, entry-level applications
to the Corio Intelligent Enterprise. Using automated configuration tools, data
migration accelerators and implementation templates, our Express service enables
our customers to migrate from entry-level applications such as Intuit QuickBooks
to Corio Financials in as little as two weeks.
CORIO IMPLEMENTATION PARTNER PROGRAM. The Corio Implementation Partner
Program, or CIPP, is a program whereby we train and certify third-party systems
integrators to use our FastLane and Express methodologies. The CIPP enables us
to scale our implementation capabilities through use of CIPP members. As of
March 31, 2000, CIPP members included Beacon Application Services, Broadiant,
Catalyst Resources, Cambridge Technology Partners, Acuent, eForce, Emerald
Solutions and Optimos. Collectively, our CIPP members have over 1,600 employees
capable of implementing our services.
CAP GEMINI ERNST & YOUNG U.S. LLC. Through our strategic alliance with Cap
Gemini Ernst & Young U.S. LLC, we have access to a large and diverse consulting
organization to provide implementation of the Corio Intelligent Enterprise to
our customers.
CIO SERVICES. Through our CIO Services program, our professional services
team provides our application management services customers with IT consulting
services in a number of strategic areas, including e-commerce. Our CIO Services
program frees our customers from the difficult and costly task of hiring and
retaining scarce chief information officer-level talent.
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STRATEGIC RELATIONSHIPS
A key element of our strategy is to establish and maintain a wide variety
of commercially beneficial strategic relationships. Among others, we have
established strategic relationships with the following third parties:
ENTERPRISE SOFTWARE VENDORS. We have established relationships with leading
software vendors to enable us to provide our customers with best-of-breed
enterprise software applications. We license software applications from leading
enterprise software application vendors, including BroadVision, Commerce One,
Moai, PeopleSoft, SAP and Siebel Systems. In addition, we have arrangements with
some of our enterprise software vendors that provide their sales people with
financial incentives to promote the Corio Intelligent Enterprise.
INFRASTRUCTURE SOFTWARE VENDORS. To assist us in providing our customers
with integrated services on a secure, hosted basis, we license third-party
technology from leading infrastructure software vendors such as Active Software,
BMC, ChainLink Technologies, Netegrity and Verisign, for incorporation into our
Orion technology platform.
DATA CENTER / NETWORK INFRASTRUCTURE PROVIDERS. We have built relationships
with leading data center and network infrastructure providers, such as
Concentric Network, to enable us to focus on our core businesses and to utilize
their expertise in data center management and network services provisioning.
CAP GEMINI ERNST & YOUNG U.S. LLC. We have entered into a strategic
alliance with Cap Gemini Ernst & Young U.S. LLC, whereby CGEY refers customers
to us and we engage in joint marketing and sales activities. Through our
relationship with CGEY, we believe we will be able to offer our services to a
broader range of emerging high-growth and middle-market companies and to scale
our business more rapidly.
RESEARCH AND DEVELOPMENT RELATIONSHIPS. We have entered into a strategic
relationship with Microsoft to build a joint development lab in Silicon Valley
to work on ASP hosting and deployment architecture using the Microsoft Windows
DNA platform. We also have a joint technology development relationship with Sun
Microsystems to optimize the delivery of our service offering on Sun
Microsystems' hardware platform.
TECHNOLOGY
Our technology platform, Orion, enables integration, automation and hosted
deployment of software applications and facilitates the customization of these
applications.
INTEGRATION. Orion enables integration of best-of-breed software
applications and provides customers a secure, central point of entry into these
applications. We are continuing to develop our technology to further enable the
integration of applications hosted by us as well as the integration of these
applications with those not hosted by us, such as those hosted by the customer
or another ASP. This capability is designed to increase the efficiency of a wide
range of our customers' business processes by combining the functionality of a
number of enterprise applications.
AUTOMATION. We continue to invest in our automation infrastructure to
enable us to rapidly implement software upgrades, patching and testing. Enhanced
automation will better enable us to scale the number of hosted applications we
can support. We have accomplished automation for a number of processes to date.
HOSTED DEPLOYMENT. We have developed, and continue to refine, technology
that allows us to deliver software applications to our customers effectively in
a multi-tenant environment over the Internet.
CONFIGURATION MANAGEMENT. We have developed, and continue to refine,
technology that allows us to track and manage modifications to the applications
and the environments used in the
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<PAGE> 50
Corio Intelligent Enterprise through a configuration management system. This
system manages changes that include extensions to software applications offered
through the Corio Intelligent Enterprise to meet the particular functionality
requirements of our customers, customizations, configuration changes, reporting
extensions and other modifications. This configuration management system allows
us to retain and manage these extensions and provide them to other customers
with similar customized functionality needs. By maintaining a library of these
solutions, we are able to provide our customers additional functionality at a
lower cost than if they were to build this customized functionality internally
or through a third party.
CUSTOMERS
As of March 31, 2000, we had 54 customers, of which 27 were operational on
our system. The following is a list of our 15 customers that, as of March 31,
2000, had the largest projected application management services revenues over
the life of their respective contracts with us:
<TABLE>
<S> <C>
BackOfficeWeb.com LoanCity.com
Broadiant MadeToOrder.com
Commodinet Participate.com
Enstar Networking Simplexis.com
Excite@Home SiteSmith
Extreme Networks Website Pros
IntraLinks ZEFER
LivePerson
</TABLE>
The following case studies illustrate how selected customers are currently
benefiting from our services.
CLARENT CORPORATION
COMPANY OVERVIEW: Clarent is a provider of IP telephone systems that enable
the simultaneous transmission of voice, fax and data over the Internet and
similar communications networks. Clarent has been our customer since January
1999.
BUSINESS CHALLENGE: Clarent was quickly outgrowing its existing entry-level
financial, accounting and management systems. Clarent's applications could not
accommodate their growing number of users, requiring employees to share systems
and causing delays in purchase order and payment processing throughout the
organization. Clarent's management believed that the company required a
best-of-breed, scalable solution to meet its IT infrastructure requirements, but
decided the cost and resources required to purchase, implement and support these
applications, as well as the disruption to management caused by a long
transition period, were prohibitive.
CORIO SOLUTION: We implemented Corio Financials, Distribution and
Manufacturing, powered by PeopleSoft, in under 12 weeks. By integrating multiple
services, we enabled the automation and streamlining of Clarent's business
processes. The applications we implemented are scalable, allowing Clarent to add
both users and functionality as Clarent's business grows and becomes more
complex. Clarent estimates that our solution will result in a total cost of
ownership savings of 46% over the life of the contract compared to an
internally-operated, less sophisticated solution that would have required an
upgrade to a best-of-breed application within two years.
EXCITE@HOME
COMPANY OVERVIEW: At Home Corporation, or Excite@Home, is a global media
company offering broadband Internet connectivity, personalized, web-based
content and targeted advertising services. Excite has been our customer since
November 1998. Excite@Home became a Corio customer in 2 phases:
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<PAGE> 51
Phase 1: Excite, Inc.
BUSINESS CHALLENGE: In January 1998, prior to its merger with @Home, Excite
acquired MatchLogic, an online advertising service. Excite needed to integrate
the two companies' accounting systems and decided that its own enterprise
software would soon be inadequate.
CORIO SOLUTION: We implemented Corio Financials, powered by PeopleSoft, in
13 weeks. This quickly integrated Excite's and MatchLogic's accounting systems
and gave Excite scalability that its former systems did not provide.
Phase 2: Excite@Home
BUSINESS CHALLENGE: Within 2 months of the completed Excite and MatchLogic
implementation, Excite announced its planned merger with @Home. After the
merger, Excite@Home's management focused on combining the merged company's
internal processes to more fully realize synergies. Excite@Home wanted to
minimize the integration challenges associated with its financial and human
resources applications, concentrate on its core operations and establish a
scalable and flexible software applications platform that could support future
growth. In addition, the company had difficulty finding talented IT personnel in
the very competitive Silicon Valley market necessary to implement, support and
maintain such a solution internally.
CORIO SOLUTION: After Excite's merger with @Home, we implemented Corio
Financials and Human Resources, powered by PeopleSoft, in 16 weeks. Our monthly
user-based pricing contract with Excite@Home provides Excite@Home with a
predictable yet flexible solution for addressing future growth opportunities.
Excite@Home estimates that our solution will result in a total cost of ownership
savings of at least 30% over the life of the contract compared to an
internally-operated, best-of-breed solution. In addition, Excite@Home recently
requested us to host Siebel Sales.
VERTICAL NETWORKS
COMPANY OVERVIEW: Vertical Networks is a leading developer of integrated
communications platforms, a new class of voice and data solutions designed to
simplify communications for branch offices and small businesses worldwide.
Vertical Networks has been our customer since March 1998.
BUSINESS CHALLENGE: Vertical Networks did not have an IT platform that
could support its growth and allow easy automation of its business processes.
Vertical Networks also relied on Flextronics, a contract manufacturer with whom
we have a strategic relationship, for the manufacturing of its products. The
combination of disparate internal software applications and an outsourced
manufacturing capability resulted in inefficiencies in order fulfillment and
bill processing for Vertical Networks and Flextronics.
CORIO SOLUTION: In under 10 weeks, we implemented Corio Financials and
Distribution, powered by PeopleSoft, and integrated these solutions into
Flextronics' manufacturing system. The implementation allowed Vertical Networks
to automate business processes ranging from order entry to invoicing. The
integration with Flextronics demonstrated the ability of our Orion platform to
integrate Corio-hosted and third-party-hosted applications successfully.
Vertical Networks estimates the total cost of ownership savings from our
solution over the life of the contract to be in excess of 60% compared to an
internally-operated solution.
SALES AND MARKETING
We sell and market our services primarily through a direct sales force.
Many of our software vendors and systems integrators also pass sales leads on to
us. In 1999, we expensed $11.9 million on sales and marketing activities,
excluding stock-based compensation. As of March 31, 2000, we had 101 sales and
marketing employees. Our sales organization is segmented by application
expertise and geographical location. We plan to establish regional offices
staffed with our IT experts to support our sales force. We intend to expand our
direct sales organization into all major U.S. markets
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and to expand our joint-sales efforts with third parties. We also intend to
extend our sales activities into international markets through our direct sales
force and through third parties.
We focus our marketing efforts on achieving brand recognition, market
awareness and lead generation. We market our services through magazine and
billboard advertising, directed advertising and targeted events, including
tradeshows, conferences and seminars. Our current customers provide references
and we feature customer recommendations in our magazine and billboard
advertising and other promotional activities.
RESEARCH AND DEVELOPMENT
In 1999, we expensed $3.2 million, excluding stock-based compensation, on
research and development. As of March 31, 2000, we had 65 employees in our
research and development team. Research and development capabilities are
essential to our strategy to enhance and expand the capabilities of our
services. We have invested significant resources in creating a structured
process for undertaking all our research and development and have recruited
engineers and software developers with relevant industry experience. When
appropriate, we also use third-party development firms to expand capacity and to
provide additional technical expertise. We have entered into a strategic
relationship with Microsoft to build a joint development lab in Silicon Valley
to work on ASP hosting and deployment architecture using the Microsoft Windows
DNA platform. We also have a joint technology development relationship with Sun
Microsystems to optimize the delivery of our service offering on Sun
Microsystems' hardware platform.
COMPETITION
We compete primarily on the basis of software functionality, total cost of
ownership, performance, service quality and security. Our current and potential
competitors primarily include:
- application service providers and business process outsourcers, such as
Applicast, AristaSoft, Breakaway Solutions, Interliant, NaviSite, Qwest
Cyber.Solutions, ReSourcePhoenix.com and USinternetworking;
- systems integrators, such as Andersen Consulting, Electronic Data Systems
and PricewaterhouseCoopers;
- Internet service providers and web hosting companies, such as Concentric
Network, DIGEX, Exodus Communications, Frontier Corporation, GTE
Internetworking, Worldcom and PSINet;
- software vendors, including J.D. Edwards, Microsoft, Oracle, PeopleSoft,
SAP, and Siebel Systems;
- major technology providers, such as Cisco Systems, IBM, Intel and Nortel
Networks;
- Internet portals, such as AOL, Excite@Home and Yahoo; and
- telecommunications companies.
The companies listed above may form strategic relationships with each other
to compete with us. These relationships may take the form of strategic
investments, joint-marketing agreements, licenses or other contractual
arrangements and may increase our competitors' ability to address customer needs
with their product and service offerings. In addition, we believe that there is
likely to be consolidation in our markets, which could lead to increased price
competition and other forms of competition.
It is possible that new competitors or alliances may emerge and gain market
share. These competitors could materially affect our ability to obtain new
contracts. Further, competitive pressure could require us to reduce the price of
our products and services, thus affecting our business, financial condition and
results of operations.
We believe that we can compete favorably against software vendors from
which we obtain our software in the event any of these vendors enter the ASP
market for at least two reasons. First, we
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believe we are more flexible than our independent software vendors, or ISVs, in
that we have established relationships with a variety of software vendors that
offer software applications within their specialty areas. By contrast, ISVs' ASP
strategies are typically limited to hosting their own applications which may not
provide the same breadth of application functionality and choice in applications
as those offered and provided by us. Second, we focus exclusively on being an
ASP and believe that companies with different focuses or whose businesses are
based largely on another strategy, such as licensing software, will lack the
focus and expertise necessary to compete favorably with us in the ASP market.
PROPRIETARY RIGHTS
Our principal proprietary rights relate to our Orion technology platform
and our trademarks. We also have developed and are developing applications and
application extensions for use internally and to offer to customers. We also
have trade secrets relating to our business processes and other confidential and
proprietary information.
We rely on a combination of copyright, trademark and trade secret
protection, confidentiality and nondisclosure agreements and licensing
arrangements to establish and protect our intellectual property rights. The
license agreements with our customers limit their rights to the technologies
that we offer and develop for our customers. In addition, we seek to avoid
disclosure of our trade secrets through a number of means, including requiring
those persons with access to our proprietary information to execute
nondisclosure agreements and restricting access to such information. We have
applied for the registration of the following trademarks: Corio, Express,
e-Hours and Orion. To date, we have not secured registration of any of our
marks. In addition, we currently have no patents and no patent applications
pending.
EMPLOYEES
As of March 31, 2000, we had 456 employees, including 101 in sales and
marketing, 65 in research and development, 91 in application management
services, 139 in professional services and 60 in general and administration.
None of our employees is represented by a labor union. We have never experienced
a work stoppage and believe our relationship with our employees is good.
FACILITIES
Our headquarters includes approximately 77,000 square feet in San Carlos,
California pursuant to a lease that expires in April 2010. We also sublease
approximately 36,000 square feet in Redwood City, California pursuant to a
sublease which expires with respect to 15,000 square feet in August 2000 and
with respect to the remainder in March 2002. We also have regional offices in
other U.S. locations.
We believe that our existing facilities are adequate to meet current
requirements and that additional or substitute space will be available as needed
to accommodate any expansion of operations.
LEGAL PROCEEDINGS
Although we are not currently a party to any litigation, we may from time
to time become involved in litigation arising in the ordinary course of our
business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of our directors and executive officers as of
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George Kadifa........................... 40 President, Chief Executive Officer and
Director
Jonathan J. Lee......................... 40 Founder, Chief Strategy Officer and Director
Eric J. Keller.......................... 47 Executive Vice President, Chief Financial
Officer
Bradford J. Boston...................... 46 Executive Vice President of Operations
John B. Ottman.......................... 42 Executive Vice President of Worldwide Markets
James T. Barrett........................ 42 Director
Aneel Bhusri............................ 34 Director
Vinod Khosla............................ 45 Director
Ted E. Schlein.......................... 36 Director
Roger S. Siboni......................... 46 Director
George J. Still, Jr. ................... 42 Director
</TABLE>
Messrs. Bhusri and Khosla are members of our compensation committee.
Messrs. Bhusri, Siboni and Still are members of our audit committee.
GEORGE KADIFA has served as our President, Chief Executive Officer and as a
director since August 1999. Prior to joining us, from August 1992 to August
1999, Mr. Kadifa was Group Vice President and later Senior Vice President of
Industrial Sector Worldwide at Oracle Corporation, a supplier of software for
information management. Mr. Kadifa holds a B.S. in Electrical Engineering from
the American University of Beirut, an M.S. in Electrical Engineering from the
California Institute of Technology and an M.B.A. from the Graduate School of
Business at the University of Chicago.
JONATHAN J. LEE is our founder and has served as our Chief Strategy Officer
since August 1999 and as a director since September 1998. Mr. Lee served as our
President from September 1998 to August 1999 and as our Chief Executive Officer
from September 1998 to February 1999 and from April 1999 to August 1999. From
October 1989 to September 1998, Mr. Lee served as Chief Executive Officer and
founder of DSCI, a provider of enterprise resource planning applications and our
predecessor company. Mr. Lee holds a B.S. in Accounting and Marketing from the
University of California at Berkeley and a B.S. in Information Management
Systems from the University of California at San Francisco. He is also an
alumnus of the Executive Program at the Graduate School of Business at Stanford
University.
ERIC J. KELLER has served as our Chief Financial Officer since February
2000. Prior to joining us, from January 1996 to June 1999, Mr. Keller served as
Chief Financial Officer at Aspect Communications Corporation, a provider of
customer relationship portals, and from June 1999 to February 2000 as an
executive advisor of Aspect. From June 1993 to January 1996, Mr. Keller served
as Chief Financial Officer of Ventritex, Inc. a manufacturer of medical devices.
Mr. Keller holds a B.S. in Industrial Relations from Cornell University and an
M.B.A. from the University of California at Berkeley.
BRADFORD J. BOSTON has served as our Executive Vice President of Operations
since July 2000. Prior to joining us, from June 1996 to July 2000, Mr. Boston
held various management positions at Sabre Holdings, Inc., a travel software
application provider, most recently as Senior Vice President. From September
1994 to June 1996, Mr. Boston served as Senior Vice President for Standards and
Information Processing at American Express Corporation. From 1980 to 1994, Mr.
Boston held various management positions at American Express, VISA
International, United Airlines and other corporations. Mr. Boston holds a B.S.
in Computer Science from the University of Illinois, Champaign-Urbana.
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JOHN B. OTTMAN has served as Executive Vice President of Worldwide Markets
since December 1999. Prior to joining us, from November 1989 to November 1999,
Mr. Ottman held various key management positions at Oracle Corporation, most
recently as Group Vice President of the Industrial Sector. Mr. Ottman's other
management positions at Oracle included Vice President, Global Alliances,
Regional Manager and Area Manager. Mr. Ottman holds a B.A. in History from
Denison University.
JAMES T. BARRETT has served as a director since July 2000. Mr. Barrett has
been affiliated with Ernst & Young since 1981, and currently serves as Director
of Global Operate. Mr. Barrett has held various key management positions at
Ernst & Young, including Area Director of Information Technology Services,
Global Director of Consumer Products and Retail Consulting and Director of
Product Industries. Mr. Barrett holds a B.B.A. in Accounting and Information
Systems from the University of Cincinnati.
ANEEL BHUSRI has served as a director since April 1999. Mr. Bhusri is a
general partner at Greylock Management, a venture capital firm, which he joined
in April 1999. Mr. Bhusri has been affiliated with PeopleSoft since August 1993,
initially as the company's Senior Vice President responsible for product
strategy, business development and marketing, and most recently as Vice
Chairman. He serves on the board of directors of PeopleSoft, Guru.com, HelloAsia
and Cameraworld.com. Mr. Bhusri holds a B.S. in Electrical Engineering from
Brown University and an M.B.A. from the Graduate School of Business at Stanford
University.
VINOD KHOSLA has served as a director since September 1998. Mr. Khosla is a
general partner at Kleiner Perkins Caufield & Byers, a venture capital firm,
which he joined in 1987. Mr. Khosla co-founded Daisy Systems. Mr. Khosla founded
and served as Chief Executive Officer at Sun Microsystems, Inc. Mr. Khosla
serves on the board of directors of Cerent Corporation, Concentric Network,
Excite Inc., Juniper Networks, Microprose, Nova Telecommunications, Total
Entertainment Network and Qwest Communications. Mr. Khosla holds a Bachelor of
Technology in Electrical Engineering from the Indian Institute of Technology, an
M.S. in Biomedical Engineering from Carnegie Mellon University and an M.B.A.
from the Graduate School of Business at Stanford University.
TED E. SCHLEIN has served as a director since September 1998. Mr. Schlein
is a general partner at Kleiner Perkins Caufield & Byers, which he joined in
November 1996. From June 1986 to October 1996, Mr. Schlein served in a variety
of executive positions at Symantec Corporation, a provider of Internet security
technology and business management technology solutions, most recently as Vice
President, Enterprise Products. Mr. Schlein serves on the board of directors of
Extensity and also serves on the board of directors of several private
companies, including weservehomes.com, eVolution, Portera Systems, Angara,
Linuxcare, WineShopper.com, Nonstop Solutions and Iron Planet. Mr. Schlein holds
a B.S. in economics from the University of Pennsylvania.
ROGER S. SIBONI has served as a director since July 1999. Mr. Siboni has
served as President, Chief Executive Officer and as a member of the board of
directors of E.piphany, a software company, since August 1998. Prior to joining
E.piphany, Mr. Siboni served, from October 1996 to July 1998, as Deputy Chairman
and Chief Operating Officer of KPMG Peat Marwick LLP, a member firm of KPMG
International, an accounting and consulting organization. Mr. Siboni also served
as National Managing Partner of KPMG's information and communications practice
from June 1993 to October 1996. He serves on the board of directors of Cadence
Design Systems, Inc., FileNET, Inc., Active Software and Pivotal Corporation.
Mr. Siboni holds a B.S. in Business Administration from the University of
California at Berkeley and is a Certified Public Accountant in New York and
California.
GEORGE J. STILL, JR. has served as a director since May 1999. Mr. Still is
a general partner at Norwest Venture Partners, a venture capital firm, which he
joined in October 1989, and is a managing partner of several partnerships of
Norwest Venture Partners. Norwest was the sole venture investor in PeopleSoft,
for which Mr. Still currently serves on the board of directors. Mr. Still was a
co-founder of PeopleMan and Verio. Mr. Still also serves as a director of
several private companies including Software Technologies Corp., Embark.com,
MetaPath Software International, Market-Touch,
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Rates.com, eForce, Inc. and Website Pros, Inc. Mr. Still received a B.S. from
Pennsylvania State University and an M.B.A. from the Amos Tuck School at
Dartmouth College.
Pursuant to our strategic alliance agreement with Cap Gemini Ernst & Young,
CGEY has the right to appoint an additional director to our board of directors.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors currently consists of seven directors. Upon the
completion of this offering, our board of directors will be divided into three
classes of directors who will serve in staggered three-year terms. As a result,
approximately one-third of the members of the board of directors will be elected
each year. Provisions in our bylaws and certificate of incorporation allow the
board of directors to fill vacancies on or increase the size of the board of
directors. These provisions, along with having a classified board of directors,
may make it difficult for our stockholders to remove incumbent directors and
fill vacancies with their own nominees to gain control of the board of
directors.
Messrs. Bhusri, Lee and Still will serve as Class I Directors, whose
initial term will expire at the 2001 annual meeting of stockholders. Messrs.
Kadifa and Schlein will serve as Class II Directors, whose initial term will
expire at the 2002 annual meeting of stockholders. Messrs. Khosla and Siboni
will serve as Class III Directors, whose initial term will expire at the 2003
annual meeting of stockholders.
BOARD COMMITTEES
In January 2000, our board designated a compensation committee and an audit
committee. Prior thereto, there were no such committees of the board. The
compensation committee, which consists of Messrs. Bhusri and Khosla, makes
recommendations to the board concerning the compensation of our officers and
directors and the administration of our 1998 Stock Plan and Employee Stock
Purchase Plan 2000. The audit committee, which consists of Messrs. Schlein,
Siboni and Still, reviews our financial controls, evaluates the scope of the
annual audit, reviews audit results, consults with management and our
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of our
internal accounting controls and financial affairs.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from us for their
services as members of our board of directors, although members are reimbursed
for expenses in connection with attendance at board of directors and committee
meetings. Directors are eligible to participate in our 1998 Stock Plan. In July
1999, Roger Siboni was granted the right to purchase 25,000 shares of common
stock and to early exercise 100,000 stock options granted to him in January
1999. Option grants to directors are at our discretion, and we have no specific
plans regarding the amounts to be granted to our directors in the future.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee currently consists of Messrs. Bhusri and Khosla.
Prior to the formation of the compensation committee, the board of directors
performed the functions typically assigned to a compensation committee. No
member of the compensation committee and none of our executive officers has a
relationship that would constitute an interlocking relationship with executive
officers and directors of another entity.
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EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation paid by us during the fiscal year ended December 31, 1999 to our
Chief Executive Officer and another executive officer, who earned more than
$100,000 during the fiscal year. In this prospectus, these individuals are
referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
------------------- SECURITIES
NAME AND POSITION SALARY BONUS UNDERLYING OPTIONS
----------------- -------- -------- -------------------
<S> <C> <C> <C>
George Kadifa............................................... $125,000 $ 0 2,209,975
President and Chief Executive Officer
Jonathan J. Lee............................................. $200,000 $100,000 0
Chief Strategy Officer
</TABLE>
Mr. Kadifa joined us as our President and Chief Executive Officer in August
1999 at an annualized base salary of $300,000 and a performance bonus of up to
$100,000. In addition to the executive officers discussed above, Ronald Clarke
joined us as our Chief Executive Officer in February 1999 and resigned in March
1999. We paid Mr. Clark $53,320 in salary and granted him an option to purchase
2,000,766 shares of our common stock. At the time Mr. Clarke resigned, however,
his options were cancelled pursuant to the terms of our 1998 Stock Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to George Kadifa, the only named
executive officer to receive option grants in fiscal 1999, information
concerning stock options granted during the fiscal year ended December 31, 1999.
The information regarding options granted as a percentage of total options
granted in the fiscal year is based upon options to purchase an aggregate of
10,527,391 shares of common stock that were granted, including to Mr. Kadifa, in
the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------------------------- AT
NUMBER OF ASSUMED ANNUAL RATE OF
SECURITIES PERCENT OF EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS PRICE OPTION TERM
OPTIONS GRANTED IN PER EXPIRATION -----------------------------
GRANTED FISCAL YEAR SHARE DATE 5% 10%
---------- ------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
George Kadifa................... 2,209,975 20.99% $0.40 08/02/09 $42,313,807 $67,901,282
</TABLE>
The potential realizable value is calculated based on the term of the
option at the time of grant, which is ten years, and the assumed initial public
offering price of $12.00. The assumed rates of appreciation are prescribed by
the Securities and Exchange Commission for illustrative purposes only and are
not intended to forecast or predict future stock prices. The potential
realizable value at 5% and 10% appreciation is calculated by assuming that the
initial public offering price 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 its appreciated price.
Mr. Kadifa's options have a ten year term and vest as to 25% of the shares
one year from the vesting commencement date and as to 1/48 of the shares at the
end of each month thereafter, subject to continued service as an employee or
consultant. In the event Mr. Kadifa is terminated involuntarily and without
cause during his first year of employment, 1/48 of the shares subject to his
option vest for each month he was employed with us. There were no option
exercises by our named executive
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officers for the year ended December 31, 1999 or unexercised in-the-money
options held by our named executive officers at December 31, 1999.
COMPENSATION PLANS
1998 Stock Plan
Our 1998 Stock Plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or the Code, and for the granting to employees, directors and
consultants of nonstatutory stock options and stock purchase rights, or SPRs.
The board of directors and the stockholders approved the 1998 Stock Plan in
September 1998. Unless terminated sooner, the 1998 Stock Plan will automatically
terminate in 2008. There are currently 18,500,000 shares reserved for issuance
under the plan. In addition, the 1998 Stock Plan provides for automatic annual
increases in the number of shares reserved for issuance under the plan, in an
amount each year equal to the lesser of:
- 6% of the outstanding shares on such date;
- 6,000,000 shares; and
- such lesser amount as may be determined by the board.
The 1998 Stock Plan may be administered by our board of directors or a
committee of the board, referred to as the administrator, which shall, in the
case of options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The administrator
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the board of directors has the authority to amend,
suspend or terminate the 1998 Stock Plan, provided that no such action may
impair the rights of any holder of an outstanding option or SPR granted under
the 1998 Stock Plan unless mutually agreed by the holder and the administrator.
Options and SPRs granted under the 1998 Stock Plan are not generally
transferable by the optionee, and each option and SPR is exercisable during the
lifetime of the optionee only by the optionee. Vested options granted under the
1998 Stock Plan must generally be exercised within three months of the end of an
optionee's status as an employee or consultant of us, or within twelve months
after an optionee's termination by death or disability, but in no event later
than the expiration of the option's ten year term. In the case of SPRs, unless
the administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's services with us for any reason including death
or disability. The purchase price for shares repurchased under the restricted
stock purchase agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to us. The
repurchase option shall lapse at a rate determined by the administrator. The
exercise price of all incentive stock options granted under the 1998 Stock Plan
must be no less than 110% of the fair market value per share on the date of the
grant for employees who own stock representing more than 10% of the voting power
of all classes of our stock, and for all other employees the exercise price must
be at least equal to the fair market value of the common stock on the date of
grant. The exercise price of nonstatutory stock options and SPRs granted under
the 1998 Stock Plan is determined by the administrator. With respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be no less than 110% of the fair market value per share on the date
of the grant for service providers who own stock representing more than 10% of
the voting power of all classes of our stock, and for all other service
providers the exercise price must be no less than 85% of the fair market value
of the common stock on the date of grant. The term of incentive stock options
granted to any participant who owns stock representing more than 10% of the
voting
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<PAGE> 59
power of all classes of our stock must not exceed five years. The term of all
other options granted under the 1998 Stock Plan may not exceed ten years.
The 1998 Stock Plan provides that in the event of a merger with or into
another corporation or a sale of substantially all of our assets, each option or
right shall be assumed or an equivalent option or right substituted by the
successor corporation. If the outstanding options or rights are not assumed or
substituted, the administrator shall notify the optionee that the option or SPR
will be fully exercisable as to all of the optioned stock, including shares as
to which it would not otherwise be exercisable for a period of at least 15 days
from the date of notice, and that the option or SPR will terminate upon the
expiration of such period.
Employee Stock Purchase Plan 2000
Our board and stockholders adopted our Employee Stock Purchase Plan 2000,
or the Purchase Plan, in February 2000, and the Purchase Plan will become
effective upon the closing of this offering. A total of 1,000,000 shares of
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan provides for automatic annual increases in the number of shares
reserved for issuance under the Purchase Plan, in an amount each year equal to
the lesser of:
- 2.5% of the outstanding shares on such date;
- 2,500,000 shares; and
- such lesser amount as may be determined by the board.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, generally contains six month offering periods, during which an option
granted under the Purchase Plan may be exercised. The offering periods generally
start on the first trading day on or after February 1 and August 1 of each year,
except for the first such offering period. The first offering period commences
on the first trading day on or after the effective date of this offering and
ends on the last trading day on or before January 31, 2001.
Employees are eligible to participate in the Purchase Plan if they are
customarily employed by us for at least 20 hours per week and more than five
months in any calendar year. However, any employee who immediately after a grant
owns stock possessing 5% or more of the total combined voting power or value of
all classes of our capital stock, or whose rights to purchase stock under all of
our employee stock purchase plans accrues at a rate which exceeds $25,000 worth
of stock for each calendar year may be not be granted an option to purchase
stock under the Purchase Plan. The Purchase Plan permits participants to
purchase common stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's total
compensation including base straight time gross earnings, bonuses and
commissions, overtime, shift premium payments, incentive payments and other
compensation. The maximum aggregate number of shares that may be issued to
employees during the first offering period is 2% of the then outstanding shares
of capital stock on the first day of such period; thereafter, the maximum number
of shares that may be issued to employees during a single offering period is
1.5% of the outstanding shares of capital stock on the first day of the offering
period.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is generally 85% of the lower of the fair
market value of the common stock at the beginning or the end of the offering
period. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us.
Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Purchase Plan. The Purchase Plan provides that, in
the event of a merger with or into another corporation or a sale of
substantially
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<PAGE> 60
all of our assets, each outstanding option may be assumed or substituted for by
the successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the offering period then in progress
will be shortened and a new exercise date will be set. The Purchase Plan will
terminate in 2010. The Purchase Plan is administered by the board of directors
or a committee of the board, and the board of directors has the authority to
amend or terminate the Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the Purchase Plan.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for any liability
arising with respect to:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- any transaction from which the director derived an improper personal
benefit; or
- unlawful payments of dividends or unlawful stock repurchases or
recissions.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recission.
Our certificate of incorporation further provides that we are authorized to
indemnify our directors and executive officers and may indemnify our other
officers and employees and agents to the fullest extent permitted by Delaware
law. We believe that indemnification under our certificate of incorporation
covers negligence and gross negligence on the part of indemnified parties. Our
bylaws permit us to secure insurance on behalf of any officer, employee or other
agent for any liability arising out of his or her actions in their capacity as
an officer, director, employee or other agent, regardless of whether we would
have the power to indemnify him or her under Delaware law.
In addition to indemnification provided for in our certificate of
incorporation, we have entered into agreements to indemnify our directors and
officers. These agreements, among other things, require us to indemnify these
directors and officers for certain expenses, including attorneys' fees,
judgments, fines and settlement amounts incurred by these persons in any action
or proceeding, including any action by or in our right, arising out of that
person's services as a director or officer of us, any subsidiary of ours or any
other company or enterprise to which the person provides services at our
request.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may be adversely affected to the
extent we pay the costs of settlement or damage awards against our directors and
officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification would be
required or permitted. We are not aware of any pending or threatened litigation
or proceeding that might result in a claim for such indemnification. We believe
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
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<PAGE> 61
CERTAIN TRANSACTIONS
Each of the transactions described in this section has terms that are no
less favorable to us than we could obtain from disinterested third parties.
PREFERRED STOCK SALES
SERIES A PREFERRED STOCK. In September 1998, we completed a number of
transactions which included, among other things, the following:
- Jonathan Lee, through a trust for which he is a trustee, contributed all
of the outstanding stock of DSCI, a predecessor to us, in exchange for:
- 3,492,000 shares of our series A preferred stock at a price of
$0.4706 per share, of which 1,746,000 shares were subject to our
right to repurchase the shares at cost, lapsing over three years;
- a promissory note in the aggregate principal amount of approximately
$2.3 million; and
- an aggregate of $1.6 million in cash.
- Entities affiliated with Kleiner, Perkins, Caufield & Byers, or KPC&B,
purchased 8,500,000 shares of series A preferred stock at a price of
$0.4706 per share.
- Jonathan Lee, through a trust of which he is a trustee, granted KPC&B a
call option to purchase 1,600,000 shares of series A preferred stock at
an aggregate purchase price of $5.0 million, as more fully described
below.
- The holders of our series A preferred stock were allocated rights to
three seats on our board of directors, currently filled by Vinod Khosla
and Ted Schlein, in connection with the investment by KPC&B, and by
Jonathan Lee. These rights expire upon the closing of this offering.
CALL OPTION AGREEMENT. In September 1998, KPC&B, Jonathan Lee, through a
trust of which he is a trustee, and we entered into a call option agreement.
Under the call option agreement, Mr. Lee's trust granted KPC&B a call option to
purchase up to 1,600,000 shares of our series A preferred stock held by Mr.
Lee's trust at an aggregate exercise price of $5.0 million. This option required
us to release a portion of our repurchase right to the extent KPC&B exercised
the option. On February 17, 2000, KPC&B exercised its call option for the entire
1,600,000 shares of series A preferred stock, and we released from our
repurchase right 422,400 shares of series A preferred stock held by Mr. Lee's
trust.
SERIES B PREFERRED STOCK. In April 1999 and May 1999, we sold 10,639,842
shares of our series B preferred stock at a price of $2.00 per share, to raise
capital to finance our operations. The holders of our series B preferred stock
were allotted two seats on our board of directors, currently filled by George J.
Still, Jr. and Aneel Bhusri.
SERIES C PREFERRED STOCK. In October, November and December 1999, we sold
7,104,621 shares of our series C preferred stock at a price of $6.50 per share
to raise capital to finance our operations. Concurrent with this transaction,
indebtedness aggregating $1.0 million in principal amount previously due to Mr.
Lee from us pursuant to the note referenced above was converted by Mr. Lee into
153,846 shares of our series C preferred stock. In October 1999, we issued
warrants to purchase 307,692 shares of our series C preferred stock at an
exercise price of $6.50 per share. In December 1999, we also issued warrants to
purchase 43,077 shares of our series C preferred stock, if this offering is
consummated on or before June 30, 2000, or warrants to purchase 64,615 shares of
our series C preferred stock if this offering is consummated between July 1,
2000 and September 30, 2000, in each case, at an exercise price of $6.50 per
share.
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<PAGE> 62
The following 5% stockholders purchased shares in the following preferred
stock financings:
<TABLE>
<CAPTION>
NO. OF
NO. OF NO. OF NO. OF SHARES OF AGGREGATE
SHARES OF SHARES OF SHARES OF SENIOR VALUE OF
SERIES A SERIES B SERIES C SERIES E TOTAL AGGREGATE PREFERRED
PURCHASER PREFERRED PREFERRED PREFERRED PREFERRED SHARES CONSIDERATION STOCK
--------- --------- --------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Funds affiliated with Kleiner
Perkins Caufield & Byers:
KPCB Java Fund.................. 4,250,000 500,000 212,308 -- 4,962,308 $ 4,380,011 $55,167,685
Kleiner Perkins Caufield & Byers
VIII, L.P. ................... 3,816,500 449,000 200,674 -- 4,466,174 3,998,388 49,595,700
KPCB VIII Founders Fund L.P. ... 221,000 26,000 11,634 -- 258,634 231,621 2,871,987
KPCB Information Sciences
Zaibatsu Fund II, L.P......... 212,500 25,000 -- 237,500 150,000 2,700,000
Jonathan and Su Lee as Trustees of
the Lee Revocable Trust......... 3,492,000 -- 153,846 -- 3,645,846 2,643,335 41,106,817
Norwest Venture Partners VII...... -- 4,000,000 198,462 -- 4,198,462 9,290,003 41,091,541
Greylock IX Limited
Partnership..................... -- 2,500,000 124,615 -- 2,624,615 5,809,998 25,685,382
Dell U.S.A., L.P.................. -- -- -- 2,857,143 2,857,143 25,000,000 9,285,716
</TABLE>
In the table above, the Aggregate Value of Preferred Stock column
represents the difference between the aggregate consideration paid for the
preferred stock by each Purchaser noted above and the value of this stock after
this offering, assuming the midpoint of the offering range of $12.00 per share.
In connection with the above transactions, we entered into agreements with
the investors providing for registration rights with respect to these shares.
For more information regarding this agreement, see "Description of Capital Stock
-- Registration Rights."
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with officers and directors
containing provisions which may require us, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as officers or directors. See "Management -- Limitation of Liability and
Indemnification Matters" for more information regarding indemnification of our
officers and directors.
EXECUTIVE OFFICER EMPLOYMENT ARRANGEMENTS
In June 1999, we entered into an offer letter with George Kadifa, our
President and Chief Executive Officer, pursuant to which we agreed to pay Mr.
Kadifa an initial annual salary of $300,000 and a performance bonus of up to
$100,000 to be paid on the achievement of agreed-upon milestones. Mr. Kadifa's
employment with us is on an at-will basis. Pursuant to a separate change in
control agreement between Corio and Mr. Kadifa, in the event that we terminate
Mr. Kadifa's employment within one year following a change in control, Mr.
Kadifa is entitled to an additional year of vesting of his options.
In September 1998, we entered into an employment agreement with Jonathan
Lee, our founder and Chief Strategy Officer, pursuant to which we agreed to pay
Mr. Lee an annual salary of $200,000 and an annualized performance bonus, paid
quarterly, of up to $100,000 based upon achievement of agreed-upon milestones.
Mr. Lee's employment with us is on an at-will basis. Under the employment
agreement, if Mr. Lee is terminated involuntarily for any reason other than for
cause or Mr. Lee voluntarily terminates his employment with us for good reason,
Mr. Lee is entitled to receive a severance payment equal to nine months' base
salary as then in effect, plus continuing health payments for nine months. Also
under the employment agreement, in the event that Mr. Lee voluntarily terminates
his employment with us within six months following a change in control, our
repurchase option in respect of any unvested shares of our common stock shall
lapse in full and Mr. Lee shall become fully vested as to such shares.
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<PAGE> 63
In February 2000, we entered into an offer letter with Eric Keller, our
Executive Vice President and Chief Financial Officer, pursuant to which we
agreed to pay Mr. Keller an annual salary of $200,000 and an annual bonus of up
to $60,000. Mr. Keller's employment with us is on an at-will basis. Pursuant to
a separate change in control agreement between Corio and Mr. Keller, in the
event that we terminate Mr. Keller's employment within one year following a
change in control, Mr. Keller is entitled to an additional year of vesting of
his options.
In June 2000, we entered into an offer letter with Bradford Boston, our
Executive Vice President of Operations, pursuant to which we agreed to pay Mr.
Boston an annual salary of $275,000 and an annual bonus of up to $100,000. Mr.
Boston's employment with us in on an at-will basis. Pursuant to a separate
change in control agreement we expect to enter into with Mr. Boston in the near
term, in the event that we terminate Mr. Boston's employment within one year
following a change in control, Mr. Boston is entitled to an additional year of
vesting of his options.
In November 1999, we entered into an offer letter with John Ottman, our
Executive Vice President of Worldwide Markets, pursuant to which we agreed to
pay Mr. Ottman an annual salary of $200,000 and a bonus of up to $100,000. Mr.
Ottman's employment with us is on an at-will basis. Pursuant to a separate
change in control agreement between Corio and Mr. Ottman, in the event that we
terminate Mr. Ottman's employment within one year following a change in control,
Mr. Ottman is entitled to an additional year of vesting of his options.
PEOPLESOFT AGREEMENTS
In January 1999, we entered into an outsourcer alliance agreement with
PeopleSoft for a software license to offer PeopleSoft software to our customers
and for other rights, and in March 1999, we entered into a software license and
services agreement with PeopleSoft for a license to use PeopleSoft software
internally. Two of our directors, Aneel Bhusri and George Still, are also
members of the board of directors of PeopleSoft. Pursuant to the agreements, we
paid a total of approximately $7.5 million to PeopleSoft in 1999, and as of
December 31, 1999 we had an accrued liability to PeopleSoft pursuant to these
agreements of approximately $1.8 million.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of May 31, 2000 for:
- each person who we know to beneficially own more than 5% of our common
stock,
- each of our directors;
- each of the named executive officers; and
- all directors and executive officers as a group.
For purposes of determining the numbers of shares beneficially owned in the
table below, beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of our common stock subject to options or warrants held by that person
that are currently exercisable or exercisable within 60 days of May 31, 2000 are
deemed outstanding. Those shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person. Percentage
ownership before offering is based on 39,030,587 shares of common stock
outstanding at May 31, 2000, assuming the conversion of all outstanding shares
of preferred stock into common stock and a per share offering price of $12.00.
For purposes of determining the number of shares outstanding in the table
below, we have assumed that the underwriters have not exercised their
over-allotment option. The percentage of shares outstanding after the offering
indicated in the table below assumes an initial public offering price of $12.00
per share, the mid-point of the public offering price range.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
OUTSTANDING
NUMBER OF SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ---------------- -------- --------
<S> <C> <C> <C>
Entities affiliated with Kleiner Perkins Caufield &
Byers, Vinod Khosla and Ted Schlein(1)................ 11,524,616 29.5 23.5
2750 Sand Hill Road
Menlo Park, CA 94025
Cap Gemini Ernst & Young U.S. LLC and James
Barrett(2)............................................ 4,666,666 12.0 9.5
1114 Avenue of the Americas, 29th Floor
New York, NY 10036
Norwest Venture Partners VII and George J. Still,
Jr.(3)................................................ 4,198,462 10.8 8.6
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301-1426
Dell U.S.A., L.P.(4).................................... 2,853,881 7.3 5.8
One Dell Way
Round Rock, TX 78682
Greylock IX Limited Partnership and Aneel Bhusri(5)..... 2,624,615 6.7 5.4
755 Page Mill Road
Building A, Suite 100
Palo Alto, CA 94304
George Kadifa........................................... 109,231 * *
Jonathan and Su Lee as trustees of the Lee Revocable
Trust and Jonathan Lee(6)............................. 2,045,846 5.2 4.2
Roger Siboni(7)......................................... 125,000 * *
All executive officers and directors as a group
(9 persons)(8)........................................ 25,823,007 66.2 52.7
</TABLE>
---------------
* Less than 1% of the outstanding shares of common stock.
(1) Consists of 5,762,308 shares held by KPCB Java Fund, L.P., 5,184,574
shares held by Kleiner Perkins Caufield & Byers VIII, L.P., 300,234
shares held by KPCB VIII Founders
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<PAGE> 65
Fund, L.P. and 277,500 shares held by KPCB Information Sciences Fund
Zaibatsu Fund II, L.P. Both Vinod Khosla and Ted Schlein are members of
our board of directors and general partners of Kleiner Perkins Caufield
& Byers. Mr. Khosla and Mr. Schlein disclaim beneficial ownership of
the shares held by the funds affiliated with Kleiner Perkins Caufield &
Byers except to the extent of their pecuniary interest therein. The
following natural persons exercise voting and/or dispositive powers for
the shares held by KPCB Information Science Zaibatsu Fund II, L.P.:
Brook Byers, John Doerr, Vinod Khosla, Joseph Lacob, Kevin Compton,
W.S. McKinsey and William Hearst. The following natural persons
exercise voting rights and/or dispositive powers for the shares held by
the KPCB Java Fund, L.P., Kleiner Perkins Caufield & Byers VIII, L.P.
and Kleiner Perkins Caufield & Byers Founders Fund, L.P.: Brook Byers,
John Doerr, James Lally, Floyd Kvamme, Vinod Khosla, Joseph Lacob,
Bernard Lacroute, Kevin Compton, W.S. McKinsey and William Hearst.
(2) Consists of a right to receive warrants to acquire 4,666,666 shares
within ninety (90) days of this offering held by Cap Gemini Ernst &
Young U.S. LLC, CGEY. CGEY may exercise all four warrants by means of
cash payment in an amount equal to the exercise price or pursuant to
net issue exercise whereby CGEY would receive shares equal to the value
of the warrant. Mr. Barrett disclaims beneficial ownership of the
shares held by CGEY except to the extent of his pecuniary interest
therein. The following natural persons exercise voting and/or
dispositive powers over the shares issuable upon the exercise of the
warrant: Geoff Unwin, William Wartluft and Mike Meyer.
(3) 4,198,462 shares are held by Norwest Venture Partners VII. George J.
Still, Jr. is a member of our board of directors and a general partner
of Norwest Venture Partners VII. Mr. Still disclaims beneficial
ownership of the shares held by the funds affiliated with Norwest
Venture Partners VII except to the extent of his pecuniary interest
therein. The following natural persons exercise voting and/or
dispositive powers for the shares held by Norwest Venture Partners VII:
George Still, Jr. and Promod Hague.
(4) 2,853,881 shares are held by Dell U.S.A., L.P. No natural person
exercises voting and/or dispositive powers over the shares held by Dell
U.S.A., L.P.
(5) 2,624,615 shares are held by Greylock IX Limited Partnership. Aneel
Bhusri is a member of our board of directors and a general partner of
Greylock. Mr. Bhusri disclaims beneficial ownership of the shares held
by the funds affiliated with Greylock except to the extent of his
pecuniary interest therein. The following natural persons exercise
voting and/or dispositive powers for the shares held by Greylock IX
Limited Partnership: Aneel Bhusri, Howard E. Cox, Jr., Roger L. Evans,
Charles M. Hazard, Jr., William W. Helman, William S. Kaiser, Henry F.
McCance and David N. Strohm.
(6) 2,045,846 shares are held by the Jonathan and Su Lee Revocable Trust.
Jonathan Lee is a member of our board of directors and our Chief
Strategy Officer. Includes 450,600 shares subject to a right of
repurchase in our favor which lapses over a period of time. Also
includes 90,000 shares held by the Jessica E.M. Lee Revocable Trust and
90,000 shares held by the Justin W.Y. Lee Revocable Trust. Jonathan and
Su Lee, as trustees of Lee Revocable Trust and Jonathan Lee disclaim
beneficial ownership of the shares held by the Jessica E.M. Lee
Revocable Trust and by the Justin W.Y. Lee Revocable Trust. Jonathan
Lee and Su Lee are the natural persons who exercise voting and/or
dispositive powers for the shares held by the Jonathan and Su Lee
Revocable Trust.
(7) 125,000 shares are held by Roger Siboni. Mr. Siboni is a member of our
board of directors. Of this amount, 88,542 shares are subject to a
right of repurchase in our favor which lapses over a period of time.
(8) Includes 667,713 shares subject to a right of repurchase in our favor
which lapses over a period of time.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock as of May 31, 2000 consisted of 138,000,000
shares of common stock, and 44,127,000 shares of preferred stock. As of May 31,
2000, there were outstanding 2,844,331 shares of common stock and 36,186,256
shares of preferred stock. These shares were held of record by a total of 101
stockholders.
Upon the closing of this offering:
- our certificate of incorporation will be amended and restated to provide
for total authorized capital consisting of 200,000,000 shares of common
stock and 10,000,000 shares of preferred stock; and
- all shares of preferred stock will convert into common stock, and a total
of 49,030,587 shares of common stock and no shares of preferred stock
will be outstanding, assuming no exercise of the underwriters'
over-allotment option.
Common Stock
The holders of our common stock are entitled to receive dividends as may be
declared by our board of directors and paid out of legally available funds.
Holders of shares of common stock are entitled to one vote per share upon all
matters upon which stockholders have the right to vote. Cumulative voting of
shares is not permitted. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of our company, the holders of our common stock are
entitled to receive and share ratably in all assets remaining available for
distribution to stockholders after payment of any preferential amounts to which
the holders of preferred stock may be entitled. Our common stock has no
preemptive rights and is not redeemable, assessable or entitled to the benefits
of any sinking fund. Shares of our common stock are not convertible into any
other security. All outstanding shares of our common stock are, and the common
stock to be issued in this offering will be, validly issued, fully paid and
nonassessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of preferred
stock will automatically convert into one share of common stock, except for the
outstanding shares of senior series E mandatorily redeemable preferred stock.
The outstanding shares of senior series E mandatorily redeemable preferred stock
will, assuming this offering closes before January 1, 2001, convert into shares
of common stock at a discount of 27% to the per share offering price. In certain
circumstances, if we close a private equity financing prior to the consummation
of this offering, the senior series E mandatorily redeemable preferred stock
will be convertible into shares of series D preferred stock at a discount to the
per share offering price in the private equity financing.
Pursuant to an amended and restated certificate of incorporation to be
filed upon the closing date, a total of 10,000,000 shares of preferred stock
will be authorized for issuance, none of which has been designated in any
series. Our board of directors is authorized, without further stockholder
action, to authorize and issue any of the 10,000,000 undesignated shares of
preferred stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, preemption
rights, redemption rights and terms, including sinking fund provisions and
certain other rights and preferences of such shares of our preferred stock. The
issuance of any class or series of preferred stock could adversely affect the
rights of the holders of common stock by restricting dividends on, diluting the
power of, impairing the liquidation rights of common stock, or delaying,
deferring or preventing a change in control of us. We have no present plans to
issue any additional preferred stock.
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<PAGE> 67
WARRANTS
Debt-Related Warrants
In connection with debt arrangements, we issued to Comdisco warrants to
purchase a total of 681,213 shares of series A preferred stock at an exercise
price of $1.24 per share on December 21, 1998. Following the closing of this
offering, the warrants automatically will become exercisable for a similar
number of shares of common stock at the same exercise price per share. Comdisco
may exercise this warrant by means of a cash payment in an amount equal to the
exercise price or, in the event the common stock is publicly traded, a net issue
exercise whereby Comdisco would receive shares equal to the value of the
warrant. The warrants expire upon the earlier to occur of:
- December 21, 2005;
- 3 years after the effective date of our initial public offering; or
- a change in control of Corio.
In connection with our equipment lease line of credit with Finova Capital
Corporation, on April 19, 2000 we issued Finova a warrant to purchase $100,000
of common stock at an exercise price per share equal to 90% of the price per
share of our common stock in this offering. Finova may exercise this amount in
whole or in part at any time and from time to time after this offering by means
of cash payment in an amount equal to the exercise price or by means of a net
issue exercise whereby Finova would receive shares equal to the value of the
warrant. The warrant expires in April 2005.
In connection with a guarantee for our new headquarters, on December 29,
1999 we issued to Comdisco a warrant to purchase up to a certain percentage of
$7,000,000 divided by the exercise price of $6.50 per share of series C
preferred stock. Following the closing of this offering, the warrants
automatically will become exercisable for a similar number of shares of common
stock at the same exercise price per share. Comdisco may exercise this warrant
by means of a cash payment in an amount equal to the exercise price or in the
event the common stock is publicly traded, a net issue exercise whereby Comdisco
would receive shares equal to the value of the warrant. The warrants expire upon
the earlier to occur of:
- December 27, 2006;
- 3 years after the effective date of our initial public offering; or
- a change in control of our company.
Real Estate Lease-Related Warrants
In connection with the lease for our new headquarters, we issued to Spieker
Properties, L.P. a warrant to purchase a total of 50,000 shares of common stock
at an exercise price of $6.50 per share on October 15, 1999. Following the
closing of this offering, the warrants automatically will become exercisable for
a similar number of shares of common stock at the same exercise price per share.
Spieker Properties, L.P. may exercise this warrant by means of a cash payment in
an amount equal to the exercise price or in the event the common stock is
publicly traded, a net issue exercise whereby Spieker Properties, L.P. would
receive shares equal to the value of the warrant. The warrants expire upon the
earlier to occur of December 31, 2001 or change in control of Corio.
Vendor Warrants
In connection with a hosting agreement, we issued to Concentric Network a
warrant to purchase a total of 153,846 shares of series C preferred stock at an
exercise price of $6.50 per share on October 29, 1999. Following the closing of
this offering, the warrants automatically will become exercisable for a similar
number of shares of common stock at the same exercise price per share.
Concentric Network may exercise such warrant by means of a cash payment in an
amount equal to the exercise price or in the event the common stock is publicly
traded, a net issue exercise whereby
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<PAGE> 68
Concentric Network would receive shares equal to the value of the warrant. The
warrants expire upon the earlier to occur of October 29, 2001 or change in
control of Corio.
In connection with a hosting license agreement, we issued to Siebel
Systems, Inc. a warrant to purchase a total of 153,846 shares of series C
preferred stock at an exercise price of $6.50 per share on October 29, 1999.
Following the closing of this offering, the warrants automatically will become
exercisable for a similar number of shares of common stock at the same exercise
price per share. Siebel Systems, Inc. may exercise this warrant by means of a
cash payment in an amount equal to the exercise price or in the event the common
stock is publicly traded, a net issue exercise whereby Siebel Systems, Inc.
would receive shares equal to the value of the warrant. The warrants expire upon
the earlier to occur of October 29, 2002 or change in control of Corio.
Cap Gemini Ernst & Young U.S. LLC Warrants
As part of our strategic alliance with Cap Gemini Ernst & Young U.S. LLC,
CGEY has been assigned and now holds four warrants to purchase up to 7,000,000
shares of our common stock at an exercise price of $6.50 per share. CGEY may
exercise the first of these warrants to acquire 4,666,666 shares of our common
stock during the 90 day period following this offering. The second, third and
fourth warrants become exercisable, respectively, upon the achievement of target
volume revenues resulting from referrals by CGEY in each of our 2000, 2001 and
2002 fiscal years. The second, third and fourth warrants may be exercised to
acquire up to 933,333, 933,333, and 466,667 shares of our common stock,
respectively. CGEY may exercise all four warrants by means of cash payment in an
amount equal to the exercise price or pursuant to net issuance exercise whereby
CGEY would receive shares equal to the value of the warrant. The warrants are
subject to cancellation or repurchase in whole or in part under circumstances
such as CGEY breaching a material provision of the agreement.
REGISTRATION RIGHTS
The holders of approximately 35,957,922 shares of outstanding common stock,
assuming an initial public offering price of $12.00 per share and the conversion
of all outstanding preferred stock and warrants to purchase preferred stock
convertible into 1,031,982 shares of our common stock, will have registration
rights under the Securities Act with respect to their shares of common stock.
Under the terms of the Amended and Restated Investor Rights Agreement dated
April 20, 2000, if we propose to register any of our common stock under the
Securities Act, the holders of the registrable securities are entitled to notice
of the registration and have the right to include their registrable securities
in the registration. However, the underwriters have certain rights to limit the
number of shares included in any registration. Beginning 180 days after the
closing of the offering, the holders of at least 40% of the registrable
securities have the right to require us on no more than two occasions, to file a
registration statement under the Securities Act in order to register all or any
part of their registrable securities, subject to conditions and limitations. We
may in certain circumstances defer these registrations, and the underwriters
have the right to limit, and in the case of our initial public offering, to
exclude entirely, the number of shares included in these registrations. Further,
the holders of registrable securities may require us to register all or any
portion of their registrable securities on Form S-3, when such form becomes
available to us, subject to conditions and limitations.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Provisions of our certificate of incorporation, bylaws and Delaware law,
described below, may have the effect of delaying, deferring or discouraging
another person from acquiring control of our company.
Certificate of Incorporation and Bylaws
Our certificate of incorporation permits our board to issue up to
10,000,000 shares of preferred stock without stockholder approval. The issuance
of a substantial number of shares of preferred stock
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<PAGE> 69
could delay or prevent an acquisition. Additional provisions of our certificate
of incorporation that may delay or prevent an acquisition include a staggered
board, advance notice procedures for stockholders to nominate candidates for
election as directors, authorization of our board to alter the number of
directors without stockholder approval and lack of cumulative voting. Our bylaws
limit the ability of our stockholders to call a special meeting and do not
permit the stockholders to act by written consent. These provisions of our
certificate of incorporation and bylaws are designed to enhance the likelihood
of continuity and stability of our board of directors. Accordingly, these
provisions may have the effect of preventing, discouraging or delaying any
potential acquisition proposals or changes in the control of our company and of
preventing changes in our management.
Effect of Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law
which, subject to exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that the stockholder became an interested stockholder,
unless:
- the transaction is approved by the board of directors prior to the date
the interested stockholder attained such status;
- upon the closing of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Wells Fargo
Shareowner Services.
LISTING
We have been approved to list our common stock on the Nasdaq National
Market under the symbol "CRIO".
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<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 49,030,587 shares of common
stock outstanding. Of these shares, the 10,000,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. Substantially all shares of our stock outstanding prior to this
offering are subject to 180-day lock-up agreements with the underwriters, and
may not be sold in the public market prior to the expiration of the lock-up
agreements except in specified circumstances. The 180-day restriction will
terminate as to 15% of the shares subject to the restriction after 90 days and
20% of the shares subject to the restriction after 120 days after the date of
this prospectus, subject to delays as a result of the timing of our earnings
releases and compliance with our insider trading policies, in the event that, at
such dates, the reported last sale price of our common stock on the Nasdaq
National Market is at least twice the initial public offering price specified in
this prospectus for a certain period of time ending on such dates. In addition,
Goldman, Sachs & Co. may, at its discretion, release the shares subject to the
lock-up agreements in whole or in part at any time without prior public notice.
However, Goldman, Sachs & Co. has no current plans to effect such a release.
<TABLE>
<CAPTION>
NUMBER OF SHARES
ELIGIBLE FOR SALE COMMENT
----------------- -------
<C> <S>
10,000,000 After the date of this prospectus, freely tradable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day lock-up.
3,527,360 After 90 days from the date of this prospectus, the lock-up
may, in certain circumstances, terminate in part, resulting
in these shares becoming saleable under Rule 144, subject in
some cases to volume limitations, Rule 144(k) or Rule 701,
subject in some cases to a right of repurchase by Corio.
4,703,146 After 120 days from the date of this prospectus, the lock-up
may, in certain circumstances, terminate in part, resulting
in these shares becoming saleable under Rule 144, subject in
some cases to volume limitations, Rule 144(k), or Rule 701,
subject in some cases to a right of repurchase by Corio.
23,515,732 After 180 days from the date of this prospectus, the 180-day
lock-up terminates in its entirety and these shares are
saleable under Rule 144, subject in some cases to volume
limitations, Rule 144(k) or Rule 701, subject in some cases
to a right of repurchase by Corio.
15,338,321 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not
yet saleable under Rule 144.
</TABLE>
RULE 144
In general, under Rule 144 a person, or persons whose shares are
aggregated, who has beneficially owned shares for at least one year is entitled
to sell within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of
- 1% of the then outstanding shares of our common stock, or approximately
shares immediately after this offering, or
- the average weekly trading volume during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to
the sale.
A person, or persons whose shares are aggregated, who is not deemed to have
been our affiliate at any time during the 90 days immediately preceding the sale
and who has beneficially
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<PAGE> 71
owned his or her shares for at least two years is entitled to sell these shares
pursuant to Rule 144(k) without regard to the limitations described above.
Affiliates must always sell pursuant to Rule 144, even after the applicable
holding periods have been satisfied.
We cannot estimate the number of shares that will be sold under Rule 144,
as this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. Prior to this offering, there
has been no public market for our common stock, and there can be no assurance
that a significant public market for our common stock will develop or be
sustained after this offering. Any future sale of substantial amounts of our
common stock in the open market may adversely affect the market price of our
common stock.
LOCK-UP AGREEMENTS
We and our officers, directors and stockholders have agreed, subject to
specified exceptions, not to, without the prior written consent of Goldman,
Sachs & Co., offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of our common stock or options to acquire shares
of our common stock during the 180-day period following the date of this
offering. Goldman, Sachs & Co. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. See "Underwriting."
The 180-day restriction will terminate as to 15% of the shares subject to
the restriction after 90 days and 20% of the shares subject to the restriction
after 120 days after the date of this prospectus, subject to delays as a result
of the timing of our earnings releases and compliance with our insider trading
policies, in the event that, at such dates, the reported last sale price of our
common stock on the Nasdaq National Market is at least twice the initial public
offering price specified in this prospectus for a certain number of days ending
on such dates.
STOCK OPTIONS
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of our common stock that are subject to outstanding
options or reserved for issuance under our 1998 Stock Plan and our Employee
Stock Purchase Plan 2000 within 180 days after the date of this prospectus, thus
permitting the resale of these shares by nonaffiliates in the public market
without restriction under the Securities Act.
RULE 701
Any of our employees or consultants who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of March 31, 2000, the holders of options exercisable for
approximately 675,206 shares of our common stock will be eligible to sell their
shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the expiration
of the 180-day lockup period.
REGISTRATION RIGHTS
If this offering closes before June 30, 2000, assuming an initial offering
price of $12.00 per share and the exercise of outstanding warrants, the holders
of 36,989,906 shares of our common stock will be entitled to rights with respect
to registration of their shares under the Securities Act. Registration of these
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by our affiliates. See "Description of Capital Stock -- Registration
Rights."
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<PAGE> 72
UNDERWRITING
Corio and the underwriters for the offering named below have entered into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Epoch Securities, Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ----------
<S> <C>
Goldman, Sachs & Co.........................................
FleetBoston Robertson Stephens Inc..........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Epoch Securities, Inc. .....................................
----------
Total............................................. 10,000,000
==========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,500,000 shares from Corio to cover such sales. They may exercise that option
for 30 days. If any shares are purchased under this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Corio. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Corio
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the initial offering price and
the other selling terms.
Corio and its directors, officers and stockholders have agreed with the
underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of Goldman, Sachs
& Co. and except in specified circumstances as described in "Shares Eligible for
Future Sale." See "Shares Eligible for Future Sale" for a discussion of these
transfer restrictions.
Epoch Securities, Inc. is an investment banking firm formed in November
1999. In addition to this offering, Epoch Securities, Inc. has engaged in the
business of public and private equity investing and financing and financial
advisory services since its inception. The five senior members of the Epoch
Securities, Inc. investment banking team have in the aggregate in excess of 40
years of investment banking and related experience in the securities industry.
Epoch Securities, Inc. does not have any material relationship with Corio or any
of its officers, directors or other controlling persons, except that Epoch
Securities has a contractual relationship with Corio under the terms of the
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<PAGE> 73
underwriting agreement entered into in connection with this offering and that
Epoch Securities is a customer of Corio.
The corporate parents of Charles Schwab & Co., Inc., Ameritrade (Inc.) and
TD Waterhouse Investor Services, Inc. are equity investors in Epoch's corporate
parent. Under the terms of Epoch's distribution agreement, Charles Schwab,
Ameritrade and TD Waterhouse are entitled to receive an allocation of any shares
allocated in the offering to Epoch on a free retention basis. Until they accept
this allocation, however, they are not obligated to take any shares. If they do
take shares, they are obligated to try to sell those shares to brokerage
customers who buy shares through the Internet, a computerized system or other
automated system, but they otherwise are entitled to allocate shares following
their customer practices. Charles Schwab, Ameritrade and TD Waterhouse are not
underwriters under the underwriting agreement. Because of their current
relationship to Epoch and their role in the distribution of securities, however,
they may be deemed to be underwriters as that term is defined in the Securities
Act in connection with this offering. They believe their activities fall within
the selling dealer exception to the definition and, therefore, believe that they
are not "underwriters" under the Securities Act.
Prior to the offering, there has been no public market for the common
stock. The initial public offering price will be negotiated among Corio and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Corio's historical performance, estimates of the business
potential and earnings prospects of Corio, an assessment of Corio's management
and the consideration of the above factors in relation to market valuation of
companies in related business.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, on the over-the-counter market or otherwise.
A prospectus in electronic format will be made available on the websites
maintained by one or more of the lead managers of this offering and may also be
made available on websites maintained by other underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make Internet distributions on the
same basis as other allocations.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The underwriters have reserved for sale, at the initial public offering
price, up to 800,000 shares of the common stock offered hereby for certain
individuals designated by Corio who have expressed an interest in purchasing
such shares of common stock in the offering. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same basis as other shares offered
hereby.
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<PAGE> 74
Corio estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.7
million.
Corio has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California and for the underwriters by Sullivan & Cromwell, Los Angeles,
California. At the close of this offering, WS Investments, an investment
partnership composed of some current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as
well as individual attorneys at this firm, will beneficially own a total of
21,730 shares of our common stock.
EXPERTS
The financial statements of Corio as of December 31, 1998 and 1999 and for
the period from September 1, 1998 through December 31, 1998 and the fiscal year
ended December 31, 1999, and of DSCI for the fiscal year ended September 30,
1997 and for the period from October 1, 1997 through September 4, 1998 have been
included in this prospectus in reliance upon the report of KPMG LLP, independent
auditors, given on the authority of said firm as experts in accounting and
auditing.
CHANGE IN INDEPENDENT AUDITORS
In March 2000, we engaged KPMG LLP to replace PricewaterhouseCoopers LLP as
our independent auditors. Our board of directors and audit committee approved
the decision to change independent auditors. We replaced PricewaterhouseCoopers
LLP prior to the completion of their audits and as such they did not issue an
auditors' report on our financial statements for any periods. We had no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures which, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused them to make reference to the matter in their report if
completed.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form S-1 under the Securities Act with respect to our
common stock. This prospectus is materially complete but does not contain all of
the information set forth in the registration statement and the exhibits and
schedules filed as part of the registration statement. For further information
with respect to us and our common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. 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, including exhibits and
schedules, may be inspected without charge at the principal office of the SEC in
Washington, D.C., and copies of all or any part of it may be obtained from that
office after payment of fees prescribed by the SEC. The SEC maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act, as amended,
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. These periodic reports,
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<PAGE> 75
proxy statements and other information will be available for inspection and
copying at the SEC's public reference rooms and the website of the SEC referred
to above.
We intend to provide our stockholders annual reports containing financial
statements audited by an independent public accounting firm and to make
available to our stockholders quarterly reports containing unaudited financial
data for the first three quarters of each fiscal year.
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<PAGE> 76
CORIO, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Corio, Inc.
We have audited the accompanying balance sheets of Corio, Inc. ("Corio" or
the "Company") as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the period from
September 1, 1998 through December 31, 1998 and for the year ended December 31,
1999, and the accompanying statements of operations, stockholders' equity
(deficit) and cash flows for the year ended September 30, 1997 and for the
period from October 1, 1997 through September 4, 1998 of Data Systems
Connectors, Inc. ("DSCI" or the "Predecessor"). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
As described in Note 1 of the notes to financial statements, the Company
acquired the stock of the Predecessor on September 4, 1998 in a transaction
which was accounted for as a purchase business combination. Accordingly, the
financial statements of the Company are presented on a different cost basis than
the financial statements of the Predecessor and therefore, are not comparable.
In our opinion, the financial statements of Corio, Inc., referred to above
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 the period from September 1, 1998 through December 31, 1998 and for
the year ended December 31, 1999, in conformity with generally accepted
accounting principles.
In our opinion, the financial statements of Data Systems Connectors, Inc.,
referred to above present fairly, in all material aspects, the results of
operations and cash flows of the Predecessor for the year ended September 30,
1997 and for the period from October 1, 1997 through September 4, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Mountain View, California
March 31, 2000, except as to Note 15 which is as
of April 20, 2000.
F-2
<PAGE> 78
CORIO, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 2000
------------------- ---------------------
1998 1999 ACTUAL PRO FORMA
------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,019 $ 37,177 $ 16,234 $ 70,734
Accounts receivable, net of allowance of $138, $233 and
$510 at December 31, 1998 and 1999 and March 31, 2000,
respectively............................................ 361 2,941 5,037 5,037
Prepaid expenses and other current assets................. 583 2,107 2,424 2,424
------- -------- -------- --------
Total current assets.................................... 1,963 42,225 23,695 78,195
Property and equipment, net................................. 1,342 14,380 22,121 22,121
Intangibles, net............................................ 5,837 3,647 3,006 3,006
Other assets................................................ 864 1,344 1,216 1,216
------- -------- -------- --------
Total assets............................................ $10,006 $ 61,596 $ 50,038 $104,538
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,331 $ 5,017 $ 9,142 $ 9,142
Accrued liabilities....................................... 1,911 8,163 11,707 11,707
Deferred revenue.......................................... 286 1,888 3,018 3,018
Current portion of notes payable.......................... -- 1,002 1,265 1,265
Current portion of notes payable -- related party......... 1,360 250 250 250
Current portion of capital lease obligations.............. 127 1,457 1,993 1,993
------- -------- -------- --------
Total current liabilities............................... 5,015 17,777 27,375 27,375
Notes payable, less current portion......................... -- 2,998 2,648 2,648
Notes payable -- related party, less current portion........ 1,218 -- -- --
Capital lease obligations, less current portion............. 368 4,337 4,823 4,823
Other liabilities........................................... 336 -- -- --
------- -------- -------- --------
Total liabilities....................................... 6,937 25,112 34,846 34,846
------- -------- -------- --------
Commitments
Stockholders' equity:
Preferred stock: $0.001 par value; 44,127,000 shares
authorized; 12,127,000 shares issued and outstanding at
December 31, 1998 and 29,964,795 shares issued and
outstanding at December 31, 1999 and March 31, 2000
(liquidation value: $73,210); and 44,127,000 shares
authorized, none outstanding on a pro forma basis as of
March 31, 2000.......................................... 12 30 30 --
Common stock: $0.001 par value; 138,000,000 shares
authorized; 873,002, 1,574,584 and 2,657,695 shares
issued and outstanding at December 31, 1998 and 1999 and
March 31, 2000, respectively; 138,000,000 shares
authorized, 38,843,951 shares issued and outstanding on
a pro forma basis as of March 31, 2000.................. 1 2 3 39
Additional paid-in capital................................ 6,289 99,649 113,355 167,849
Note receivable from stockholder.......................... -- (15) -- --
Deferred stock-based compensation......................... (32) (14,981) (21,476) (21,476)
Accumulated deficit....................................... (3,201) (48,201) (76,720) (76,720)
------- -------- -------- --------
Total stockholders' equity.............................. 3,069 36,484 15,192 69,692
------- -------- -------- --------
Total liabilities and stockholders' equity.............. $10,006 $ 61,596 $ 50,038 $104,538
======= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 79
CORIO, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DSCI CORIO
------------------------------ --------------------------------------------------
FOR THE FOR THE
PERIOD FROM PERIOD FROM
OCTOBER 1, SEPTEMBER 1, THREE MONTHS
1997 TO 1998 (DATE OF ENDED
YEAR ENDED SEPTEMBER 4, INCEPTION) TO YEAR ENDED MARCH 31,
SEPTEMBER 30, 1998 (DATE OF DECEMBER 31, DECEMBER 31, ------------------
1997 ACQUISITION) 1998 1999 1999 2000
------------- -------------- -------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Application management
services....................... $ -- $ -- $ -- $ 746 $ 35 $ 1,137
Professional services and
other.......................... 5,682 4,280 1,292 5,036 826 4,143
------ ------- ------- -------- ------- --------
Total revenues................. 5,682 4,280 1,292 5,782 861 5,280
COSTS AND EXPENSES:
Application management
services....................... -- -- -- 6,297 868 5,901
Professional services and
other.......................... 2,521 2,185 1,039 7,755 928 5,471
Research and development......... -- -- 93 3,192 267 2,233
Sales and marketing.............. -- -- 461 11,930 600 9,593
General and administrative....... 3,011 3,437 2,092 10,416 1,783 4,750
Amortization of stock based
compensation:
Application management
services..................... -- -- -- 229 26 140
Professional services and
other........................ -- -- 1 427 15 267
Research and development....... -- -- 3 923 57 640
Sales and marketing............ -- -- 1 2,769 3 1,534
General and administrative..... -- -- 2 4,176 43 2,676
Amortization of intangibles...... -- -- 730 2,190 547 641
------ ------- ------- -------- ------- --------
Total operating expenses....... 5,532 5,622 4,422 50,304 5,137 33,846
------ ------- ------- -------- ------- --------
Income (loss) from operations...... 150 (1,342) (3,130) (44,522) (4,276) (28,566)
Interest and other income.......... 107 76 7 541 68 367
Interest and other expense......... (180) (189) (78) (1,019) (165) (320)
------ ------- ------- -------- ------- --------
Net income (loss).................. $ 77 $(1,455) $(3,201) $(45,000) $(4,373) $(28,519)
====== ======= ======= ======== ======= ========
Basic and diluted net loss per
share............................ $ (3.89) $ (38.96) $ (4.39) $ (16.75)
======= ======== ======= ========
Shares used in computation -- basic
and diluted...................... 823 1,155 996 1,703
======= ======== ======= ========
Pro forma net loss and net loss per
share (unaudited):
Net loss as reported............... $(28,519)
Series E beneficial conversion
charge........................... (20,158)
--------
Pro forma net loss attributable to
common stockholders.............. $(48,677)
========
Basic and diluted net loss per
share............................ $ (1.54)
========
Shares used in computation......... 31,668
========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 80
CORIO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED RETAINED
--------------- --------------- PAID-IN FROM STOCK-BASED EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER COMPENSATION (DEFICIT)
------ ------ ------ ------ ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DSCI PERIOD:
Balance at October 1, 1996......... -- $-- 50 $10 $ -- $ -- $ -- $ 294
Net income......................... -- -- -- -- -- -- -- 77
------ --- ----- --- -------- ---- -------- --------
Balance at September 30, 1997...... -- -- 50 10 -- -- -- 371
Net loss........................... -- -- -- -- -- -- -- (1,455)
------ --- ----- --- -------- ---- -------- --------
Balance at September 4, 1998....... -- $-- 50 $10 $ -- $ -- $ -- $ (1,084)
====== === ===== === ======== ==== ======== ========
CORIO PERIOD:
Balance at September 1, 1998....... -- $-- -- $-- $ -- $ -- $ -- $ --
Issuance of series A preferred
stock, net of issuance costs of
$26.............................. 8,500 9 -- -- 3,965 -- -- --
Issuance of series A preferred
stock in connection with
DSCI acquisition................. 3,492 3 -- -- 1,640 -- -- --
Issuance of series A preferred
stock in exchange for services... 135 -- -- -- 63 -- -- --
Issuance of preferred stock
warrants......................... -- -- -- -- 539 -- -- --
Issuance of common stock........... -- -- 873 1 43 -- -- --
Deferred stock-based
compensation..................... -- -- -- -- 39 -- (39) --
Amortization of deferred
stock-based compensation......... -- -- -- -- -- -- 7 --
Net loss........................... -- -- -- -- -- -- -- (3,201)
------ --- ----- --- -------- ---- -------- --------
Balance at December 31, 1998....... 12,127 12 873 1 6,289 -- (32) (3,201)
Issuance of series A preferred
stock in exchange for services... 93 -- -- -- 373 -- -- --
Issuance of series B preferred
stock, net of issuance costs of
$46.............................. 10,513 11 -- -- 20,968 -- -- --
Issuance of series B preferred
stock in exchange for notes
payable-related party............ 127 -- -- -- 254 -- -- --
Issuance of series C preferred
stock, net of issuance costs of
$79.............................. 6,951 7 -- -- 45,094 -- -- --
Issuance of series C preferred
stock in exchange for notes
payable-related party............ 154 -- -- -- 1,000 -- -- --
Issuance of preferred stock
warrants......................... -- -- -- -- 1,404 -- --
Issuance of common stock........... -- -- 375 -- 574 (10) -- --
Issuance of common stock upon
exercise of stock options........ -- -- 527 1 37 (5) -- --
Repurchase of common stock......... -- -- (200) -- (10) -- --
Issuance of common stock warrant... -- -- -- -- 136 -- -- --
Issuance of stock options to
non-employees.................... -- -- -- -- 57 -- -- --
Deferred stock-based
compensation..................... -- -- -- -- 23,473 -- (23,473) --
Amortization of deferred
stock-based compensation......... -- -- -- -- -- -- 8,524 --
Net loss........................... -- -- -- -- -- -- (45,000)
------ --- ----- --- -------- ---- -------- --------
Balance at December 31, 1999....... 29,965 30 1,575 2 99,649 (15) (14,981) (48,201)
Remeasurement of performance-based
stock warrant (unaudited)........ -- -- -- -- 781 -- -- --
Issuance of common stock
(unaudited)...................... -- -- 10 -- 56 -- -- --
Issuance of common stock upon
exercise of stock options
(unaudited)...................... -- -- 1,073 1 903 -- -- --
Issuance of stock options to
non-employees (unaudited)........ -- -- -- -- 214 -- -- --
Deferred stock-based compensation
(unaudited)...................... -- -- -- -- 11,752 -- (11,752) --
Amortization of deferred
stock-based compensation
(unaudited)...................... -- -- -- -- -- -- 5,257 --
Proceeds from note receivable from
stockholder (unaudited).......... -- -- -- -- -- 15 -- --
Net loss (unaudited)............... -- -- -- -- -- -- -- (28,519)
------ --- ----- --- -------- ---- -------- --------
Balance at March 31, 2000
(unaudited)...................... 29,965 $30 2,658 $ 3 $113,355 $ -- $(21,476) $(76,720)
====== === ===== === ======== ==== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
DSCI PERIOD:
Balance at October 1, 1996......... $ 304
Net income......................... 77
--------
Balance at September 30, 1997...... 381
Net loss........................... (1,455)
--------
Balance at September 4, 1998....... $ (1,074)
========
CORIO PERIOD:
Balance at September 1, 1998....... $ --
Issuance of series A preferred
stock, net of issuance costs of
$26.............................. 3,974
Issuance of series A preferred
stock in connection with
DSCI acquisition................. 1,643
Issuance of series A preferred
stock in exchange for services... 63
Issuance of preferred stock
warrants......................... 539
Issuance of common stock........... 44
Deferred stock-based
compensation..................... --
Amortization of deferred
stock-based compensation......... 7
Net loss........................... (3,201)
--------
Balance at December 31, 1998....... 3,069
Issuance of series A preferred
stock in exchange for services... 373
Issuance of series B preferred
stock, net of issuance costs of
$46.............................. 20,979
Issuance of series B preferred
stock in exchange for notes
payable-related party............ 254
Issuance of series C preferred
stock, net of issuance costs of
$79.............................. 45,101
Issuance of series C preferred
stock in exchange for notes
payable-related party............ 1,000
Issuance of preferred stock
warrants......................... 1,404
Issuance of common stock........... 564
Issuance of common stock upon
exercise of stock options........ 33
Repurchase of common stock......... (10)
Issuance of common stock warrant... 136
Issuance of stock options to
non-employees.................... 57
Deferred stock-based
compensation..................... --
Amortization of deferred
stock-based compensation......... 8,524
Net loss........................... (45,000)
--------
Balance at December 31, 1999....... 36,484
Remeasurement of performance-based
stock warrant (unaudited)........ 781
Issuance of common stock
(unaudited)...................... 56
Issuance of common stock upon
exercise of stock options
(unaudited)...................... 904
Issuance of stock options to
non-employees (unaudited)........ 214
Deferred stock-based compensation
(unaudited)...................... --
Amortization of deferred
stock-based compensation
(unaudited)...................... 5,257
Proceeds from note receivable from
stockholder (unaudited).......... 15
Net loss (unaudited)............... (28,519)
--------
Balance at March 31, 2000
(unaudited)...................... $ 15,192
========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 81
CORIO, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DSCI CORIO
------------------------------- -----------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM OCTOBER 1, FROM SEPTEMBER 1,
1997 TO 1998 (DATE OF THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 4, INCEPTION) TO YEAR ENDED MARCH 31,
SEPTEMBER 30, 1998 (DATE OF DECEMBER 31, DECEMBER 31, ------------------
1997 ACQUISITION) 1998 1999 1999 2000
------------- --------------- ----------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 77 $(1,455) $(3,201) $(45,000) $(4,373) $(28,519)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 29 32 19 4,668 981 1,679
Amortization of intangibles......... -- -- 730 2,190 547 641
Amortization of deferred stock-based
compensation...................... -- -- 7 8,524 144 5,257
Compensation for grants of stock,
options and warrants in exchange
for services...................... -- 3 313 1,439 43 916
Changes in assets and liabilities:
Accounts receivable............... (443) 207 (44) (2,580) 150 (2,096)
Prepaid expenses and other current
assets.......................... 133 (63) (512) (889) 79 (54)
Accounts payable.................. (108) 29 1,164 3,686 (887) 4,125
Accrued liabilities............... 50 1,178 343 6,288 10,613 3,544
Deferred revenue.................. 202 268 69 1,602 90 1,130
Other liabilities................. (290) -- 336 (336) -- --
----- ------- ------- -------- ------- --------
Net cash (used in) provided by
operating activities.......... (350) 199 (776) (20,408) 7,387 (13,377)
Cash flows from investing activities:
Purchase of property and equipment.... (46) (11) (798) (12,424) (9,836) (8,134)
Acquisition of DSCI, net of cash
acquired............................ -- -- (1,106) -- -- --
Other assets.......................... (19) 29 (319) 232 68 --
----- ------- ------- -------- ------- --------
Net cash (used in) provided by
investing activities.......... (65) 18 (2,223) (12,192) (9,768) (8,134)
Cash flows from financing activities:
Proceeds from issuance of preferred
stock, net.......................... -- -- 3,974 66,080 -- --
Proceeds from sale of common stock and
exercise of stock options........... -- -- 44 48 -- 904
Proceeds from note receivable from
stockholder......................... -- -- -- -- -- 15
Payments on capital lease
obligations......................... -- -- -- (260) (12) (264)
Borrowings on notes payable........... -- -- -- 4,000 3,000 --
Repayment of notes payable............ -- -- -- -- -- (87)
Repayment of notes payable -- related
party............................... -- -- -- (1,110) -- --
----- ------- ------- -------- ------- --------
Net cash provided by financing
activities.................... -- -- 4,018 68,758 2,988 568
----- ------- ------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents........................... (415) 217 1,019 36,158 607 (20,943)
Cash and cash equivalents, beginning of
period................................ 699 284 -- 1,019 1,019 37,177
----- ------- ------- -------- ------- --------
Cash and cash equivalents, end of
period................................ $ 284 $ 501 $ 1,019 $ 37,177 $ 1,626 $ 16,234
===== ======= ======= ======== ======= ========
Supplemental disclosure of cash flow
information:
Cash paid for interest................ $ -- $ -- $ -- $ 693 $ 50 $ 205
===== ======= ======= ======== ======= ========
Supplemental non-cash investing and
financing activities:
Issuance of series A preferred stock
in connection with DSCI
acquisition....................... $ 1,643 $ -- $ -- $ --
======= ======== ======= ========
Issuance of note payable -- related
party in connection with DSCI
acquisition....................... $ 2,328 $ -- $ -- $ --
======= ======== ======= ========
Acquisition of property and
equipment under capital leases.... $ 495 $ 5,305 $ 1,013 $ 1,286
======= ======== ======= ========
Issuance of preferred stock and
common stock warrants............. $ 539 $ 1,540 $ -- $ 781
======= ======== ======= ========
Issuance of preferred stock in
exchange for notes
payable -- related party.......... $ -- $ 1,254 $ -- $ --
======= ======== ======= ========
Deferred stock-based compensation... $ 39 $ 23,473 $ 477 $ 11,752
======= ======== ======= ========
Issuance of stock and options for
services.......................... $ 63 $ 969 $ -- $ 270
======= ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 82
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Corio, Inc. ("Corio" or the "Company") is a leading application service
provider, or ASP. The Company makes available to its customers over a secure
network for a monthly fee a suite of scalable software applications that are
licensed and integrated by the Company from various software vendors. The
Company also provides professional services which include initial implementation
and ongoing support services. The Company was incorporated under the laws of the
state of Delaware on September 1, 1998. On September 4, 1998, the Company
acquired all of the outstanding common stock of Data Systems Connectors, Inc.
("DSCI" or the "Predecessor") (Note 2). The Company's operations prior to
September 4, 1998 were immaterial.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of DSCI for the
year ended September 30, 1997 and for the period from October 1, 1997 to
September 4, 1998 (date of acquisition). The accompanying financial statements
for the period from September 1, 1998 (date of inception) to December 31, 1998,
for the year ended December 31, 1999 and for the three months ended March 31,
1999 and 2000 (unaudited) include the accounts of the Company. Due to the
application of purchase accounting by Corio, the accounts of DSCI prior to the
acquisition are not comparable to those of Corio.
The pro forma balance sheet as of March 31, 2000 includes the net proceeds
of $54.5 million from the April 20, 2000 sale of senior series E mandatorily
redeemable preferred stock, and the assumed automatic conversion of all
outstanding shares of series A, B, C and E preferred stock upon the closing of
the Company's planned initial public offering into 36,186,256 shares of common
stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist principally of cash on deposit with a bank and money market
accounts that are stated at cost, which approximate fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents and accounts
receivable. The Company places its cash with two high quality financial
institutions. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of accounts receivable.
F-7
<PAGE> 83
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which includes
accounts receivable, accounts payable, accrued liabilities and debt obligations
approximate their fair values at March 31, 2000 and at December 31, 1999 and
1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, generally three to five years. Leasehold improvements are amortized
over the shorter of the estimated useful lives of the assets or the lease term.
In 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires the capitalization of direct costs incurred in
connection with developing or obtaining software for internal use, including
external direct costs of materials and services and payroll and payroll related
costs for employees who are directly associated with and devote time to an
internal-use software development project. Such capitalized costs are amortized
on a straight-line basis over the software's economic useful life of three
years. During the year ended December 31, 1999, the Company purchased $12.0
million in computer software and capitalized $355,000 of costs related to the
implementation of internal-use software which is included in computer software
in property and equipment at December 31, 1999. During the three months ended
March 31, 2000, the Company purchased $268,000 in computer software and
capitalized $275,000 of costs related to the implementation of internal-use
software.
INCOME TAXES
The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant between the fair value of the Company's stock and the exercise price.
Deferred compensation is amortized and expensed in accordance with the graded
vesting approach provided for in Financial Accounting Standards Board ("FASB")
Interpretation No. 28. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The Company uses the Black-Scholes option pricing model to value
options granted to non-employees. The related expense is recorded over the
period in which the related services are received.
F-8
<PAGE> 84
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
INTANGIBLES
Goodwill and other intangibles were recorded in connection with the
acquisition of DSCI. Intangibles are being amortized on a straight-line basis
over three years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets, including goodwill and other
intangibles, for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of any asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
REVENUE RECOGNITION
The Company generates revenue from application management services,
professional services and other revenues.
Application management services revenue consists of monthly recurring fees
for hosting services and is recognized as the services are performed. Our
application management services provide customers rights to access applications,
hardware for the application access, customer service, and rights to upgrades
and updates as provided to the Company under contract with the original software
vendor. Our customers generally do not have the right to take possession of the
software at any time during the hosting agreement. Contracts for application
management services include monthly or quarterly minimum volume commitments by
the Company's customers and fees for actual volume usage. Minimum volume
customer commitments are recognized as they become due and payable. Actual
volume usage that exceed designated minimums are recognized as revenues when
amounts due are earned by the Company.
Professional services and other revenues include revenues from consulting
services, implementation services, training, resale of software, and
post-contract support. Revenue from consulting services is recognized using the
percentage-of-completion method for fixed-fee arrangements under the
cost-to-cost method or as the services are provided for time-and-materials
arrangements. Losses resulting from fixed-fee contracts are recorded at the time
such losses are known. Revenue from customer training and education are
recognized at the date the services are performed. Revenue from post-contract
support, i.e., unspecified upgrades and telephone support, is recognized ratably
over the period the support is provided. When software and post-contract support
are sold as a bundled arrangement where no VSOE exists, the entire fee is
recognized as revenue over the post-contract support period. Such revenues from
resale of software and maintenance and support have been immaterial.
The Company provides limited services warranty rights to its customers,
which are accounted for in accordance with SFAS No. 5, "Accounting for
Contingencies". To date, the estimated warranty obligations have not been
considered significant.
F-9
<PAGE> 85
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $15,000 and
$1,204,000 for the three months ended March 31, 1999 and 2000, respectively, and
$1,193,000 for the year ended December 31, 1999. There were no advertising costs
prior to the year ended December 31, 1999 for the Company or Predecessor.
COMPREHENSIVE INCOME
In 1998, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. The Company's and Predecessor's comprehensive loss was
equal to its net loss for all periods presented.
STOCK SPLIT
In July 1999, the Company's board of directors approved a 2-for-1 stock
split of common stock, preferred stock, options and warrants. Accordingly, all
share and per share amounts, including stock option, warrant and net loss per
share information have been restated in the financial statements to
retroactively reflect the stock split.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of shares of common stock outstanding
during the period (excluding shares subject to repurchase). Diluted net loss per
share is computed by dividing the net loss for the period by the weighted
average number of shares of common stock and potentially dilutive common
securities outstanding during the period. Potentially dilutive common shares are
excluded from the computation in loss periods as their effect would be
antidilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM SEPTEMBER 1, THREE MONTHS ENDED
1998 (DATE OF YEAR ENDED MARCH 31,
INCEPTION) TO DECEMBER 31, ------------------
DECEMBER 31, 1998 1999 1999 2000
------------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net loss.................................. $(3,201) $(45,000) $(4,373) $(28,519)
======= ======== ======= ========
Denominator:
Weighted average shares of common stock... 823 1,155 996 1,703
======= ======== ======= ========
Net loss per share:
Basic and diluted......................... $ (3.89) $ (38.96) $ (4.39) $ (16.75)
======= ======== ======= ========
</TABLE>
F-10
<PAGE> 86
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation above as their effect
would have been antidilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD THREE MONTHS
FROM SEPTEMBER 1, ENDED
1998 (DATE OF YEAR ENDED MARCH 31,
INCEPTION) TO DECEMBER 31, ---------------
DECEMBER 31, 1998 1999 1999 2000
----------------- ------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Series A preferred stock.............. 12,127 12,220 12,127 12,220
Series B preferred stock.............. -- 10,640 -- 10,640
Series C preferred stock.............. -- 7,105 -- 7,105
Preferred stock warrants.............. 1,788 989 1,788 989
Common stock subject to repurchase.... -- 96 120 89
Common stock options and warrants..... 2,135 8,805 4,842 10,008
</TABLE>
PRO FORMA NET LOSS AND NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the three months ended March 31, 2000 is
computed using the weighted-average number of shares of common stock
outstanding, including the pro forma effect of the automatic conversion of our
preferred stock into shares of our common stock. The weighted average number of
shares of common stock outstanding is determined as if the preferred stock was
converted on January 1, 2000, except for senior series E mandatorily redeemable
preferred stock which was sold on April 20, 2000 and is assumed to convert on
March 31, 2000, assuming an initial public offering price of $12.00. Pro forma
common equivalents, consisting of incremental common stock issuance upon the
exercise of stock options and warrants, as well as shares subject to repurchase
agreements, are not included in pro forma diluted net loss per share because
they would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established new standards of
accounting and reporting for derivative instruments and hedging activities. In
July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal
years beginning after June 15, 2000. The Company will adopt SFAS No. 133 during
its year ending December 31, 2001. To date, the Company has not engaged in any
derivative or hedging activities.
NOTE 2 -- ACQUISITION OF DATA SYSTEMS CONNECTORS, INC.
On September 4, 1998, the Company acquired all of the outstanding common
stock of DSCI, a provider of information technology consulting services, license
and other services.
F-11
<PAGE> 87
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
This transaction was accounted for using the purchase method of accounting.
The allocation of the aggregate purchase price to the tangible and identifiable
intangible assets (covenant not to compete, workforce in place and customer
list) acquired and liabilities assumed in connection with this acquisition was
based on estimated fair values as determined by management. The allocation is
summarized below (in thousands):
<TABLE>
<S> <C>
Covenant not to compete..................................... $1,643
Workforce in place.......................................... 750
Customer list............................................... 520
Goodwill.................................................... 3,654
Tangible net assets......................................... 491
------
$7,058
======
</TABLE>
The total purchase price of approximately $7.1 million consisted of
$1,607,000 in cash, 3,492,000 shares of the Company's series A preferred stock
valued at $1,643,000 issued to a stockholder of the Company (Note 14), a secured
subordinated promissory note in the amount of $2,328,000 issued to the same
stockholder of the Company (Note 14), assumed liabilities of $1,250,000 and
transaction costs of $230,000.
Goodwill and intangibles, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
----------------- ----------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill and intangibles.... $6,567 $ 6,567 $ 6,567
Accumulated amortization.... (730) (2,920) (3,561)
------ ------- -------
$5,837 $ 3,647 $ 3,006
====== ======= =======
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
----------------- ----------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.......... $ 489 $ 4,985 $ 9,430
Computer software........... -- 12,983 13,806
Furniture and fixtures...... 673 796 3,326
Leasehold improvements...... 199 207 1,829
------ ------- -------
1,361 18,971 28,391
Accumulated depreciation and
amortization.............. (19) (4,591) (6,270)
------ ------- -------
$1,342 $14,380 $22,121
====== ======= =======
</TABLE>
Property and equipment includes assets under capital leases of $495,000 at
December 31, 1998, $5,770,000 at December 31, 1999 and $7,087,000 at March 31,
2000. Accumulated depreciation of assets under capital leases totaled $781,000
at December 31, 1999 and $1,257,000 at March 31, 2000. There was no accumulated
depreciation at December 31, 1998.
F-12
<PAGE> 88
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 4 -- ACCOUNTS RECEIVABLE AND ACCRUED LIABILITIES
The Company records accounts receivable when amounts are billed in
accordance with the contract terms or as services are performed under
non-cancelable contractual services arrangements. The December 31, 1999 balance
includes $1.0 million billed in advance and collected in early January 2000.
Revenue recognized under this arrangement was $190,000 in 1999. Included in
accounts receivable at December 31, 1999 and March 31, 2000 was $401,000 and
$1,091,000, respectively, of unbilled receivables under various professional
services contracts.
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
----------------- ----------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued license and technical
access fees................. $ -- $4,285 $ 4,392
Accrued compensation and
related benefits............ 339 1,658 4,088
Assumed liability in
connection with DSCI
acquisition................. 1,250 1,250 1,250
Other......................... 322 970 1,977
------ ------ -------
$1,911 $8,163 $11,707
====== ====== =======
</TABLE>
The assumed liability in connection with the DSCI acquisition of $1,250,000
principally consists of an estimated income tax liability. This tax liability
will be paid upon the ultimate resolution of this matter with income tax
authorities.
NOTE 5 -- BORROWING AGREEMENT
In February 1999, the Company entered into a $3 million revolving line of
credit agreement with a bank, which expired in January 2000. Borrowings were
limited to 80% of certain eligible accounts receivable and bear interest at the
bank's prime rate (8.5% at December 31, 1999) plus 0.25%. The line of credit
agreement was collateralized by certain assets of the Company and contains
financial covenants, including a minimum tangible net worth and quick ratio.
There were no borrowings under this line of credit agreement.
NOTE 6 -- NOTES PAYABLE
In December 1998, the Company entered into a loan and security agreement to
borrow up to $4,000,000. Borrowings under the agreement bear interest at 11.5%
per annum and are payable in 42 monthly installments. Borrowings under the
agreement are collateralized by substantially all of the Company's assets. As of
December 31, 1999, $4,000,000 was outstanding and is payable as follows: 2000,
$1,002,000; 2001, $1,554,000; 2002, $1,185,000; and 2003, $259,000. In
connection with the loan and security agreement, the Company granted the lender
warrants to purchase 469,523 shares of series A preferred stock at an exercise
price of $1.24 per share (Note 9). The fair value of the warrants is being
amortized over 42 months as additional interest expense.
F-13
<PAGE> 89
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 7 -- INCOME TAXES
The income tax expense differed from the amounts computed by applying the
statutory federal income tax rate of 34% to pretax income as a result of the
following (in thousands):
<TABLE>
<CAPTION>
DSCI CORIO
-------------------------------- ------------------------------
FOR THE PERIOD
FROM
FOR THE PERIOD SEPTEMBER 1,
FROM OCTOBER 1, 1998 (DATE OF
1997 THROUGH INCEPTION)
YEAR ENDED SEPTEMBER 4, THROUGH YEAR ENDED
SEPTEMBER 30, 1998 (DATE OF DECEMBER 31, DECEMBER 31,
1997 ACQUISITION) 1998 1999
------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate.... $ 26 $(494) $(1,088) $(15,299)
State taxes...................... 18 1 1 3
Amortization of intangibles...... -- -- 200 745
Net operating loss not
benefited...................... -- 44 887 11,576
Nondeductible expenses........... 5 449 -- 131
Nondeductible stock
compensation................... -- -- -- 2,848
Other............................ (49) -- -- (4)
---- ----- ------- --------
Total income tax expense....... $ -- $ -- $ -- $ --
==== ===== ======= ========
</TABLE>
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves..................................... $ 315 $ 1,922
State income taxes........................................ 1 1
Other..................................................... 13 --
Net operating loss and credit carryforwards............... 760 12,173
------- --------
Gross deferred tax assets................................... 1,089 14,096
Valuation allowance......................................... (1,089) (13,691)
------- --------
Total deferred tax assets.............................. -- 405
Deferred tax liability:
Property and equipment.................................... -- (405)
------- --------
Net deferred tax assets..................................... $ -- $ --
======= ========
</TABLE>
The acquisition of DSCI was structured as a tax-free exchange of stock,
therefore, the difference between the recognized fair values of acquired net
assets and their historical tax bases is not deductible for tax purposes.
Based on the available objective evidence, management believes it is not
more likely than not that the net deferred tax assets will be realized,
therefore, management has established a valuation allowance for the entire
amount of net deferred tax assets. The net change in the total valuation
allowance for the year ended December 31, 1999 was an increase of $12,602,000;
there was an
F-14
<PAGE> 90
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
increase of $1,089,000 for the period from September 1, 1998 (date of inception)
through December 31, 1998.
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $32,974,000 and state income tax purposes of
approximately $16,493,000 available to reduce future income subject to income
taxes. The difference between the federal and state net operating loss
carryforward is due to the State of California 50% limitation rule for net
operating loss. The federal net operating loss carryforwards expire beginning in
2018 through 2019. State net operating loss carryforwards expire beginning in
2004.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. The Company has not yet determined whether an ownership change
occurred due to significant stock transactions in each of the reporting years
disclosed. If an ownership change occurred, utilization of the net operating
loss carryforwards could be reduced significantly on an annual basis.
NOTE 8 -- LEASES AND COMMITMENTS
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2010. The Company
subleases to a tenant, one of its facilities under a sub-lease agreement which
expires on February 15, 2000 (sublease rental income of $75,000 in fiscal year
1999 and $13,000 in fiscal year 2000). Rent expense for the Predecessor was
$68,000 for the year ended September 30, 1997 and $94,000 for the period from
October 1, 1997 to September 4, 1998 (date of acquisition). Rent expense for the
Company was $59,000 for the period from September 1, 1998 (date of inception) to
December 31, 1998, $1,473,000 for the year ended December 31, 1999 and $192,000
and $584,000 for the three months ended March 31, 1999 and 2000, respectively.
The terms of the facility lease provide for rental payments on a graduated
scale. The Company recognizes rent expense on a straight-line basis over the
lease period and has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating (net of future
minimum sublease rental income) and capital leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, CAPITAL LEASES OPERATING LEASES
------------ -------------- ----------------
<S> <C> <C>
2000................................................ $ 1,947 $ 3,392
2001................................................ 2,432 4,296
2002................................................ 1,990 3,919
2003................................................ 363 3,660
2004................................................ -- 3,749
2005 and thereafter................................. -- 21,256
------- -------
Total minimum lease payments...................... 6,732 $40,272
=======
Less amount representing interest................... (938)
-------
Present value of minimum lease payments............. 5,794
Less current portion................................ (1,457)
-------
Capital lease obligations, less current portion..... $ 4,337
=======
</TABLE>
F-15
<PAGE> 91
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
In December 1998, the Company entered into a master lease agreement to
purchase equipment up to an aggregate of $4,000,000. As of March 31, 2000, the
Company had drawn down the entire $4,000,000 related to this agreement. Each
draw against the agreement bears interest at 8.75% per annum and is payable in
42 monthly installments. In connection with the agreement, the Company granted
the lessor warrants to purchase 186,190 shares of series A preferred stock at an
exercise price of $1.24 per share (Note 9). The fair value of these warrants is
being amortized over 42 months as additional interest expense.
In December 1998, the Company entered into a guarantee with a lender for
$350,000 as security on a facility lease. The guarantee is collateralized by
certain assets of the Company. In connection with the guarantee, the Company
granted the lender warrants to purchase 25,500 shares of series A preferred
stock at an exercise price of $1.24 per share (Note 9). The fair value of these
warrants is being amortized over 42 months as additional interest expense.
In December 1999, the Company entered into another guarantee with the same
lender for a maximum $7,000,000 letter of credit as security on another facility
lease. The guarantee is collateralized by certain assets of the Company. In
connection with the guarantee, the Company granted the lender a right to
purchase shares of series C preferred stock at an exercise price of $6.50 per
share (Note 9).
In March 2000, the Company entered into a volume purchase agreement to
purchase up to $6,000,000 of equipment through September 2001.
NOTE 9 -- PREFERRED STOCK
The Company currently has authorized for issuance an aggregate of
33,127,000 shares of $0.001 par value preferred stock. At December 31, 1999 and
March 31, 2000, the following numbers of shares of each series of preferred
stock were authorized and were issued and outstanding (in thousands):
<TABLE>
<CAPTION>
SHARES ISSUED
SHARES AND LIQUIDATION
SERIES AUTHORIZED OUTSTANDING VALUE
------ ---------- ------------- -----------
<S> <C> <C> <C>
A..................................................... 14,127 12,220 $ 5,751
B..................................................... 11,000 10,640 21,279
C..................................................... 8,000 7,105 46,180
------ ------ -------
33,127 29,965 $73,210
====== ====== =======
</TABLE>
As of December 31, 1999 and March 31, 2000, 1,018,500 and 450,600 shares of
series A preferred stock were subject to repurchase from a stockholder of the
Company at a price of $0.01 per share (Note 14).
During the year ended December 31, 1999, the Company issued 93,332 shares
of series A preferred stock in exchange for services. The fair value of the
series A preferred stock of $373,000 was determined by the deemed fair value of
$4.00 per share of the Company's common stock on the date the service was
completed and was recorded as a general and administrative expense.
F-16
<PAGE> 92
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
The holders of preferred stock have various rights and preferences as
follows:
VOTING
Each share of series A, B and C preferred stock has voting rights equal to
an equivalent number of shares of common stock into which it is convertible and
votes together as one class with the common stock.
DIVIDENDS
Holders of convertible preferred stock are entitled to receive
noncumulative dividends at the rate of $0.0235295, $0.10 and $0.325 per share
per annum for each share of series A, B and C preferred stock, respectively,
when and if declared by the board of directors. The holders of preferred stock
will also be entitled to participate in dividends on common stock, when and if
declared by the board of directors, based on the number of shares of common
stock held on an as-if converted basis. No dividends on convertible preferred
stock or common stock have been declared by the board from inception through
March 31, 2000.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's common stock and preferred stock own less than 51% of the
resulting voting power of the surviving entity, the holders of preferred stock
are entitled to receive an amount of $0.47059, $2.00 and $6.50 per share of each
share of series A, series B and series C preferred stock, respectively, held,
plus any declared but unpaid dividends prior to and in preference to any
distribution to the holders of common stock. The remaining assets, if any, shall
be distributed among the holders of preferred stock and common stock pro rata
based on the equivalent number of shares of common stock held by each; provided,
however, that each holder of preferred stock ceases to share in such additional
distributions at such time as the holder has received total distributions in
respect of such share equal to three times the original purchase price. Should
the Company's legally available assets be insufficient to satisfy the
liquidation preferences of the preferred stock in full the funds will be
distributed ratably among the holders of preferred stock in proportion to the
full preferential amount each such holder is otherwise entitled to receive.
CONVERSION
Each share of preferred stock is convertible, at the option of the holder,
into the number of shares of common stock as determined by the then effective
conversion ratio. Each share of preferred stock automatically converts into the
number of shares of common stock into which such shares are convertible at the
then effective conversion ratio upon: (1) the closing of a public offering of
common stock at a per share price of at least $6.50 per share, with gross
proceeds of at least $33,000,000, or (2) the consent of the holders of at least
a majority of the holders of the then outstanding shares of series A preferred
stock, the holders of at least a majority of the then outstanding shares of
series B preferred stock, and the holders of at least a majority of the then
outstanding shares of series C preferred stock.
F-17
<PAGE> 93
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
WARRANTS FOR PREFERRED STOCK
In December 1998 and in connection with (i) the master lease agreement to
purchase equipment (Note 8), (ii) the $350,000 guarantee for security on a
facility lease (Note 8), and (iii) a loan and security agreement for $4,000,000
(Note 6), the Company granted warrants to purchase 186,190 shares, 25,500
shares, and 469,523 shares, respectively, of series A preferred stock at the
average of the price of the series A and series B preferred stock. Series A
preferred stock price was $0.47 and was known at December 31, 1998. The series B
preferred stock was issued at $2.00 per share in April 1999 and the price was
not known at December 31, 1998. The estimated value of the warrant of $539,000
was recorded in the year ended December 31, 1998. Upon issuance of series B
preferred stock, the actual fair value was determined and the amount was
adjusted to a total adjusted fair value of $1,016,000. As of March 31, 2000, the
warrants were outstanding and exercisable and will expire in December 2005 or
three years from the closing of a public offering of common stock, whichever is
earlier. The following assumptions were used in the Black-Scholes fair value
calculation: no dividends; contractual life of seven years; risk-free interest
rate of 6.0%; and expected volatility of 60%. The fair value of the warrants is
amortized over a period of 42 months.
In October 1999, the Company granted to a software vendor in connection
with a remarketing agreement a warrant to purchase 153,846 shares of series C
preferred stock at $6.50 per share. This is a performance based warrant that
will become exercisable in October 2000, provided that the remarketing agreement
continues with the software vendor. Assuming the performance criteria are met,
the warrant will expire in October 2002. The fair value of the warrant issued
will be remeasured each period using the Black-Scholes option pricing model. At
December 31, 1999, the fair value of the warrant was calculated using the
Black-Scholes option pricing model, using $6.50 as the fair value of the
underlying preferred stock and the following weighted average assumptions at
December 31, 1999: no dividends, contractual life of 3 years, risk-free interest
rate of 6.5%; and expected volatility of 70%. At March 31, 2000, the fair value
of the warrant was calculated using the Black-Scholes option pricing model,
using $12.00 as the fair value of the underlying preferred stock and the
following weighted-average assumptions at March 31, 2000: no dividends;
contractual life of 3 years; risk-free interest rate of 7.0%; and expected
volatility of 80%. The fair value of the warrant of $508,000 at December 31,
1999 and $1,289,000 at March 31, 2000 is being amortized over one year.
In addition, the Company granted to a service provider a warrant to
purchase 153,846 shares of series C preferred stock at $6.50 per share. As of
March 31, 2000, the warrant was outstanding and exercisable and will expire in
October 2001. The fair value of the warrant issued was calculated using the
Black-Scholes option pricing model, using $6.50 as the fair value of the
underlying preferred stock and the following weighted-average assumptions: no
dividends; contractual life of 2 years; risk-free interest rate of 6.5%; and
expected volatility of 70%. The fair value of the warrant of $419,000 at
December 31, 1999 and March 31, 2000 is being amortized over two years.
In December 1999, the Company granted a lender (Note 8) a warrant to
purchase shares of series C preferred stock at $6.50 per share. The number of
shares will be calculated as a percent of the $7,000,000 letter of credit. The
percentages start at 4% if the Company closes a public offering of common stock,
acquisition or merger on or before June 30, 2000 and increases to 80% if the
Company closes a public offering of common stock, acquisition or merger on or
after January 1, 2004. This warrant does not become exercisable unless the
Company successfully completes an initial public offering, acquisition or
merger. In the event the Company successfully completes a public
F-18
<PAGE> 94
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
offering, the warrant is exercisable through December 2006 or 3 years from the
date of a public offering, whichever is earlier.
NOTE 10 -- COMMON STOCK
The Company's certificate of incorporation authorizes the Company to issue
50,000,000 shares of $0.001 par value common stock. As of December 31, 1999, an
aggregate of 1,574,584 shares were issued and outstanding, including an
aggregate of 96,354 shares subject to repurchase at a weighted average price of
$0.24 per share. As of March 31, 2000, an aggregate of 2,657,695 shares were
issued and outstanding, including an aggregate of 88,542 shares subject to
repurchase at a weighted average price of $0.24 per share (Note 11).
During the year ended December 31, 1999, the Company issued 50,000 shares
of common stock in exchange for services. The fair value of the common stock of
$189,000 was recorded as a marketing expense. In addition, the Company issued
125,000 shares of common stock to board members of the Company. The fair value
of the common stock of $350,000 was recorded as a general and administrative
expense.
WARRANT FOR COMMON STOCK
In October 1999, the Company granted to a landlord a warrant to purchase
50,000 shares of the Company's common stock at an exercise price of $6.50 per
share. As of March 31, 2000, the warrant was outstanding and exercisable and
will expire in December 2001. The fair value of the warrant issued was
calculated using the Black-Scholes pricing model, using $6.50 as the fair value
of the underlying common stock and the following weighted-average assumptions:
no dividends; contractual life of 2 years; risk-free interest rate of 6.5%; and
expected volatility of 70%. The fair value of the warrant of $136,000 is being
amortized over the term of the related lease agreement.
COMMON STOCK RESERVED
The Company has reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Conversion of preferred stock.............................. 29,964,795 29,964,795
Exercise of outstanding options............................ 8,754,951 9,972,073
Exercise of preferred stock warrants....................... 988,905 988,905
Exercise of common stock warrant........................... 50,000 50,000
Additional shares available for grant under the 1998 Stock
Plan..................................................... 618,467 6,927,950
---------- ----------
Total............................................ 40,377,118 47,903,723
========== ==========
</TABLE>
NOTE 11 -- STOCK PLANS
STOCK OPTION PLAN
Under the Company's 1998 Stock Plan (the "Plan"), the Company was
authorized as of December 31, 1999 and March 31, 2000 to issue up to 9,900,000
and 18,500,000 shares of common stock, respectively, to directors, employees,
and consultants. The Plan provides for the issuance of stock purchase rights,
incentive stock options and nonstatutory stock options. Effective in fiscal year
2000, the Plan provides for automatic annual increases in the number of shares
reserved for issuance
F-19
<PAGE> 95
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
under the Plan in an amount each year equal to the lesser of 1) 6% of the
outstanding amount on such date, 2) 6,000,000 shares or 3) such lesser amount as
may be determined by the board of directors.
Stock purchase rights that have been issued under the Plan are subject to a
restricted stock purchase agreement, whereby the Company has the right to
repurchase the stock upon the voluntary or involuntary termination of the
purchaser's employment with the Company at the original issuance cost. The
Company's repurchase right lapses at a rate determined by the Plan
administrator, but at a minimum rate of 20% per year. Through December 31, 1999,
the Company had issued 475,000 shares under restricted stock purchase
agreements, of which 200,000 shares have been repurchased. As of December 31,
1999 and March 31, 2000, 96,354 and 88,542 shares respectively, are subject to
repurchase at a weighted average price of $0.24 per share.
Under the Plan, the exercise price for incentive stock options is at least
100% of the stock's fair market value on the date of grant for employees owning
10% or less of the voting power of all classes of stock and at least 110% of the
fair market value on the date of grant for employees owning more than 10% of the
voting power of all classes of stock. For nonstatutory stock options, the
exercise price is also at least 110% of the fair market value on the date of
grant for employees owning more than 10% of the voting power of all classes of
stock.
Under the Plan, options generally expire in 10 years. However, the term of
the options may be limited to 5 years if incentive stock options are granted to
an optionee who owns stock representing more than 10% of the voting power of all
classes of stock. Vesting periods are determined by the Company's Board of
Directors and generally provide for shares to vest over a four-year period.
A summary of the status of the Company's options under the Plan is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------- ---------- --------------
<S> <C> <C> <C>
Balance, September 1, 1998
Shares reserved for grant............. 7,000,000 -- $ --
Granted............................... (2,206,000) 2,206,000 $0.05
Cancelled............................. 71,000 (71,000) $0.05
----------- ----------
Balance, December 31, 1998.............. 4,865,000 2,135,000 $0.05
Shares reserved for grant............. 2,900,000 -- $ --
Granted............................... (10,527,391) 10,527,391 $0.59
Exercised............................. -- (526,582) $0.07
Cancelled............................. 3,380,858 (3,380,858) $0.06
----------- ----------
Balance, December 31, 1999.............. 618,467 8,754,951 $0.70
Shares reserved for grant
(unaudited)........................ 8,600,000 -- $ --
Granted (unaudited)................... (2,368,600) 2,368,600 $5.54
Exercised (unaudited)................. -- (1,073,395) $0.85
Cancelled (unaudited)................. 78,083 (78,083) $1.71
----------- ----------
Balance, March 31, 2000 (unaudited)..... 6,927,950 9,972,073 $1.82
=========== ==========
</TABLE>
F-20
<PAGE> 96
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Weighted-average fair values per share of options granted during the
following years were:
<TABLE>
<S> <C>
1998........................................................ $0.06
1999........................................................ $2.66
</TABLE>
The following table summarizes information concerning options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE WEIGHTED
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES EXERCISE PRICE
------------ ----------- ------------ -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.05 1,572,626 8.90 $0.05 62,857 $0.05
$0.20 - $0.35 2,005,100 9.42 $0.30 28,350 $0.35
$ 0.40 2,295,975 9.58 $0.40 -- $0.00
$ 1.50 2,515,900 9.73 $1.50 16,000 $1.50
$ 2.00 365,350 9.88 $2.00 -- $0.00
--------- -------
8,754,951 9.48 $0.70 107,207 $0.35
========= =======
</TABLE>
As of December 31, 1998, 530,625 shares were exercisable at a
weighted-average exercise price of $0.05 per share. As of March 31, 2000, 85,735
shares were exercisable at a weighted-average exercise price of $0.36 per share.
STOCK-BASED COMPENSATION
In connection with stock options granted to employees to purchase common
stock, the Company recorded a deferred charge for stock-based compensation of
$39,000 for the period from September 1, 1998 (date of inception) to December
31, 1998, $23,473,000 for the year ended December 31, 1999 and $477,000 and
$11,752,000 for the three months ended March 31, 1999 and 2000, respectively.
Such amounts represent, for employee stock options, the difference at the grant
date between the exercise price of each stock option granted and the fair value
of the underlying common stock. The deferred charges for employee options are
being amortized to expenses using the graded vesting approach through fiscal
year 2004. Amortization of deferred stock-based compensation expense was $7,000
for the period from September 1, 1998 (date of inception) to December 31, 1998,
$8,524,000 in the year ended December 31, 1999 and $144,000 and $5,257,000 for
the three months ended March 31, 1999 and 2000, respectively. The amortization
of
F-21
<PAGE> 97
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
deferred stock-based compensation relates to the following items in the
accompanying statements of operations (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM THREE MONTHS
SEPTEMBER 1, 1998 ENDED
(DATE OF INCEPTION) MARCH 31,
TO DECEMBER 31, YEAR ENDED -------------
1998 DECEMBER 31, 1999 1999 2000
------------------- ----------------- ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Costs and expenses:
Application management services......... $-- $ 229 $ 26 $ 140
Professional services and other......... 1 427 15 267
Research and development................ 3 923 57 640
Sales and marketing..................... 1 2,769 3 1,534
General and administrative.............. 2 4,176 43 2,676
--- ------ ---- ------
$ 7 $8,524 $144 $5,257
=== ====== ==== ======
</TABLE>
In connection with stock options granted to non-employees to purchase
common stock, the Company recorded compensation of $57,000 in the year ended
December 31, 1999 and $214,000 for the three months ended March 31, 2000. Such
amount represents, for non-employee options, the deemed fair value of the option
at the date of vesting.
ADDITIONAL STOCK PLAN INFORMATION
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for the awards under
a method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SEPTEMBER 1, 1998
(DATE OF INCEPTION)
TO DECEMBER 31, YEAR ENDED
1998 DECEMBER 31, 1999
------------------- -----------------
<S> <C> <C>
Net loss:
As reported..................................... $(3,201) $(45,000)
Pro forma....................................... $(3,211) $(45,749)
Basic and diluted net loss per share:
As reported..................................... $ (3.89) $ (38.96)
Pro forma....................................... $ (3.90) $ (39.61)
</TABLE>
The Company calculated the fair value of each option on the date of grant
using the graded vesting approach with the following weighted-average
assumptions: no dividends; expected option term of four years; risk free
interest rates of 6.0% for the period from September 1, 1998 (date of inception)
to December 31, 1998 and 6.5% for the year ended December 31, 1999; and expected
volatility of 60% for the period from September 1, 1998 (date of inception) to
December 31, 1998 and 70% for the year ended December 31, 1999.
F-22
<PAGE> 98
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
EMPLOYEE STOCK PURCHASE PLAN
In February 2000, the board of directors approved to reserve 1,000,000
shares for issuance under the Employee Stock Purchase Plan 2000 (the "ESPP"). In
addition, the ESPP provides for automatic annual increases in the number of
shares reserved for issuance under the ESPP, in an amount each year equal to the
lesser of (1) 2.5% of the outstanding shares on such date, (2) 2,500,000 shares
or (3) such lesser amount as may be determined by the board of directors.
NOTE 12 -- EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified 401(k) defined contribution plan (the
"Plan") covering substantially all of its employees. Participants are permitted,
in accordance with the provisions of Section 401(k) of the Internal Revenue
Code, to contribute up to 25% of their earnings into the Plan. Contributions
made by the Company are discretionary, and the Company has not made any
contributions since inception of the Plan.
NOTE 13 -- SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING INFORMATION
The Company has adopted SFAS No. 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously required. Based on the information provided to the
Company's chief operating decision maker for purposes of making decisions about
allocating resources and assessing performance, the Company's operations have
been classified into two operating segments (i) application management services
and (ii) professional services. The operations of the Predecessor were
classified in a single operating segment, professional services. Corporate
expenses, including those for sales and marketing, general and administrative
and research and development, are not allocated to operating segments.
Disaggregated information is as follows (in thousands):
<TABLE>
<CAPTION>
APPLICATION
MANAGEMENT PROFESSIONAL
SERVICES SERVICES UNALLOCATED TOTAL
----------- ------------ ----------- --------
<S> <C> <C> <C> <C>
FOR THE PERIOD FROM SEPTEMBER 1, 1998 (DATE
OF INCEPTION) THROUGH DECEMBER 31, 1998
Revenues................................... $ -- $ 1,292 $ -- $ 1,292
Depreciation and amortization.............. $ -- $ 3 $ 16 $ 19
Segment profit (loss)...................... $ -- $ 253 $ (3,454) $ (3,201)
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenues................................... $ 746 $ 5,036 $ -- $ 5,782
Depreciation and amortization.............. $ 1,228 $ 124 $ 3,316 $ 4,668
Segment loss............................... $(5,551) $(2,719) $(36,730) $(45,000)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
Revenues................................... $ 1,137 $ 4,143 $ -- $ 5,280
Depreciation and amortization.............. $ 558 $ 49 $ 1,072 $ 1,679
Segment loss............................... $(4,764) $(1,328) $(22,427) $(28,519)
</TABLE>
The Company does not allocate all assets to its operating segments, nor
does it allocate interest revenue or interest expense. In addition, the Company
has no foreign operations.
F-23
<PAGE> 99
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Significant customer information is as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
PERCENT OF TOTAL REVENUE ACCOUNTS RECEIVABLE
-------------------------------------------------------------------- ---------------------------
DSCI CORIO CORIO
--------------------------------- -------------------------------- ---------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM
OCTOBER 1, 1997 SEPTEMBER 1, 1998
TO (DATE OF
YEAR ENDED SEPTEMBER 4, 1998 INCEPTION) YEAR ENDED
SEPTEMBER 30, (DATE OF TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 ACQUISITION) 1998 1999 1998 1999
------------- ----------------- ----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Customer A........... -- 32% 43% 19% 32% --
Customer B........... -- -- 11% -- 13% --
Customer C........... -- -- -- 18% -- --
Customer D........... -- -- -- -- -- 35%
Customer E........... 24% 33% -- -- -- --
Customer F........... 40% -- -- -- -- --
</TABLE>
NOTE 14 -- RELATED PARTY TRANSACTIONS
In connection with the acquisition of DSCI in September 1998, the Company
issued a secured subordinated promissory note for $2,328,000 to a stockholder of
the Company. Such note was not convertible at the issuance date. The promissory
note earned interest at 9.5% per annum and is payable in two equal payments
occurring on each of the first two anniversaries of the date of issuance. During
1999, the Company made the first cash payment of $1,336,000 (including principal
of $1,110,000 and interest of $226,000) and converted $1,000,000 (including
principal of $968,000 and interest of $32,000) into 153,846 shares of series C
preferred stock. As of December 31, 1999, and March 31, 2000, the outstanding
balance was $250,000, which will be repaid in fiscal year 2000.
In addition, 3,492,000 shares of the Company's series A preferred stock,
valued at $1,643,000, was issued to the same stockholder of the Company as a
result of the acquisition of DSCI (Note 2). Such shares were issued under a
restricted stock agreement, whereby the Company has the right to repurchase any
unvested shares at a price per share of $0.01. The vesting terms are as follows:
1,746,000 shares shall vest immediately, 582,000 shares shall vest within one
year, and the remaining 1,164,000 shares shall vest monthly over 36 months. In
February 2000, the Company released from its rights of repurchase 422,400 shares
of its series A preferred stock held by the stockholder, which resulted in
additional expense of $93,000 for the quarter ended March 31, 2000. As of March
31, 2000, 450,600 shares of series A preferred stock are subject to repurchase
at a price of $0.01 per share.
In January 1999, the Company entered into an outsourcer alliance agreement
with PeopleSoft for a software license to offer PeopleSoft software to customers
of the Company and for other rights, and in March 1999, the Company entered into
a software license and services agreement with PeopleSoft for a license to use
PeopleSoft software internally. Two directors of the Company are also members of
the board of directors of PeopleSoft. Pursuant to the agreements, the Company
paid a total of approximately $7.5 million to PeopleSoft in 1999, and the
Company had an accrued liability to PeopleSoft pursuant to these agreements of
approximately $1.8 million as of December 31, 1999.
NOTE 15 -- SUBSEQUENT EVENTS
In April 2000, the Company entered into an equipment lease line of credit
agreement to purchase up to an aggregate of $5,000,000. In connection with the
agreement, the Company issued
F-24
<PAGE> 100
CORIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
the lender a warrant to purchase up to $100,000 of the Company's common stock at
90% of the price per share of the common stock offered in an initial public
offering by the Company.
In April 2000, the Company issued 5,450,000 shares of senior series E
mandatorily redeemable preferred stock at $10.00 per share, for aggregate net
proceeds of approximately $54.5 million. The senior series E mandatorily
redeemable preferred stock converts to common stock upon an initial public
offering at 73% of the price per share of the common stock offered in an initial
public offering by the Company completed on or before December 31, 2000, or at
65% of the price per share in the event of certain transactions as defined. The
Company will record a $20.2 million charge for the beneficial conversion feature
inherent in this transaction which will increase net loss to derive net loss
attributable to common stockholders. Such adjustment will be recorded in the
period in which the Company completes an initial public offering.
On April 1, 2000 the Company amended its certificate of incorporation to
provide for total authorized capital of 138,000,000 shares of common stock and
44,127,000 shares of preferred stock. This has been retroactively reflected in
the financial statements.
In April 2000, we entered into a seven year strategic alliance with Ernst &
Young on behalf of its consulting division, E&Y consulting. In May 2000, Ernst &
Young completed a sale of substantially all of E&Y Consulting to Cap Gemini,
S.A. At the time of completion of this sale, E&Y Consulting assigned to Cap
Gemini all of its rights and obligations pursuant to its strategic alliance with
us, including the right to execute warrants we issued to E&Y on behalf of E&Y
Consulting. The consulting business previously conducted by E&Y Consulting is
now being carried out by Cap Gemini Ernst & Young, U.S. LLC, which now refers to
itself as CGEY. Pursuant to the Company's agreement with CGEY, CGEY has agreed,
for two years following the agreement, to designate and use the Company as its
exclusive ASP for companies in North and South America that have less than $1
billion of annual net revenues. CGEY has agreed that, during this period, it
will not offer the ASP services that the Company offers. CGEY has further agreed
that for five years following the initial two year exclusivity period, CGEY will
designate the Company as its "Preferred ASP Partner." In return, the Company has
issued CGEY the warrants discussed below, and has agreed to certain other
obligations. CGEY and the Company also agreed to work together to engage in
joint marketing and promotional activities.
As part of this agreement and in connection with Cap Gemini's acquisition
of E&Y Consulting, CGEY has been assigned and now holds four warrants to
purchase up to 7,000,000 shares of our common stock at an exercise price of
$6.50 per share. CGEY may exercise the first of these warrants to acquire
4,666,666 shares of our common stock during the 90 day period following this
offering. The second, third and fourth warrants become exercisable,
respectively, upon the achievement of target volume revenues resulting from
referrals by CGEY in each of our 2000, 2001 and 2002 fiscal years. The second,
third and fourth warrants may be exercised to acquire up to 933,333, 933,333,
and 466,667 shares of our common stock, respectively. The warrants are subject
to cancellation or repurchase in whole or in part under circumstances such as if
CGEY breaches a material provision of the agreement. The agreement itself may be
terminated prior to the end of the seven year term by consent of the parties or
unilaterally by a parting in the event the other party defaults in the
performance of a material provision of the agreement, subject to a cure period.
As these are performance based warrants, in accordance with EITF Issue No.
96-18, the fair value of the warrants issued will be remeasured each period
using the Black-Scholes option-pricing model. The related charges will be
recorded as a sales and marketing expense.
F-25
<PAGE> 101
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 4
Note Regarding Forward-Looking
Statements......................... 20
Use of Proceeds...................... 21
Dividend Policy...................... 21
Capitalization....................... 22
Dilution............................. 23
Selected Financial Data.............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 25
Business............................. 39
Management........................... 51
Certain Transactions................. 58
Principal Stockholders............... 61
Description of Capital Stock......... 63
Shares Eligible for Future Sale...... 67
Underwriting......................... 69
Validity of Common Stock............. 71
Experts.............................. 71
Change in Independent Auditors....... 71
Where You Can Find Additional
Information........................ 71
Index to Financial Statements........ F-1
</TABLE>
----------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
10,000,000 Shares
CORIO, INC.
Common Stock
----------------------
[CORIO LOGO]
----------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
ROBERTSON STEPHENS
EPOCH PARTNERS
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration Fee............................................ $ 39,468
NASD Fee.................................................... 5,500
Nasdaq National Market Listing Fee.......................... 78,875
Printing and Engraving...................................... 275,000
Legal Fees and Expenses..................................... 600,000
Accounting Fees and Expenses................................ 650,000
Blue Sky Fees and Expenses.................................. 25,000
Transfer Agent Fees......................................... 25,000
Miscellaneous............................................... 1,157
----------
Total.................................................. $1,700,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's certificate of incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach or
alleged breach of their duty of care to the Company or its stockholders. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the certificate of incorporation of the Registrant provides, inter alia, that
each person who is made a party or is threatened to be made a party to or
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a director or officer of the Company or, while a
director or officer of the Company, is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a director
or officer or in any other capacity while serving as a director or officer, is
authorized to be indemnified and held harmless by the Company to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee's heirs, executors and administrators; provided, however, that,
except with respect to the proceedings brought by an indemnitee to enforce
rights to indemnification (subject to certain restrictions and as more fully
described in the Registrant's certificate of incorporation), the Company shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company. The right to
indemnification conferred in the Registrant's certificate of incorporation
includes the right to be paid by the Company the expenses incurred in connection
with any such proceeding in advance of its final disposition; provided, however,
that, if and to the extent that the Delaware General Corporation Law requires,
such an advancement of expenses incurred by an indemnitee in his or her capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service with respect to an employee benefit plan, shall be made only
upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately
II-1
<PAGE> 103
be determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under the Company's certificate of incorporation or otherwise.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the bylaws, as well as certain additional procedural
protections. The indemnity agreements provide that directors and executive
officers will be indemnified to the fullest possible extent not prohibited by
law against all expenses (including attorney's fees) and settlement amounts paid
or incurred by them in any action or proceeding, including any derivative action
by or in the right of the Registrant, on account of their services as directors
or executive officers of the Registrant or as directors or officers of any other
company or enterprise when they are serving in such capacities at the request of
the Registrant. Pursuant to the indemnity agreements, the Company will not be
obligated to indemnify or advance expenses to an indemnified party with respect
to proceedings or claims initiated by the indemnified party and not by way of
defense, except with respect to proceedings specifically authorized by the board
of directors or brought to enforce a right to indemnification under such
indemnity agreement, the Company's certificate of incorporation, bylaws or any
statute or law, or as otherwise required under Section 145 of the Delaware
General Corporation Law. Also under the indemnification agreements, the Company
is not obligated to indemnify the indemnified party for (i) any expenses
incurred by the indemnified party with respect to any proceeding instituted by
the indemnified party to enforce or interpret the agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the indemnified party in such proceeding was not made in good faith or was
frivolous, (ii) acts, omissions or transactions on the part of the indemnified
party from which such party may not be relieved of liability under applicable
law or (iii) expenses and the payment of profits arising from the purchase and
sale by the indemnified party of securities in violation of Section 16(b) of the
Exchange Act, or any similar or successor statute.
The indemnification provisions in the certificate of incorporation and the
indemnification agreements entered into between the Registrant and its directors
and executive officers, may be sufficiently broad to permit indemnification of
the Registrant's officers and directors for liabilities arising under the 1933
Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant
10.1 Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive officers
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following consists of information regarding all securities sold by us
since September 1998:
1. In September 1998, we issued and sold 11,992,000 shares of our series A
preferred stock to a total of 5 investors at $0.47059 per share, for aggregate
proceeds of $4,000,015. One consultant was issued 135,000 shares of series A
preferred stock for his services in connection with our series A preferred stock
financing. The foregoing purchase and sale was exempt from Registration under
the Securities Act pursuant to Section 4(2), and Regulation D promulgated
thereunder, on the basis that the investors were "accredited" as defined therein
and the sale did not involve a public offering.
II-2
<PAGE> 104
2. In December 1998, we issued warrants to purchase up to 681,213 shares of
series A preferred stock at an exercise price of $1.24 per share. The foregoing
transaction was exempt from Registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a public
offering.
3. On February 23, 1999, we issued and sold 300,000 shares of common stock
to a member of our board of directors at $0.05 per share, for aggregate proceeds
of $15,000. This member of our board of directors subsequently resigned from our
board, after which time we purchased 200,000 of his shares under our right of
repurchase. The foregoing purchase and sale was exempt from Registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
4. On April 9, 1999, April 16, 1999 and May 7, 1999, we issued and sold
10,639,842 shares of series B preferred stock to a total of 21 investors at
$2.00 per share, for aggregate proceeds of $21,024,996. The foregoing purchase
and sale was exempt from Registration under the Securities Act pursuant to
Section 4(2), and Regulation D promulgated thereunder, on the basis that the
investors were "accredited" as defined therein and the sale did not involve a
public offering.
5. On July 7, 1999, we issued and sold 50,000 shares of common stock to a
consultant at $0.20 per share, for aggregate proceeds of $10,000. The foregoing
purchase and sale was exempt from Registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
6. On July 8, 1999, we issued and sold 25,000 shares of common stock to a
member of the board of directors at $0.40 per share, for aggregate proceeds of
$10,000. The foregoing purchase and sale was exempt from Registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
7. On August 2, 1999, we issued and sold 93,332 shares of series A
preferred stock to a consultant at $1.00 per share in exchange for services, for
aggregate proceeds of $93,332. The foregoing purchase and sale was exempt from
Registration under the Securities Act pursuant to Section 4(2) thereof on the
basis that the transaction did not involve a public offering.
8. In October 15, 1999, we issued warrants to purchase 50,000 shares of
common stock to Spieker Properties, L.P. at an exercise price of $6.50 per
share. The foregoing transaction was exempt from Registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
9. On October 29, 1999, November 15, 1999 and December 15, 1999, we issued
and sold 7,104,621 shares of series C preferred stock to a total of 31 investors
at $6.50 per share, for aggregate proceeds of $45,180,039. In October 1999, we
also issued and sold warrants to Concentric Network Corporation and Siebel
Systems, Inc. to purchase 307,692 shares of series C preferred stock at an
exercise price of $6.50 per share. The foregoing purchases and sales were exempt
from Registration under the Securities Act pursuant to Section 4(2), and
Regulation D promulgated thereunder, on the basis that the investors were
"accredited" as defined therein and the sale did not involve a public offering.
10. On December 27, 1999, we issued warrants to purchase 43,077 shares of
series C preferred stock to Comdisco, Inc. at an exercise price of $6.50 per
share, assuming this offering is completed on or before June 30, 2000. The
foregoing transaction was exempt from Registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transaction did not
involve a public offering.
11. On February 17, 2000, we issued 9,716 shares of common stock to Sison &
Company Limited in connection with consulting services. The foregoing purchase
and sale was exempt from Registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a public
offering.
II-3
<PAGE> 105
12. On April 20, 2000, we issued an aggregate of 5,450,000 shares of senior
series E mandatorily redeemable preferred stock to a total of twelve investors
at $10.00 per share, for aggregate net proceeds of approximately $54.5 million.
The foregoing purchase and sale was exempt from Registration under the
Securities Act pursuant to Section 4(2), and Regulation D promulgated
thereunder, on the basis that the investors were "accredited" as defined therein
and the sale did not involve a public offering.
13. Since September 1998, we have granted stock options under our 1998
Stock Plan, covering an aggregate of 9,279,937 shares of common stock (net of
expirations, exercises and cancellations) at exercise prices ranging from $0.05
to $12.00. The foregoing transactions were exempt from Registration under the
Securities Act pursuant to Rule 701.
14. Since September 1998, options to purchase 1,786,613 shares were
exercised with a weighted average exercise price of approximately $0.55 a share.
These transactions were exempt from Registration under the Securities Act
pursuant to Rule 701.
15. On April 19, 2000, we issued a warrant to purchase $100,000 of common
stock to Finova, at an exercise price equal to 90% of the price of our common
stock in this offering. The foregoing transaction was exempt from Registration
under the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
16. On April 20, 2000, we issued warrants to purchase up to 4,666,666
shares of common stock to Ernst & Young LLP, at an exercise price of $6.50 per
share in exchange for referral and marketing services. The foregoing transaction
was exempt from Registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public offering.
None of the transactions involved any underwriters, underwriting discounts
or commissions or any public offering, and we believe that each transaction was
exempt from registration requirements of the Securities Act by virtue of Section
4(2) thereof, Regulation D promulgated thereunder or pursuant to compensatory
benefit plans and contracts relating to compensation as provided under Rule 701.
The recipients in such transaction represented their intention to acquire the
securities for investment purposes only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments issued in such transactions. All
recipients had adequate access to information about us.
In particular, the securities described in the preferred stock financings
and warrant issuances pursuant to numbers 1, 2, 3, 6, 8, 9, 10 and 11 are owned
in their entirety by individuals or large institutional investors who (A)
represented to us that they were "accredited investors" within the definition of
Rule 501 of Regulation D, familiar with investing in private companies, (B)
represented to us that they understood that the securities they were purchasing
were restricted and the risk of possible loss associated with their investment,
(C) represented to us that they were familiar with our history and business, (D)
received our recent financial information and (E) were afforded the opportunity
to ask questions of our management. Each of the investors had expressed previous
interest to our officers and directors in making an investment in us when an
opportunity was available, and such investors were contacted only on a
one-on-one basis without any general solicitation or advertising of the
investment opportunity. Accordingly, we believe that the each of the foregoing
transactions was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
++1.1 Form of Underwriting Agreement
++3.1 Certificate of Incorporation of the Registrant
</TABLE>
II-4
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
++3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant
++3.3 Bylaws of the Registrant
++4.1 Form of Registrant's Common Stock Certificate
++5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding
legality of the securities being issued
++10.1 Form of Indemnification Agreement entered into by and
between the Registrant and each of its directors and
executive officers
++10.2+ Hosting License Agreement dated June 30, 1999 between the
Registrant and Active Software, Inc.
++10.3+ Master Agreement dated November 8, 1999 between the
Registrant and BroadVision, Inc.
10.4+ Reseller Agreement dated November 8, 1999 between the
Registrant and BroadVision, Inc.
10.5+ License and Hosting Agreement dated October 29, 1999 between
the Registrant and Commerce One, Inc.
++10.6+ Host Server Solutions Service Agreement dated January 29,
1999 between the Registrant and Concentric Network, Inc.
++10.7+ Amendment No. 1 to Host Server Solutions Service Agreement
dated August 23, 1999 between the Registrant and Concentric
Network, Inc.
10.8+ Amendment No. 2 to Host Server Solutions Service Agreement
dated June 1, 2000
++10.9 Alliance and Co-Marketing Agreement dated April 20, 2000
between the Registrant and Ernst & Young LLP
++10.10 Amended and Restated Investor Rights Agreement dated April
20, 2000 between the Registrant and Ernst & Young LLP
10.11+ Outsourcer Alliance Agreement dated January 1, 1999 between
the Registrant and PeopleSoft USA, Inc.
10.12 Marketing Alliance Agreement dated February 10, 2000 between
the Registrant and SAP America, Inc.
10.13+ Value Added Industry Remarketer Agreement dated August 13,
1999 between the Registrant and Siebel Systems, Inc.
++10.14 Form of Change in Control Agreement entered into by and
between the Registrant and certain of its officers.
++16.1 Letter regarding change in independent auditors
++20.1 1998 Stock Plan
++20.2 Employee Stock Purchase Plan 2000 and related agreements
++23.1 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included
in Exhibit 5.1)
23.2 Report on Financial Statement Schedule and Consent of
Independent Auditors
++24.1 Power of Attorney (see page II-7)
++27.1 Financial Data Schedule
</TABLE>
---------------
* To be filed by amendment.
+ Confidential treatment has been requested for certain portions of this
exhibit.
++ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned 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.
II-5
<PAGE> 107
Insofar as indemnification for liabilities arising under the Securities
Act, or Act, may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the 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 its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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 the 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-6
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 5 to Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Carlos, State of California, on the nineteenth day of July, 2000.
CORIO, INC.
By: /s/ GEORGE KADIFA
------------------------------------
George Kadifa,
President, Chief Executive Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 5 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ GEORGE KADIFA President and Chief Executive July 19, 2000
--------------------------------------------------- Officer and Director (Principal
George Kadifa Executive Officer)
* Executive Vice President and Chief July 19, 2000
--------------------------------------------------- Financial Officer (Principal
Eric J. Keller Financial and Accounting Officer)
* Founder and Chief Strategy Officer July 19, 2000
---------------------------------------------------
Jonathan J. Lee
* Director July 19, 2000
---------------------------------------------------
Vinod Khosla
* Director July 19, 2000
---------------------------------------------------
Aneel Bhusri
* Director July 19, 2000
---------------------------------------------------
Ted E. Schlein
* Director July 19, 2000
---------------------------------------------------
Roger S. Siboni
* Director July 19, 2000
---------------------------------------------------
George J. Still, Jr.
*By: /s/ GEORGE KADIFA
-----------------------------------------------
George Kadifa
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 109
SCHEDULE II
CORIO, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND DEDUCTIONS/ END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Accounts receivable allowances:
Predecessor:
For the year ended September 30, 1997...... $ -- $ -- $ -- $ --
For the period from October 1, 1997 to
September 4, 1998 (date of
acquisition)............................ $ -- $ -- $ -- $ --
Company:
For the period from September 1, 1998 (date
of inception) to December 31, 1998...... $ -- $138 $ -- $138
For the year ended December 31, 1999....... $138 $125 $ (30) $233
For the three months ended March 31, 2000
(unaudited)............................. $233 $277 $ -- $510
</TABLE>
II-8
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
++1.1 Form of Underwriting Agreement
++3.1 Certificate of Incorporation of the Registrant
++3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant
++3.3 Bylaws of the Registrant
++4.1 Form of Registrant's Common Stock Certificate
++5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding
legality of the securities being issued
++10.1 Form of Indemnification Agreement entered into by and
between the Registrant and each of its directors and
executive officers
++10.2+ Hosting License Agreement dated June 30, 1999 between the
Registrant and Active Software, Inc.
++10.3+ Master Agreement dated November 8, 1999 between the
Registrant and BroadVision, Inc.
10.4+ Reseller Agreement dated November 8, 1999 between the
Registrant and BroadVision, Inc.
10.5+ License and Hosting Agreement dated October 29, 1999 between
the Registrant and Commerce One, Inc.
++10.6+ Host Server Solutions Service Agreement dated January 29,
1999 between the Registrant and Concentric Network, Inc.
++10.7+ Amendment No. 1 to Host Server Solutions Service Agreement
dated August 23, 1999 between the Registrant and Concentric
Network, Inc.
10.8+ Amendment No. 2 to Host Server Solutions Service Agreement
dated June 1, 2000
++10.9 Alliance and Co-Marketing Agreement dated April 20, 2000
between the Registrant and Ernst & Young LLP
++10.10 Amended and Restated Investor Rights Agreement dated April
20, 2000 between the Registrant and Ernst & Young LLP
10.11+ Outsourcer Alliance Agreement dated January 1, 1999 between
the Registrant and PeopleSoft USA, Inc.
10.12 Marketing Alliance Agreement dated February 10, 2000 between
the Registrant and SAP America, Inc.
10.13+ Value Added Industry Remarketer Agreement dated August 13,
1999 between the Registrant and Siebel Systems, Inc.
++10.14 Form of Change in Control Agreement entered into by and
between the Registrant and each of its executive officers.
++16.1 Letter regarding change in independent auditors
++20.1 1998 Stock Plan
++20.2 Employee Stock Purchase Plan 2000 and related agreements
++23.1 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included
in Exhibit 5.1)
23.2 Report on Financial Statement Schedule and Consent of
Independent Auditors
++24.1 Power of Attorney (see page II-7)
++27.1 Financial Data Schedule
</TABLE>
---------------
* To be filed by amendment.
+ Confidential treatment has been requested for certain portions of this
exhibit.
++ Previously filed.
