<PAGE>
As filed with the Securities and Exchange Commission on October 26, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRINAGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 7372 95-4822603
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
19191 S. Vermont Ave., 9th Floor
Torrance, California 90502
(310) 630-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
David P. Woodall
Chief Executive Officer
19191 S. Vermont Ave., 9th Floor
Torrance, California 90502
(310) 630-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Robert M. Mattson, Jr. Brian K. Beard
Charles S. Kaufman Jeffrey A. Mullins
Craig S. Mordock Rod Teasley
Brandon C. Parris GUNDERSON DETTMER STOUGH VILLENEUVE
MORRISON & FOERSTER LLP FRANKLIN & HACHIGIAN, LLP
19900 MacArthur Boulevard, 12th Floor 2700 Via Fortuna, Suite 300
Irvine, California 92612 Austin, Texas 78746
(949) 251-7500 (512) 732-8400
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
=========================================================================================
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) Registration Fee(1)
-----------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.0001 par value.......... $75,000,000 $19,800
=========================================================================================
</TABLE>
(1) Estimated solely for purpose of calculating the amount of the registration
fee. This estimate is made in accordance with Rule 457(o) under the
Securities Act of 1933, as amended.
---------------
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 that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission becomes effective. This prospectus is not +
+an offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 26, 2000
PRELIMINARY PROSPECTUS
Shares
[LOGO OF TRINAGY, INC. APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of our common stock. We are
selling all of the shares of common stock offered under this prospectus.
There is currently no public market for our common stock. We currently
anticipate that the initial public offering price for our shares will be
between $ and $ per share. We have applied to have our common stock
approved for quotation on the Nasdaq National Market under the symbol "TRGY".
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4 to read about risks you should consider before
buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved 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>
Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds, before expenses, to us.................................... $ $
</TABLE>
-----------
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock from us at the initial public offering
price less the underwriting discount. The underwriters expect to deliver the
shares on or about , 2001.
-----------
Bear, Stearns & Co. Inc.
CIBC World Markets
Wit SoundView
C.E. Unterberg, Towbin
The date of this prospectus is , 2000
<PAGE>
[DESCRIPTION OF GRAPHICS ON INSIDE COVER]
[The top half of the page consists of a graphic depiction of a sunrise. In
the upper left hand corner of the page appears the Trinagy logo. The lower half
of the page consists of a black strip. The sentence "Imagine what you can see
today." appears on the black strip in white print. In the lower right hand
corner of the page there is a vertical red rectangle. The word "TREND" appears
in the red rectangle in black print.]
<PAGE>
[DESCRIPTION OF GRAPHICS ON INSIDE FRONT COVER]
[This graphic is divided into three columns entitled from left to right,
"Collection," "Processing" and "Reporting." Each column is subdivided into three
separate horizontal tiers entitled from top to bottom, "Global Tier," "Regional
Tier" and "Local Tier." The Global Tier of the Collection column contains images
of computer equipment labeled "Data Sources" connecting to images of pipes
labeled "Data Pipes" connecting to an image labeled "Servers." A broken arrow
drops down from the Servers on the Global Tier and branches off to a graphic of
regional servers on the Regional Tier. The broken arrow continues down from the
Regional Tier and connects to local servers on the Local Tier. To the left of
the local servers appears a graphic labeled "Call Record System" which is
connected by a data pipe connecting to the local servers. Directly below the
graphic labeled Call Record System appears a graphic in the shape of a cloud
labeled "SNMP and Non-SNMP Agents" connected by a data pipe connecting to the
local servers. Below the column entitled Collection appears seven bullet points.
The first bullet point reads, "TREND's caching pollers interrogate network
devices and data stores for network activity, availability and performance
data." The second bullet point reads, "DataPipes collect, reformat and then
insert data into open platform TREND servers." The third bullet point reads,
"simple network management protocol (SNMP) data can be collected via DataPipes."
The fourth bullet point reads, "Other available DataPipes collect data from non-
SNMP sources." The fifth bullet point reads, "DataPipe development tools ease
creation of custom DataPipes to capture information from other data sources such
as operational support systems (OSS)/business support systems (BSS), Radius
servers and voice over IP (VoIP) gateways." The sixth bullet point reads, "TREND
pollers, DataPipes, TREND servers, TRENDweb servers and Database servers are
deployed in a variety of configurations to meet each customer's unique
requirements." The seventh bullet point reads, "Provisioning, asset and other
OSS/BSS related information can be collected centrally and then automatically
distributed to localized servers."
In the Global Tier of the Processing column are three images of computer
equipment labeled "TREND Clients" connected to a cloud graphic labeled
"Network." From the Network cloud, an arrow with dashes moves to the right and
connects with a graphic similar to that of the global servers in the Global Tier
section of the Collection column. An arrow with dashes also connects the Servers
to the Network cloud. A second arrow drops down from the Network cloud and
connects to a graphic similar to that of the graphic on the Regional Tier
section of the Collection column. A third arrow with dashes drops down from the
Network cloud and connects to a graphic similar to that of the graphic on the
local tier of the Collection column. An arrow labeled "Processed Data" moves
straight up from the graphic of the local servers on the Local Tier to the
graphic of the regional servers on the Regional Tier. Another arrow labeled
"Processed Data" moves straight up from the graphic of the regional servers on
the Regional Tier and connects to the graphic of the global servers on the
Global Tier. Below the column entitled "Processing" appears four bullet points.
The first bullet point reads, "TREND servers process, aggregate and prepare
collected data for report presentation." The second bullet point reads, "Data
aggregation and statistical analysis options, including time-based summarization
are supported." The third bullet point reads, "Summarized or unnecessary data is
automatically aged and moved from TREND server databases." The fourth bullet
point reads, "Processed data is automatically forwarded to centralized or
specialized TREND servers for further processing and correlation."
In the Global Tier of the Reporting column an arrow with dashes labeled
"TREND Server Data" moves from a graphic similar to that in the Collection and
Processing column straight to the right and branches off into a series of
vertically aligned images of computer equipment labeled from top-to-bottom:
"Billing System;" "Provisioning System;" "Asset Management System;" "Customer
Relationship Management;" "Help Desk;" "Other Database Applications;" and "Other
Reporting Applications." The same arrow with dashes branches off and drops down
and connects to a graphic in the shape of a cloud labeled "Network" on the
Regional Tier. A second arrow with dashes labeled "TRENDweb Server Data drops
down from the global servers and connects to the Network cloud on the Regional
Tier. To the left of the Network cloud appears an image identical to the
regional servers in the Collection and Processing column. From the regional
servers one broken arrow labeled "TRENDweb Server Data" and a second broken
arrow labeled "TREND Server Data" move straight to the right and connects to the
Network cloud. Arranged concentrically
<PAGE>
around the Network cloud is a series of four images of computer equipment with
lines connecting the images to the Network cloud. A graphic identical to the
local servers appears in the Local Tier with one broken arrow labeled "TRENDweb
Server Data" and a second broken arrow labeled "TRENDserver Data" connecting
the local server to the Network cloud. From the right portion of the Network
cloud, two graphics in the shape of documents appear vertically above each
other, both connected to the Network cloud and labeled from top-to-bottom:
"Report Packs" and "Custom Reports." To the right of each of the images labeled
"ReportPack" and "Custom Reports" a straight line connects to vertical graphics
in the shape of a larger documents that contains faint images of small graphs
and text appearing on the interior of the graphic. Below the column entitled
Reporting appears four bullet points underneath. The first bullet point reads,
"TREND ReportPacks provide predefined reporting solutions for key devices,
applications and networking technologies." The second bullet point reads,
"ReportPacks include executive summary capacity planning, service level
management and other views of network and system performance." The third bullet
point reads, "Users can customize existing reports or create new reports using
TRENDweb." The fourth bullet point reads, "The open platform database and TREND
server export data utilities and support integration with other systems
including OSS/BSS and reporting applications." At the bottom right corner of
the graphic is the Trinagy logo.]
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 30
Management............................................................... 42
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 65
Experts.................................................................. 65
Where You Can Find Additional Information................................ 65
Index to Consolidated Financial Statements............................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, particularly the risks of investing in our common stock
discussed under the caption "Risk Factors" and the consolidated financial
statements and accompanying notes before you decide to buy our common stock.
Trinagy
Our Business
We provide a highly scalable and flexible service level management software
solution that is designed to address the needs of network service providers and
large enterprises. Our TREND software products monitor, analyze and report on
the performance and quality of service of information technology (IT)
infrastructures, which consist of network devices, servers and server-based
applications. Our solution offers customers a user-friendly interface to
proactively manage their IT resources by analyzing global and specific network
resource activity levels and trends, anticipating future demand and preparing
customized reports.
As organizations rely upon more complex communication networks, they are
increasingly outsourcing their network infrastructures to service providers.
This trend toward outsourcing has led many of these providers to introduce new,
differentiated services and to bundle infrastructure management solutions into
their overall service packages. Businesses that outsource their network
infrastructures are demanding guaranteed levels of network performance through
formal service level agreements. The use of these agreements has created a need
for service level management software that can provide the insight needed to
assess network performance and build personalized services.
Our TREND software products are built on a distributed architecture that
allows data to be collected, processed and analyzed locally, regionally or
centrally. This distributed architecture also makes our solution highly
scalable, which enables customers to deploy additional products and systems as
their networks and IT systems expand or diversify. We believe that our TREND
software products offer increased revenue opportunities for service providers,
proactive network planning capabilities for network engineers and increased
benefits for network end users such as reduced downtime and greater
productivity.
As of September 30, 2000 we had over 400 customers worldwide, including
network service providers such as AT&T, BT, IBM and Verizon, and enterprises
such as FedEx, General Electric and Staples. We sell our software to network
service providers and large enterprises worldwide primarily through our direct
sales organization. In addition, we have established relationships with
strategic marketing partners, systems integrators, network equipment vendors,
service providers and resellers to help us achieve broader market penetration.
For example, we recently entered into a global pass-thru reseller agreement
with Nortel Networks.
Our goal is to become the leading supplier of service level management
software. To achieve this goal we intend to:
. maintain a leadership position in the network service provider market;
. maintain and broaden our technology leadership position;
. leverage our existing customer base;
. expand our indirect sales channel; and
. expand our global presence.
As of September 30, 2000, we had 147 full time employees, including 66 in
sales and marketing, 46 in research and development, 23 in customer service and
12 in administrative.
We were incorporated in California in November 1988 as DeskTalk Systems,
Inc. We began doing business as Trinagy in September 2000. We plan to
reincorporate in Delaware as Trinagy, Inc. prior to the completion of this
offering. Our principal executive offices are located at 19191 S. Vermont
Avenue, 9th Floor, Torrance, California 90502. Our telephone number at that
location is (310) 630-1000.
1
<PAGE>
The Offering
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<C> <S>
Common stock offered by Trinagy ................... shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... We intend to use the net
proceeds from the offering
for general corporate
purposes, including
working capital and
capital expenditures. See
"Use of Proceeds" on page
16 for more detailed
information.
Proposed Nasdaq National Market symbol............. TRGY
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on shares of our common stock outstanding as of June 30, 2000. This
calculation:
. includes an aggregate of 6,558,828 shares of common stock to be issued
upon conversion of all of our outstanding shares of preferred stock
outstanding on that date;
. excludes 239,851 shares of common stock issuable upon exercise of
warrants outstanding on that date at a weighted average exercise price
of $1.98 per share;
. excludes 5,020,247 shares of common stock to be issued upon exercise of
options outstanding as of that date at a weighted average exercise price
of $1.38 per share;
. excludes 950,630 shares reserved for future issuance under our existing
stock plans;
. excludes 2,500,000 shares that will be available for issuance under our
2001 Stock Incentive Plan upon completion of this offering and annual
increases in the number of shares authorized under that plan beginning
January 1, 2002; and
. excludes 1,000,000 shares that will be available for future issuance
under our 2001 Employee Stock Purchase Plan upon completion of this
offering and annual increases in the number of shares authorized under
that plan beginning January 1, 2002.
For a more detailed discussion of our capital stock and stock option plans
please refer to notes 7 and 8 to the financial statements, "Management--
Employee Benefit Plans" on page 47, and "Description of Capital Stock" on page
57.
Unless we indicate otherwise, all information contained in this prospectus
assumes that:
. we will have effected a 3 for 2 split of our common stock prior to this
offering;
. all outstanding shares of convertible preferred stock will be converted
into common stock on a 3 for 2 basis upon completion of this offering;
. our certificate of incorporation will have been amended to, among other
things, authorize 5,000,000 shares of undesignated preferred stock and
100,000,000 shares of common stock; and
. the underwriters have not exercised their over-allotment option.
2
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following table sets forth our summary consolidated financial data for
the periods indicated. You should read this information together with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus and the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
----------- ------ ------- ------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Software licenses........................ $1,044 $2,277 $ 3,602 $ 4,524 $ 6,912 $ 2,642 $ 5,826
Services................................. 339 645 1,135 1,953 3,390 1,730 2,138
------ ------ ------- ------- ------- ------- -------
Total revenues.......................... 1,383 2,922 4,737 6,477 10,302 4,372 7,964
------ ------ ------- ------- ------- ------- -------
Gross profit.............................. 1,299 2,594 4,067 4,788 7,672 3,198 6,061
Operating income (loss) .................. 53 143 (2,247) (5,970) (7,770) (3,404) (4,965)
Net income (loss) ........................ 50 180 (2,243) (6,140) (7,622) (3,282) (4,857)
====== ====== ======= ======= ======= ======= =======
Basic and diluted net income (loss) per
share.................................... $ 0.02 $ 0.05 $ (0.53) $ (1.39) $ (1.16) $ (0.71) $ (0.69)
====== ====== ======= ======= ======= ======= =======
Shares used in computing basic and diluted
net loss per share ...................... 2,699 3,414 4,214 4,425 6,552 4,595 7,056
====== ====== ======= ======= ======= ======= =======
Pro forma basic and diluted net income
(loss) per share (unaudited)............. $ (0.71) $ (0.36)
======= =======
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited).............................. 10,707 13,615
======= =======
</TABLE>
The pro forma loss per common share assumes the conversion of all
outstanding shares of convertible preferred stock into common stock on a 3 for
2 basis upon completion of this offering. See note 12 of the notes to
consolidated financial statements.
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------
(unaudited)
Actual As Adjusted
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<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................... $11,368 $
Working capital ............................................ 7,670
Total assets ............................................... 17,102
Total stockholders' equity ................................. 8,855
</TABLE>
The as adjusted data summarized above adjusts the actual amounts to reflect
the application of the net proceeds from the sale of shares of common
stock offered by us at an assumed initial public offering price of $
per share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
3
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock. If any of the following risks actually occur, our
business, financial condition and results of operations would likely suffer. In
these circumstances, the market price of our common stock could decline, and
you may lose all or part of your investment.
Risks Related to Our Business
Our operating results may fluctuate as a result of factors outside our control,
which could cause our stock price to fluctuate or decline.
Our operating results have fluctuated in the past, and are likely to
fluctuate significantly in the future based upon a number of factors related to
our industry and the markets for our products. We have little or no control
over many of these factors. We operate in a highly dynamic industry and future
results could be subject to significant fluctuations, particularly on a
quarterly basis. As a result, our quarterly revenues and operating results may
fail to meet or exceed the expectations of securities analysts and investors,
which could cause the market price for our common stock to decline
substantially. Factors that may contribute to the fluctuation of our operating
results and volatility of our stock price include:
. the demand for our products and services;
. the timing of sales of our products and services;
. the timing of customer orders and product implementations;
. the introduction of new products and enhanced services by us or our
competitors;
. deferrals of customer orders in anticipation of software enhancements;
. unexpected delays in introducing new products and services;
. changes in our competitors' pricing policies;
. changes in the mix of our sales, including the mix between higher margin
software products and relatively lower margin services;
. technological changes in IT infrastructures, which could require us to
modify our products or develop new products;
. market acceptance of our products; and
. changes in customer purchasing cycles.
In addition, we have experienced and may continue to experience seasonality
in the sales of our products and services. We have historically experienced
greater sales growth during the fourth quarter and reduced sales growth in the
first quarter. Moreover, sales of our products and services in Europe and other
parts of the world are significantly reduced during our third quarter due to
the reduction of business activities by many of our customers. Due to these
factors and those discussed above, investors should not rely on quarter-to-
quarter comparisons of our results of operations as indicators of future
performance.
We have incurred losses since 1997 and we expect to incur losses for the
foreseeable future.
We have incurred net losses and losses from operations for each period since
1997 and we expect to incur losses for the foreseeable future. We incurred net
losses of $2.2 million, $6.1 million and $7.6 million for the years ended
December 31, 1997, 1998 and 1999, and $4.9 million for the six months ended
June 30, 2000.
4
<PAGE>
We had an accumulated deficit of $17.5 million as of December 31, 1999 and
$22.0 million as of June 30, 2000. We expect to continue to incur substantial
operating losses for the foreseeable future. We cannot predict the extent of
our future losses or when we may become profitable. If we do achieve
profitability, we may not be able to sustain or increase profitability in the
future. We expect to incur increasing sales and marketing, research and
development and general and administrative expenses. As a result, we will need
to significantly increase our revenues to achieve profitability. Although our
revenues have increased, our growth may not continue at the current rate or at
all.
We are growing rapidly, and our failure to manage this growth could harm our
business.
We have experienced and are currently experiencing a period of significant
growth. Our full-time employees increased from 61 at December 31, 1998 to 97 at
December 31, 1999 to 147 at September 30, 2000. This growth has placed a
significant strain on our resources. We expect that any future growth would
cause similar or increased strains on our resources. As part of this growth, we
will have to implement new operational and financial systems and procedures and
controls; expand, train and manage our employee base; and maintain close
coordination among our technical, accounting, finance, marketing and sales
staffs. If we are unable to manage our growth effectively, our business,
results of operations and financial condition could be adversely affected.
Several members of our senior management joined us in 2000. Although we
believe that these individuals are currently integrated with the other members
of our management team, we cannot assure you that our management team will be
able to continue to work together effectively or to manage our growth
successfully. We believe that the successful integration of our management team
is critical to our ability to manage our operations effectively and support our
anticipated future growth.
Our sales cycles are long and unpredictable, which makes period-to-period
revenues difficult to predict.
Because the market for our network performance management software products
and related services is new, we experience long and unpredictable sales cycles.
The sales cycle for our network performance management software typically
ranges from two to six months. In the early stages of this market, our
customers have frequently viewed the purchase of our products as part of a
long-term strategic decision regarding the management of their IT
infrastructure. This decision process has sometimes resulted in customers
taking a long period of time to assess alternative solutions by our competitors
or deferring a purchase decision until the market evolves. Sales cycles
continue to be long and the timing of purchase decisions by individual
customers remains at times uncertain. We must continue to educate potential
customers on the use and benefits of our products and services, as well as the
integration of our products and services with additional software applications
utilized by the individual customers. Because our sales cycle is long and the
timing of individual orders is uncertain, our period-to-period revenues may be
difficult to predict.
Our revenues depend in large part on service providers, including
telecommunications companies, and any adverse trend in these customers' markets
could adversely affect our results of operations.
We have historically generated significant portions of our revenues by
licensing our products to customers in the service provider industry, which
include telecommunications companies, Internet service providers (ISPs),
application service providers (ASPs) and other outsourcers. For the year ended
December 31, 1999 and the six months ended June 30, 2000, revenues from
customers in the service provider industry represented 75% and 68% of our total
revenues. We expect that a significant portion of our revenues will continue to
be attributable to the licensing of our products to customers in the service
provider industry. Our future performance depends significantly upon the
service provider market generally and any adverse trend in that market would
have a harmful effect on our business and results of operations. In particular,
if service provider customers incorporate fewer of our solutions as part of
their product and service offerings to service users, our business could be
adversely affected.
5
<PAGE>
We may be unable to attract or retain highly skilled employees that are
necessary for the success and growth of our business.
Our ability to grow and be successful depends on our continuing ability to
attract, motivate and retain highly skilled employees. We depend on the
continued services of senior management and other personnel, particularly
David Woodall, our Chief Executive Officer. We do not currently maintain a key
person life insurance policy on our Chief Executive Officer. As we continue to
grow, we will need to hire additional personnel in all operational areas.
Competition for personnel in our industry is intense. We have experienced in
the past and expect to continue to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
If we do not succeed in attracting or retaining such personnel, our business
could be adversely affected.
Our future growth depends on our ability to expand internationally, and
factors specific to international expansion may prevent us from achieving this
growth.
We have a limited history of marketing, selling and supporting our products
and services internationally. We first established a presence in the United
Kingdom in April 1998. Revenues from customers outside North America
represented 23% and 32% of our total revenues for the year ended December 31,
1999 and the six months ended June 30, 2000. We intend to expand our
international operations to achieve additional growth, but we may face
significant challenges to our international expansion. The expansion of our
existing international operations and entry into additional international
markets will require significant management attention and financial resources.
To expand internationally we must hire and train qualified personnel to staff
and manage our international operations. However, we may experience
difficulties in recruiting and training an international staff. We must also
be able to enter into strategic relationships with companies in international
markets. If we are not able to maintain successful strategic relationships
internationally or recruit additional companies to enter into strategic
relationships, our future growth could be limited.
To achieve broad acceptance in some international markets, particularly
Asia, we may need to localize our products to handle native languages in these
markets. Localizing our products is a complex process and we intend to work
with third parties to develop these localized products. To date, we have not
localized our products for any international market and we cannot assure you
that our localization efforts will be successful.
We also face other risks inherent in conducting business internationally,
such as:
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonal business activity in certain parts of the world;
. potentially adverse tax consequences;
. fluctuations in currency exchange rates;
. political and economic instability; and
. trade barriers.
Any of these factors could seriously harm our international operations and,
consequently, our business.
Our business will suffer if we do not significantly expand and manage our
direct sales force and our indirect sales channels.
We sell our network performance management software products primarily
through our direct sales force. We must significantly expand our direct sales
operations to increase our revenues. We cannot be certain that we will be
successful in these efforts. Our products and services require sophisticated
sales efforts and our ability to increase our direct sales operation will
depend on our ability to attract, train, motivate and retain top sales people
with effective sales skills and advanced technical knowledge. Competition for
qualified sales personnel
6
<PAGE>
is intense in our industry. Moreover, new sales personnel require training and
take time to achieve full productivity. If we are unable to hire or retain
qualified sales personnel, if newly hired personnel fail to develop the
necessary skills, or if they reach productivity more slowly than anticipated,
we may be unable to grow our revenues as rapidly as planned, if at all, and our
business could be harmed.
In addition, to increase our sales, we must, among other things, further
expand and manage our indirect sales channels through agreements with
distributors, systems integrators and resellers. Software license revenues
through our indirect channels comprised approximately 10% and 20% of our total
software license revenues for the year ended December 31, 1999 and the six
months ended June 30, 2000. If we are unable to expand and manage these
indirect sales channels, if the parties within our indirect sales channels are
unable or unwilling to effectively market and sell our products, or if we lose
existing relationships with these parties, we might not be able to increase our
revenues and our business and results of operations could be significantly
harmed.
Customer satisfaction and demand for our products will depend on our ability to
expand our services organization.
We believe that growth in our product license revenues depends on our
ability to provide our customers with services to assist with support,
training, consulting and initial implementation and deployment of our products.
As a result, we plan to increase the number of service personnel to meet these
needs. New service personnel will require training and take time to reach full
productivity. We may not be able to attract, motivate or retain a sufficient
number of highly qualified service personnel. Competition for qualified service
personnel is intense due to the limited number of people who have the requisite
knowledge and skills. To meet our customers' needs for services, we may also
need to use more costly third-party consultants to supplement our own services
group. In addition, we could experience delays in recognizing revenue if our
services group fails to complete implementations in a timely manner.
Our inability to maintain and establish new relationships with strategic
partners could cause our revenues to decline.
We have developed strategic joint product development and marketing
relationships that include developing compatible products, cross training
personnel and implementing joint marketing. We intend to continue to develop
new relationships with strategic partners. Our success will depend largely upon
our ability to develop and maintain these and similar relationships and on the
performance and success of these third parties. We may not be able to further
develop and fully benefit from our existing relationships. In addition, we have
established these relationships only recently, and we cannot predict the degree
to which we will be able to develop compatible products or successful joint
marketing programs. If we are unable to establish and maintain these
relationships, our future sales volume may decline. In addition, our current
agreements with our strategic partners are not exclusive, and these partners
may develop relationships with our competitors.
Our prospects for obtaining additional financing, if required, are uncertain
and failure to obtain needed financing could affect our ability to pursue
future growth.
We currently anticipate that our available cash and cash equivalents,
together with the proceeds of this offering, available borrowings under our
line of credit and proposed increases to that line, will be sufficient to meet
our anticipated working capital and capital expenditure requirements for at
least 12 months after the date of this prospectus. We may need to raise
additional funds, however, to respond to business contingencies which may
include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. develop new or enhance existing products and services;
. enhance our operating infrastructure;
7
<PAGE>
. hire additional personnel;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
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 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.
Because we rely on our TREND software products and related services for
substantially all of our revenues, our failure to commercialize them
successfully or to offer additional products could weaken our competitive
position and adversely affect our business.
We currently derive substantially all of our revenues from licensing fees
and services related to our TREND software products. We anticipate that
revenues from these products and services will continue to account for
substantially all of our revenues for the foreseeable future. Broad market
acceptance of our TREND software products is, therefore, critical to our future
success, and any factor adversely affecting sales or pricing levels of these
products could have an adverse affect on our business, results of operations
and financial condition. In addition, we cannot assure you that market
acceptance of our products will increase or even remain at current levels.
Factors that may affect the market acceptance of our TREND software products
include the availability and price of competing products and technologies and
the success of our sales efforts and those of our marketing partners.
Our future performance will also depend in part on the successful
development, introduction, and marketing of new and enhanced products. We
cannot assure you that we will be able to develop, introduce and market any new
or enhanced products, and our failure to do so would have an adverse effect on
our business, results of operations and financial condition. Furthermore, in
order to be successful in this emerging market, we must be able to
differentiate ourselves from our competitors through our products and service
offerings and brand name recognition. We may not be successful in
differentiating ourselves or achieving widespread market acceptance of our
products and services. In addition, organizations that have already invested
substantial resources in other methods of managing their computer hardware and
software systems may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing management products.
The inability of our products to operate with the products used by our present
and potential customers would harm our revenues.
Our products are designed to operate on a variety of hardware and software
platforms employed by our customers in their networks. We must continually
modify and enhance our products to keep pace with changes in hardware and
software platforms and database technology. As a result, uncertainties related
to the timing and nature of new product announcements, introductions or
modifications by hardware and software vendors could materially adversely
impact our business, operating results or financial condition. The failure of
our products to operate effectively across the various existing and evolving
versions of hardware and software platforms and database environments could
have a material adverse effect on our business, operating results or financial
condition.
We face intense competition, which could affect our ability to acquire and
retain customers, increase our revenues and our market share.
Our market is intensely competitive, and we expect competition to intensify
in the future. Our failure to maintain and enhance our competitive position
could seriously harm our business. Our customers' requirements
8
<PAGE>
and the technology available to satisfy those requirements are continually
changing. Therefore, we must be able to respond to these changes in order to
remain competitive. Our competitors vary in size and in the scope and breadth
of products and services offered.
Our primary source of competition comes from suppliers of comparable
products, including Concord Communications, CrossKeys Systems, InfoVista,
NetScout Systems and Quallaby. Other sources of actual or potential competition
include:
. suppliers of system management products, such as BMC Software, Computer
Associates, Compuware, Hewlett-Packard and Tivoli Systems (an IBM
company);
. providers of other network management products, such as Micromuse,
Objective Systems Integrators, Visual Networks and Lucent Technologies
(through its VitalSuite product);
. parties who act as outsourcers of network infrastructure management
services; and
. organizations' internal design and development teams that produce
customized applications for their specific needs.
Many of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do, and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have broader name recognition and more
extensive customer bases that they could leverage, thereby gaining market share
to our detriment. They may be able to undertake more extensive promotional
activities, adopt more aggressive pricing strategies, and offer purchasers more
attractive terms than we can. Our competitors may develop products that are
superior to ours or that achieve greater market acceptance. In addition,
current and potential competitors may establish cooperative relationships among
themselves or with third parties to enhance their products to address customer
needs.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our products. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business would be seriously harmed.
We rely on third-party software incorporated in our products and any impaired
relations with these third parties, errors in the third-party software or
inability to enhance the software over time could harm our business.
We rely on third-party software that we license from a number of suppliers.
We currently rely on a license with Sybase for the database our TREND software
products use to store data gathered through our software solution. We also rely
on Merant to provide an interface between the database and our TREND software
products and Allaire to enable Java servlet technology to be embedded in the
TREND software products. These licenses may not continue to be available to us
on commercially reasonable terms or at all. It may be difficult for us to
replace any third-party software if a vendor seeks to terminate our license to
the software. If these licenses become unavailable to us on reasonable terms or
at all, our business would be materially and adversely affected. In addition,
it may be more difficult for us to correct any errors in third-party software
that we license because the software is not within our control. We expect to
incorporate additional third-party software into our products as we expand our
product line and broaden our service offerings and may have to rely on
strategic relationships or other third parties to expand the functionality of
our product line.
Software defects could lead to loss of revenues or delay the market acceptance
of our products.
Our network performance management software products are complex and,
accordingly, may contain undetected errors or failures when first introduced or
as new versions are released. This may result in loss of, or delay in, market
acceptance of our products. We have in the past discovered software errors in
our new releases
9
<PAGE>
and new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience delays in
release, customer dissatisfaction and potentially lost revenues during the
period required to correct these errors. We may in the future discover errors
or scalability limitations in new releases or new products after the
commencement of commercial shipments.
We could be subject to potential product liability and warranty claims by
customers if our products were to interfere with the operations of our
customers' other software applications.
Our products are integrated with our customers' networks and software
applications. The sale and support of our products may entail the risk of
product liability or warranty claims based on disruption to these networks or
applications. In addition, the failure of our products to perform to customer
expectations could give rise to warranty claims. Any of these claims, even if
not meritorious, could result in costly litigation or divert management's
attention and resources. Although we carry general liability insurance, our
current insurance coverage would likely be insufficient to protect us from all
liability that may be imposed under these types of claims. A material product
liability claim could seriously harm our results of operations.
Our success depends in part upon our ability to protect our intellectual
property, but we may not be able to do so adequately.
Our success depends in large part upon our proprietary technology. 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. We license rather than
sell our products and require our customers to enter into license agreements,
which impose restrictions on their ability to utilize the software. In
addition, we seek to avoid disclosure of our trade secrets through a number of
means, including requiring those persons with access to our proprietary
information to execute nondisclosure agreements with us and restricting access
to our source code. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection.
We have no patents or current patent applications pending. Our future
patents, if any, may be successfully challenged or may not provide us with any
competitive advantages. We may not develop proprietary products or technologies
that are patentable. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, and while we are unable to determine the extent to
which piracy of our software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products, or design around our proprietary intellectual property.
We may face costly damages or litigation costs if a third party claims that we
infringe its intellectual property.
Software products such as ours are increasingly subject to third-party
infringement claims as the number of competitors in our industry grows and the
functionality of products in different industry segments overlap. In addition,
former employers of our current and future employees may assert that our
employees have disclosed confidential or proprietary information to us. Any of
these claims even if they are without merit, could:
. be expensive and time consuming to defend;
. cause us to cease making, licensing or using software that incorporates
the challenged intellectual property;
. cause software shipment and installation delays;
. require us to redesign our software, if feasible; or
. divert management's attention and resources.
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<PAGE>
In addition, as a result of intellectual property claims against us, with or
without merit, we may be required to enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which could seriously harm our
business. A successful claim of infringement against us or our failure or
inability to license the infringed or similar technology could adversely affect
our business because we would not be able to sell the affected product without
redeveloping it or incurring significant additional expenses.
Any future acquisitions of companies or technologies may result in the
distraction of our management and disruptions to our business.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From
time to time, we may engage in discussions and negotiations with companies
regarding our acquiring or investing in their businesses, products, services or
technologies. We may not be able to identify suitable acquisition or investment
candidates in the future, or if we do identify suitable candidates, we may not
be able to make such 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 with our own. 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 securities could be dilutive to our
existing stockholders. In addition, the accounting treatment for any
acquisition transaction may result in significant goodwill, which, when
amortized, will negatively affect our net income. As of the date of this
prospectus, we have no agreement to enter into any investment or acquisition
transaction.
Risks Related to Our Industry
The market for network and systems management software is evolving, and if this
market does not develop as anticipated, our revenues could decline.
We derive all of our revenues from software licenses and related services
that are designed to allow service providers and enterprises to monitor,
analyze and report on the performance and quality of service of their IT
infrastructures, including networks, servers and applications. Accordingly, if
the market for network and systems management software does not continue to
grow, or grows at a rate that is slower than anticipated, we could face
declining revenues, which would adversely affect our business. Because the
market for network and systems management software is in an early stage of
development, we cannot accurately assess the size of the market and may be
unable to identify an effective distribution strategy, the competitive
environment that will develop, and the appropriate features and prices for
products to address the market. Furthermore, in order to be successful in this
emerging market, we must be able to differentiate ourselves from our
competitors through our products and service offerings and brand name
recognition. We may not be successful in differentiating ourselves or achieving
widespread market acceptance of our software and services. If we are to be
successful, our current and potential customers must recognize the value of
network and systems management software, decide to invest in the management of
their networks, and, in particular, adopt and continue to use our software
solutions. In addition, organizations that have already invested substantial
resources in other methods of managing their computer hardware and software
systems may be reluctant or slow to adopt a new approach that may replace,
limit or compete with their existing network and systems management systems.
Evolving technological developments and emerging industry standards will
require us to enhance the functionality of our network performance management
software products, and any inability to enhance functionality could cause our
sales to decline.
Because the market for our products is emerging and subject to rapid
technological change and evolving industry standards, the life cycles of our
products are difficult to predict. Competitors may introduce new
11
<PAGE>
products or enhancements to existing products employing new technologies, which
could render our existing products and services obsolete and unmarketable. Our
results of operations would be seriously harmed if we are unable to develop,
release and market new software product enhancements on a timely and cost-
effective basis, or if new products or enhancements do not achieve market
acceptance or fail to respond to evolving industry or technology standards. In
addition, evolving technological developments and emerging industry standards
could create difficulties and cause delays or prevent the successful
development, introduction and marketing of these new products and services.
If we do not provide network performance management software products and
related services that meet the changing demands of our customers, the market
for our products will not grow or may decline, and our product sales will
suffer.
To successfully implement our business strategy, we have to provide network
performance management software products and related services that meet the
ever-changing and increasingly sophisticated demands of our customers and
achieve market acceptance. We expect that competitive factors will create a
continuing need for us to improve and add to our suite of software products.
Not only will we have to expend significant funds and other resources to
continue to improve our existing suite of products, but we must also properly
anticipate, address and respond to consumer preferences and demands. As the
needs of service providers and enterprises change with respect to their
networks, our existing suite of software products may become obsolete or
inefficient relative to our competitors' offerings and may require
modifications or improvements. For example, to the extent that customers
require that network performance management products incorporate features from
operational and business support systems (OSS/BSS), we may need to enhance our
product offerings to meet these demands.
The addition of new products and services may also require that we continue
to improve the technology underlying our products. These requirements could be
significant, and we may fail to fulfill them quickly and efficiently, or at
all. We cannot assure you that we will be successful in enhancing, upgrading or
continuing to effectively market our network performance management software
products, or that any new products or services that we may develop or acquire
will achieve market acceptance. If we fail to expand the breadth of our
products quickly in response to customer needs, or if these offerings fail to
achieve market acceptance, the market for our products may decline or stop
growing.
Without the continued demand for the Internet and related infrastructure to
transport data, demand for our products would decline.
Our revenues will depend, in large part, upon third parties maintaining the
Internet infrastructure to provide a reliable network backbone with the
necessary speed, data capacity, security and hardware necessary for reliable
Internet access and services. Rapid growth in the use of and interest in the
Internet has occurred only recently. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently broad base of
consumers may not adopt and continue to use the Internet and other online
services and data transmission options as a medium for business transactions.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and there exist few
proven and profitable services and products. In addition, the Internet may not
be accepted in the long term as a medium for conducting business transactions
for a number of reasons, including potentially inadequate development of the
necessary network infrastructure or delayed development of enabling
technologies and performance improvements. Finally, privacy and security
concerns raised by governmental bodies and consumer groups regarding consumer
and business use of the Internet, and governmental regulation that seeks to
address these concerns, could impede the expected growth of e-commerce and
other business uses of the Internet.
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Risks Related to this Offering
Our stock price may be volatile, which could lead to losses by investors and to
securities litigation.
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained after completion of
this offering. We will negotiate and determine the initial public offering
price with the representatives of the underwriters based on several factors.
The initial public offering price may not be indicative of the prices that will
prevail in the public market after this offering, and the market price of the
common stock could fall below the initial public offering price.
The value of your investment in Trinagy could decline due to the impact of
any of the following factors upon the market price of our common stock:
. variations in our actual and anticipated operating results;
. changes in our earnings estimates by analysts;
. our failure to meet analysts' and investors' performance expectations;
and
. lack of liquidity.
In addition, stock markets, particularly the Nasdaq National Market, have
experienced extreme price and volume fluctuations, and the market prices of
securities of technology companies have been highly volatile. These
fluctuations have often been unrelated to the operating performance of such
companies. Fluctuations such as these may affect the market price of our common
stock. Substantial sales of our common stock after this offering could also
cause our stock price to decline. As a result, investors may not be able to
resell their shares at or above the initial public offering price. In the past,
securities class action litigation has often been instituted against companies
following periods of volatility in their stock price. This type of litigation
could result in substantial costs and could divert our management's attention
and resources.
Our officers, directors and their affiliates hold a majority of our stock and,
as a result, control us, which could limit your ability to influence the
outcome of significant corporate transactions.
Our directors, officers and their affiliates will, as a group, beneficially
own approximately % of our outstanding common stock after the completion of
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 have an
adverse effect on our stock price. These actions may be taken even if they are
opposed by the other investors, including those who purchase shares in this
offering.
The provisions of our charter documents and Delaware law could delay or prevent
the sale of our company and diminish the voting rights of the holders of our
common stock.
Upon the completion of this offering, our amended and restated certificate
of incorporation and amended and restated bylaws will contain provisions that
could make it more difficult for a third party to acquire, or attempt to
acquire, control of our company, even if a change in control would result in
the purchase of your shares at a premium to the market price. For example, our
board of directors will have the authority to issue up to 5,000,000 shares of
preferred stock and will be able to fix the price, rights, preferences,
privileges, and restrictions of this preferred stock without any further vote
or action by our stockholders. The issuance of preferred stock may delay or
prevent a change in control transaction. As a result, the market price of our
common stock and the voting and other rights of our stockholders may be
adversely affected. The issuance of preferred stock may result in the loss of
voting control to other stockholders.
Our amended and restated charter documents may contain other provisions that
could have an anti-takeover effect, including:
. only one of the three classes of directors is elected each year;
13
<PAGE>
. stockholders have limited ability to remove directors;
. stockholders cannot take actions by written consent;
. stockholders cannot call a special meeting of stockholders; and
. stockholders must give advance notice to nominate directors or submit
proposals for consideration at stockholder meetings.
In addition, following the completion of this offering, we will be subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which regulates corporate acquisitions. These provisions could
discourage potential acquisition proposals and could delay or prevent a change
in control transaction. They could also have the effect of discouraging others
from making tender offers for our common stock or preventing changes in our
management.
Investors will be relying on our management's judgment regarding the use of
proceeds from this offering.
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. The failure of
management to spend these proceeds effectively could harm our financial
condition and result in lost business opportunities. Pending any specific use
of the proceeds from this offering, we plan to invest in short-term,
investment-grade, interest-bearing securities. These investments may not yield
a favorable return.
The liquidity of our common stock is uncertain since it has not been publicly
traded.
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 our shares
of common stock 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.
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 the common stock. The net tangible
book value of a share of our common stock purchased at an assumed initial
public offering price of $ per share will be only $ . Additional
dilution may be incurred if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options or if warrant
holders exercise their warrants to purchase common stock.
Future sales of our common stock may depress our stock price.
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.
These 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. Please see
"Shares Eligible for Future Sale" for a description of sales that may occur in
the future.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "potential," or "continue," the negative of
these terms or other comparable terminology. These statements involve a number
of risks and uncertainties. Actual events or results may differ materially from
any forward-looking statement as a result of various factors, including those
we discuss in "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by law, we undertake
no obligation to update publicly any forward-looking statements for any reason
after the date of this prospectus to conform these statements to actual results
or to changes in our expectations. Before investing in our common stock,
investors should be aware that the occurrence of the events described under
"Risk Factors" and elsewhere in this prospectus could have a material adverse
effect on our business, operating results and financial condition.
15
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock we are offering will be approximately $ , or approximately $ if the
underwriters exercise their over-allotment option, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to obtain additional capital, to
create a public market for our common stock, to enhance our ability to acquire
other businesses, products or technologies and to facilitate future access to
public equity markets. We intend to use the net proceeds for general corporate
purposes, including working capital, capital expenditures and investments in
product development, expansion of sales and marketing activities, and other
corporate expenses. We may also use a portion of the net proceeds from this
offering to acquire or invest in businesses, products or technologies that
complement our business. We currently have no commitments or agreements to make
any acquisitions or investments. We have not determined the amounts we plan to
spend on any of the uses described above or the timing of these expenditures.
Pending the use of the net proceeds of this offering, we intend to invest these
funds in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. In
addition, our loan agreements restrict our payments of cash dividends to our
stockholders.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all
outstanding shares of convertible preferred stock into shares of common
stock on a 3 for 2 basis upon the closing of this offering; and
. on a pro forma basis as adjusted to reflect the receipt of the estimated
net proceeds from the sale of shares of common stock offered hereby at
an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
June 30, 2000
------------------------------
(unaudited)
Pro Pro Forma
Actual Forma As Adjusted
-------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Stockholders' Equity (Deficit):
Convertible preferred stock, Series B, $0.0001
par value, 1,525,424 shares authorized,
1,525,424 shares issued and outstanding actual;
none issued and outstanding pro forma and
pro forma as adjusted.......................... $ 3,545 $ -- $
Convertible preferred stock, Series C, $0.0001
par value, 1,244,486 shares authorized,
1,244,486 shares issued and outstanding actual;
none issued and outstanding pro forma and
pro forma as adjusted.......................... 10,093 --
Convertible preferred stock, Series D, $0.0001
par value, 1,602,642 shares authorized,
1,602,642 shares issued and outstanding actual;
none issued and outstanding pro forma and pro
forma as adjusted.............................. 14,887 --
Common Stock, $0.0001 par value, 100,000,000
shares authorized; 5,413,812 shares issued and
outstanding actual; 11,972,640 shares issued
and outstanding pro forma and
shares issued and outstanding pro forma as
adjusted....................................... 1 1
Additional paid in capital...................... 5,596 34,121
Deferred compensation........................... (2,900) (2,900)
Accumulated deficit............................. (22,367) (22,367)
-------- -------
Total stockholders' equity (deficit).......... $ 8,855 $ 8,855
======== =======
</TABLE>
The preceding table does not include:
. 5,020,247 shares of common stock subject to outstanding options as of
June 30, 2000 at a weighted average exercise price of $1.38 per share;
. 950,630 additional shares available for future grant under our existing
stock plans;
. 239,851 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.38 per share;
. 2,500,000 shares that will be available for issuance under our 2001
Stock Incentive Plan upon completion of this offering and annual
increases in the number of shares authorized under that plan beginning
January 1, 2002; and
. 1,000,000 shares that will be available for issuance under our 2001
Employee Stock Purchase Plan upon completion of this offering and annual
increases in the number of shares authorized under that plan beginning
January 1, 2002.
This information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$8.9 million, or $0.74 per share, assuming the conversion of all outstanding
shares of our preferred stock into shares of our common stock. Pro forma net
tangible book value per share is determined by dividing the pro forma number of
outstanding shares of our common stock into our net tangible book value, which
is our total tangible assets less total liabilities. Giving effect to our
receipt of the estimated net proceeds from this offering, after deducting
underwriting discounts and commissions and our estimated offering expenses, our
pro forma net tangible book value as of June 30, 2000 would have been
approximately $ , or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders, and an immediate dilution in pro forma net tangible book value of
$ per share to new investors purchasing shares at the initial public
offering price. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of June 30, 2000... $
Increase per share attributable to new investors..................
-----
Pro forma net tangible book value per share after this offering.....
-----
Dilution per share to new investors ................................ $
=====
</TABLE>
The following table shows as of June 30, 2000, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by existing
stockholders and by investors purchasing shares of common stock in this
offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. % $ % $
New investors..........
Total................ 100.0% $ 100.0% $
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to , or % of the total
shares of common stock outstanding after this offering.
The above discussion and tables assume no exercise of stock options or
warrants outstanding as of June 30, 2000 and give effect to the conversion of
all outstanding shares of convertible preferred stock into common stock. In the
event that we issue additional shares of common stock in the future, purchasers
of common stock in this offering may experience further dilution. As of June
30, 2000, there were options outstanding to purchase 5,020,247 shares of common
stock at a weighted average exercise price of $1.38 per share and warrants to
purchase approximately 239,851 shares of common stock at a weighted average
exercise price of $1.98 per share. We also had 950,630 shares of common stock
available for issuance under our existing stock option plans as of June 30,
2000. To the extent these outstanding options or warrants are exercised, or new
options or rights are issued under our stock plans, new investors will
experience further dilution.
Assuming the exercise in full of all outstanding options and warrants, our
pro forma as adjusted net tangible book value at June 30, 2000 would be $
per share, representing an immediate increase in net tangible book value
of $ per share to our existing stockholders, and an immediate decrease
in the net tangible book value per share of $ to new investors.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following consolidated selected financial data should be read in
conjunction with the consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 have been
derived from consolidated financial statements that have been audited by Arthur
Andersen LLP, independent public accountants, included elsewhere in this
prospectus. The consolidated statement of operations data for the year ended
December 31, 1996 and the consolidated balance sheet data as of December 31,
1996 and 1997 have been derived from audited consolidated financial statements
not included in this prospectus. The consolidated statement of operations data
for the year ended December 31, 1995 and the consolidated balance sheet data as
of December 31, 1995 are derived from unaudited consolidated financial
statements not included in this prospectus. Interim results for the periods
ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are
derived from our unaudited financial statements appearing elsewhere in this
prospectus which, in the opinion of management, reflect all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation of the results of operations as of and for the relevant period.
Historical results are not necessarily indicative of the results to be expected
in the future.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
----------- ------ ------- ------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues:
Software licenses.................... $1,044 $2,277 $ 3,602 $ 4,524 $ 6,912 $ 2,642 $ 5,826
Services............................. 339 645 1,135 1,953 3,390 1,730 2,138
------ ------ ------- ------- ------- ------- -------
Total revenues.................... 1,383 2,922 4,737 6,477 10,302 4,372 7,964
------ ------ ------- ------- ------- ------- -------
Gross profit.......................... 1,299 2,594 4,067 4,788 7,672 3,198 6,061
Operating income (loss) .............. 53 143 (2,247) (5,970) (7,770) (3,404) (4,965)
Net income (loss) .................... 50 180 (2,243) (6,140) (7,622) (3,282) (4,857)
Basic and diluted net income (loss)
per share............................ $ 0.02 $ 0.05 $ (0.53) $ (1.39) $ (1.16) $ (0.71) $ (0.69)
====== ====== ======= ======= ======= ======= =======
Shares used in computing basic and
diluted net loss per share........... 2,699 3,414 4,214 4,425 6,552 4,595 7,056
====== ====== ======= ======= ======= ======= =======
Pro forma basic and diluted net (loss)
per share (unaudited)................ $ (0.71) $ (0.36)
======= =======
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited).......................... 10,707 13,615
======= =======
<CAPTION>
As of December 31,
-------------------------------------------- As of June 30,
1995 1996 1997 1998 1999 2000
----------- ------ ------- ------- ------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............. $ 40 $ 249 $ 519 $ 7,672 $ 20 $11,368
Working capital (deficit)............. 497 260 607 4,973 (2,337) 7,670
Total assets.......................... 478 1,724 3,223 10,212 4,981 17,102
Long-term debt........................ -- 312 -- -- -- --
Total stockholders' equity (deficit).. 430 218 1,303 5,741 (1,521) 8,855
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following Management's Discussion and Analysis of
Financial Condition and Results of Operations together with the consolidated
financial statements and related notes included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those described under "Risk Factors" and elsewhere in this
prospectus.
Overview
We provide a highly scalable and flexible service level management (SLM)
software solution that is designed to address the needs of service providers
and large enterprises. Our software is built on a distributed architecture and
monitors, analyzes and reports on the performance and quality of service of IT
infrastructures, which consist of network devices, servers and server-based
applications. Our solution offers customers a user-friendly interface to
proactively manage their IT resources by analyzing both global and specific
network resource activity levels and trends, anticipating future demand and
preparing customized reports.
We were founded in November 1988 as DeskTalk Systems, Inc. and began doing
business as Trinagy in September 2000. We intend to reincorporate in Delaware
as Trinagy, Inc. prior to the closing of this offering. We began shipping
network management products in 1993 and shipped the first version of our TREND
software products in 1995.
We generate revenues from licensing our software products directly to end
users and indirectly through sublicense fees from resellers. We also generate
revenues from maintenance, consulting and training services performed for
customers who license our products.
We account for revenue in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2 with
Respect to Certain Transactions," issued by the American Institute of Certified
Public Accountants. Accordingly, revenues from perpetual software license
agreements are recognized once all of the following conditions are met: a
signed purchase order has been received, the software has been delivered, there
are no material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable and no other significant vendor
obligations exist. We defer maintenance revenues and recognize them ratably
over the term of the support period, which is generally one year. Revenues from
consulting services are primarily related to implementation services performed
on a time and material basis under separate service agreements for the
installation of our software products. We defer revenues from consulting and
training services and recognize them as the respective services are performed.
Revenues from software licenses represented 76%, 70% and 67% of our total
revenues in the fiscal years ended December 31, 1997, 1998 and 1999. For the
six months ended June 30, 1999 and 2000, software license revenues accounted
for 60% and 73% of our total revenues. We currently anticipate that our
revenues from software licenses will continue to represent the majority of our
future revenues.
A significant portion of our sales is derived from licenses to network
service providers, including telecommunications carriers and next-generation
service providers such as ISPs and ASPs. Revenues from service providers
represented 63%, 61% and 75% of total revenues in 1997, 1998 and 1999. For the
six months ended June 30, 1999 and 2000, service provider license revenues
accounted for 70% and 68% of our total revenues.
We distribute our products primarily through our direct sales force in North
America and Europe and through channel partners in the rest of the world.
Software license revenues through our indirect channels comprised approximately
15%, 15%, 10% and 20% of our total software license revenues for the years
ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 2000.
Revenues from sales outside of North America represented 9%, 17% and 23% of
total revenues in 1997, 1998 and 1999. For the six months ended June 1999 and
2000, revenues from sales outside of North America accounted for 23% and 32% of
our total revenues.
20
<PAGE>
AT&T and IBM represented 1% and 10% of our total revenues for 1999 and 13%
and 14% of our total revenues for the six months ended June 30, 2000.
Our cost of revenues is comprised of cost of license revenues and cost of
service revenues. The cost of license revenues consists primarily of royalties
or license fees paid to third party software vendors for their software that is
embedded in our software products. Additionally, cost of license revenues
include costs for media, manuals and packaging. Cost of service revenues
consists primarily of personnel-related costs in providing maintenance and
technical support, installation assistance, training and consulting. Gross
profit on software license revenues is generally substantially higher than that
on service revenues. Therefore, our overall gross profit is favorably impacted
by increases in the percentage of license revenues.
Our operating expenses consist of four categories: research and development,
selling and marketing, general and administrative expenses and stock-based
compensation expense. Research and development expenses consist primarily of
salaries and related personnel expenses including recruitment expenses,
independent contractor expense and lease or depreciation expense of the
computer equipment used in product development and quality assurance. All
research and development costs are expensed as incurred. Selling and marketing
expenses are mainly comprised of salaries, commissions and related expenses for
personnel engaged in direct sales including recruitment expenses, channel and
partner development, travel, tradeshow participation, advertising, public
relations and other marketing and promotional activities. General and
administrative expenses consist principally of salaries and related expenses
for executive, financial, legal and administrative personnel, professional
service fees and general corporate expenses.
We allocate the total costs for overhead and facilities of each of the
functional areas that use the overhead and facilities services based on their
estimated usage as measured primarily by employee headcount. These allocated
charges include facility rent, communication charges and depreciation expense
for equipment and furniture.
During 1998, in connection with an amendment to certain terms of our 1990
and 1995 Incentive Stock Option Plans to extend the expiration period from four
to six years, we recognized a one-time stock-based compensation charge of
$410,000.
In connection with the grant of stock options to employees through June 30,
2000, we recorded deferred stock-based compensation within stockholders' equity
(deficit) of approximately $3.1 million, representing the difference between
the deemed fair value of the common stock for accounting purposes and the
exercise price of these options at the date of grant. For the six months ended
June 30, 2000, we amortized $178,000 of this deferred stock-based compensation.
In addition, in connection with the grant of stock options during the three
months ended September 30, 2000, we will record additional deferred stock-based
compensation within stockholders' equity (deficit) of approximately $1.4
million, and total amortization of deferred stock-based compensation related to
the three months ended September 30, 2000 will be approximately $418,000.
Amortization of deferred stock-based compensation will be made over the vesting
period of the related options, generally four years. The amount of deferred
stock-based compensation expense to be recorded in future periods could
decrease if options for which accrued but unvested compensation has been
recorded are forfeited. See note 8 of the notes to consolidated financial
statements.
Interest income (expense), net, consists primarily of interest earned on
cash and cash equivalents offset by interest expense incurred on capital leases
of equipment, furniture and fixtures and on usage of our working capital line
of credit.
In recent years we have incurred substantial costs to develop our technology
and products, to recruit and train personnel for our engineering, sales and
marketing and technical support departments, and to build our administrative
organization. Our full-time employees increased from 85 at June 30, 1999 to 129
at June 30, 2000. As a result of these investments, we have incurred net losses
since 1997. As of June 30, 2000, we had an accumulated deficit of $22.0
million. We anticipate that our operating expenses will continue to increase
for the foreseeable future as we continue to expand our product development and
sales and marketing efforts. In addition, we expect to incur additional
expenses associated with being a public company. Accordingly, we expect to
incur net losses for the forseeable future.
21
<PAGE>
Results of Operations
The following table sets forth selected data from our consolidated
statements of operations for the periods presented, expressed as a percentage
of revenues.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
------------------ --------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses...................... 76% 70% 67% 60% 73%
Services............................... 24 30 33 40 27
--- --- --- ----- -----
Total revenues....................... 100 100 100 100 100
Cost of Revenues:
Software licenses ..................... 6 7 6 5 5
Services............................... 8 19 20 22 19
--- --- --- ----- -----
Total cost of revenues............... 14 26 26 27 24
--- --- --- ----- -----
Gross profit............................. 86 74 74 73 76
Operating Expenses:
Sales and marketing.................... 69 72 78 77 77
Research and development............... 29 61 48 50 42
General and administrative............. 35 27 24 24 17
Stock-based compensation............... -- 6 -- -- 2
--- --- --- ----- -----
Total operating expenses............. 133 166 150 151 138
Operating loss........................... (47) (92) (76) (78) (62)
Interest income/(expense), net........... -- (2) 2 3 1
--- --- --- ----- -----
Loss before provision for income taxes... (47)% (94)% (74)% (75)% (61)%
</TABLE>
The following table sets forth, for the periods presented, supplemental
gross margin data broken out for licenses and services:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Gross Margin Data:
Software licenses gross margin (license gross
profit as % of license revenues)............. 92% 90% 91% 92% 94%
Services gross margin (services gross profit
as % of services revenue).................... 65% 37% 41% 44% 29%
</TABLE>
Six Months Ended June 30, 1999 and 2000
Revenues
Total revenues increased from $4.4 million for the six months ended June 30,
1999 to $8.0 million for the six months ended June 30, 2000, representing an
increase of 82%. This increase is principally due to the growth in software
license revenues.
Software Licenses. Revenues from software licenses were $2.6 million for the
six months ended June 30, 1999 and $5.8 million for the six months ended June
30, 2000, representing an increase of 121%. This increase is primarily
attributable to greater market acceptance of our TREND software products by
global service providers and increased channel sales through the Nortel
Networks reseller program.
22
<PAGE>
Services. Service revenues increased 24% from $1.7 million for the six
months ended June 30, 1999 to $2.1 million for the six months ended June 30,
2000. This increase was primarily attributable to the continued growth of our
installed base of customers, which has led to an increased number of
maintenance contracts, partly offset by the timing of revenue recognition on
other service revenues.
Gross Profits
Gross profits were $3.2 million for the six months ended June 30, 1999
compared to $6.1 million for the six months ended June 30, 2000. Total gross
margins increased from 73% for the six months ended June 30, 1999 to 76% in
the six months ended June 30, 2000. Margins have improved since 1999 due to
higher software license margins and a higher proportion of software license
revenues.
Gross profits on software licenses increased from $2.4 million for the six
months ended June 30, 1999 to $5.5 million for the six months ended June 30,
2000. Gross margins on software license revenues increased from 92% in the six
months ended June 30, 1999 to 94% in the six months ended June 30, 2000
primarily due to a lower cost of embedded database software.
Gross profits on service revenues decreased from $770,000 for the six
months ended June 30, 1999 to $609,000 for the six months ended June 30, 2000.
Gross margins on service revenues declined from 44% for the six months ended
June 30, 1999 to 29% for the six months ended June 30, 2000 mainly due to the
increased focus on selling software licenses rather than consulting services.
Operating Expenses
Research and Development Expenses. Research and development expenses
increased from $2.2 million for the six months ended June 30, 1999 to $3.4
million for the six months ended June 30, 2000. This increase primarily
reflects the costs of additional personnel and related expenses for software
development and enhancement. We believe that continued investment in research
and development is critical to our strategic objectives, and we expect that
the dollar amounts of research and development expenses will increase in
future periods, but may fluctuate as a percentage of revenues from period to
period.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$3.3 million for the six months ended June 30, 1999 to $6.1 million for the
six months ended June 30, 2000. This increase mainly reflects the costs of
additional sales and marketing personnel and related expenses, increased
travel expenses, and increased marketing and sales promotion expenses. We
anticipate that our sales and marketing expenses will continue to increase in
absolute dollars in future periods as we continue to expand our sales and
marketing efforts, but may fluctuate as a percentage of total revenues from
period to period.
General and Administrative Expenses. General and administrative expenses
increased from $1.1 million for the six months ended June 30, 1999 to $1.4
million for the six months ended June 30, 2000. The increase in general and
administrative expenses was primarily due to the costs of additional finance,
human resources and other administrative personnel and the related expenses
and increases in general corporate expenses. We expect general and
administrative expenses to increase as we incur the additional costs of
growing our business and being a reporting company. These expenses may
fluctuate as a percentage of revenues from period to period.
Stock-Based Compensation
We amortized $178,000 of deferred stock-based compensation during the six
months ended June 30, 2000.
Interest Income (Expense), Net
Interest income (expense), net was a net interest income of $125,000 for
the six months ended June 30, 1999 and $114,000 for the six months ended June
30, 2000. Net interest income reflected interest earned on
23
<PAGE>
excess cash from our December 1998 Series C preferred stock financing during
the first six months of 1999, and from the April 2000 Series D preferred stock
financing during the first six months of 2000, which offset interest expense on
capital leases and the cost of borrowings.
Provision for Income Taxes
We have incurred cumulative net losses since inception. We have not
recognized any federal tax provision or benefit. For state taxes, we have
reflected minimum income tax payments.
Comparison of Years Ended December 31, 1997, 1998 and 1999
Revenues
Total revenues were $4.7 million in 1997, $6.5 million in 1998 and $10.3
million in 1999. Total revenues increased 37% from 1997 to 1998 and 59% from
1998 to 1999.
Software Licenses. Revenues from software licenses were $3.6 million, $4.5
million and $6.9 million for the years ended December 31, 1997, 1998 and 1999,
representing increases of 26% from 1997 to 1998 and 53% from 1998 to 1999.
These increases were primarily due to increased demand from service providers
and growth in revenues outside of North America.
Services. Revenues from services were $1.1 million, $2.0 million and $3.4
million for the years ended December 31, 1997, 1998 and 1999, representing
increases of 72% from 1997 to 1998 and 74% from 1998 to 1999. These increases
were primarily attributable to the growth of our installed base of customers.
Gross Profits
Gross profits were $4.1 million in 1997, $4.8 million in 1998 and $7.7
million in 1999. Total gross margins were 86%, 74% and 74% in 1997, 1998 and
1999. Total gross margins declined from 1997 to 1998 due to lower margins on
software licenses and on service revenues. Total gross margins improved from
1998 to 1999 due to higher software license margins and higher services
margins.
Gross profits on software licenses were $3.3 million, $4.1 million and $6.3
million in 1997, 1998 and 1999. Gross margins on software licenses were 92%,
90% and 91% for the years ended December 31, 1997, 1998 and 1999. Margins on
software licenses declined from 1997 to 1998 primarily due to the mix of TREND
software products sold to our customers.
Gross profits on service revenues were $739,000, $716,000 and $1.4 million
in 1997, 1998 and 1999. Gross margins on service revenues were 65%, 37% and 41%
for the years ended December 31, 1997, 1998 and 1999. Margins on service
revenues declined from 1997 to 1998 primarily due to a higher proportion of
consulting activities which generally have a lower margin than maintenance
contracts. Margins on service revenues improved from 1998 to 1999 mainly due to
an increased proportion of revenues generated from maintenance contracts in
1999 compared to 1998.
Operating Expenses
Research and Development Expenses. Research and development expenses were
$1.4 million, $4.0 million and $5.0 million in 1997, 1998 and 1999. These
increases primarily reflect the costs of additional personnel and related
expenses for software development and enhancement.
Sales and Marketing Expenses. Sales and marketing expenses were $3.3
million, $4.7 million and $8.0 million in 1997, 1998 and 1999 respectively.
These increases mainly reflect the costs of additional sales and marketing
personnel and related expenses, increased travel expenses, and increased
marketing and sales promotion expenses.
24
<PAGE>
General and Administrative Expenses. General and administrative expenses
were $1.7 million, $1.7 million and $2.4 million in 1997, 1998 and 1999. The
increase from 1998 to 1999 was primarily due to the costs of additional
finance, human resources and other administrative personnel and related
expenses, and increases in general corporate expenses such as rent and
telecommunications expenses.
Stock-Based Compensation
During 1998, in connection with the amendment to certain terms of our 1990
and 1995 Incentive Stock Option Plans to extend the option expiration period
from four to six years, we recognized a one-time stock-based compensation
charge of $410,000.
Interest Income (Expense), Net
Interest income (expense), net was a net expense of $7,000 in 1997, a net
expense of $167,000 in 1998 and a net income of $151,000 in 1999. Net interest
income in 1999 primarily reflects interest earned on short-term investments of
excess cash provided by our Series C preferred stock financing in December
1998, which more than offset the interest expense incurred on capital leases
and our working capital credit line. Since our Series C preferred stock
financing occurred in December 1998, interest expenses incurred on capital
leases and the working capital credit line were not offset by interest income
on those funds during that same year.
Provision for Income Taxes
We have incurred cumulative net losses since inception. We have not
recognized any federal tax provision or benefit. For state taxes, we have
reflected the minimum income tax payments. As of December 31, 1999, we had
approximately $14.9 million of federal and $3.3 million of state net operating
loss carryforwards to offset against future taxable income. The federal net
operating loss and tax credit carryforwards expire in years 2006 through 2019
if they are not used. The state net operating loss carryforwards expire in
years 2000 through 2004 if they are not used.
25
<PAGE>
Quarterly Results of Operations
The following table contains, for the periods presented, selected data from
our consolidated statements of operations. The data has been derived from our
unaudited consolidated financial statements and, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments, that are
necessary for a fair presentation of the results of operations for these
periods. This unaudited information should be read in conjunction with the
consolidated financial statements and notes, included elsewhere in this
prospectus. The operating results in any quarter are not necessarily indicative
of the results that may be expected for any future period. We have incurred
losses in each quarter presented below, and expect to continue to incur losses
for the foreseeable future.
<TABLE>
<CAPTION>
For the Three Months Ended:
--------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Operating
Data:
Revenues:
Software licenses..... $ 1,096 $ 1,545 $ 1,617 $ 2,654 $ 2,905 $ 2,921
Services.............. 763 967 815 845 912 1,226
------- ------- ------- ------- ------- -------
Total revenues...... 1,859 2,512 2,432 3,499 3,817 4,147
Cost of Revenues:
Software licenses..... 94 119 123 280 218 157
Services.............. 454 506 522 532 726 802
------- ------- ------- ------- ------- -------
Total cost of
revenues........... 548 625 645 812 944 959
------- ------- ------- ------- ------- -------
Gross profit............ 1,311 1,887 1,787 2,687 2,873 3,188
Operating Expenses:
Sales and marketing... 1,396 1,945 2,013 2,665 2,648 3,449
Research and
development.......... 1,097 1,096 1,264 1,538 1,685 1,711
General and
administrative....... 530 538 563 796 708 647
Stock-based
compensation......... -- -- -- -- -- 177
------- ------- ------- ------- ------- -------
Total operating
expenses........... 3,023 3,579 3,840 4,999 5,041 5,984
------- ------- ------- ------- ------- -------
Loss from operations.... (1,712) (1,692) (2,053) (2,312) (2,168) (2,796)
Interest
income/(expense), net.. 72 54 27 (2) (41) 155
------- ------- ------- ------- ------- -------
Loss before income
taxes.................. $(1,640) $(1,638) $(2,026) $(2,314) $(2,209) $(2,641)
------- ------- ------- ------- ------- -------
<CAPTION>
For the Three Months Ended:
--------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Percentage of Revenues:
Revenues:
Software licenses..... 59% 62% 66% 76% 76% 70%
Services.............. 41 38 34 24 24 30
------- ------- ------- ------- ------- -------
Total revenues...... 100 100 100 100 100 100
Cost of Revenues:
Software licenses..... 5 5 5 8 6 4
Services.............. 24 20 22 15 19 19
------- ------- ------- ------- ------- -------
Total cost of
revenues........... 29 25 27 23 25 23
------- ------- ------- ------- ------- -------
Gross profit............ 71 75 73 77 75 77
Operating Expenses:
Sales and marketing... 75 77 83 76 69 83
Research and
development.......... 59 44 52 44 44 41
General and
administrative....... 29 21 23 23 19 16
Stock-based
compensation......... -- -- -- -- -- 4
------- ------- ------- ------- ------- -------
Total operating
expenses........... 163 142 158 143 132 144
------- ------- ------- ------- ------- -------
Loss from operations.... (92) (67) (85) (66) (57) (67)
Interest
income/(expense), net.. 4 2 1 0 (1) 4
------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (88)% (65)% (84)% (66)% (58)% (63)%
</TABLE>
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<PAGE>
The following table sets forth, for the periods indicated, supplemental
gross margin data broken out for licenses and services.
<TABLE>
<CAPTION>
For the Three Months Ended:
----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Supplemental Gross
Margin Data:
Software licenses
gross margin (license
gross profit as % of
license revenues) ... 91% 92% 92% 89% 92% 95%
Services gross margin
(services gross
profit as % of
services revenue) ... 40% 48% 36% 37% 20% 35%
</TABLE>
Revenues
Revenues increased 123% from the quarter ended March 31, 1999 through the
quarter ended June 30, 2000. This increase was primarily due to quarter-to-
quarter growth in software license revenues, which increased 167% during this
period. Software license revenues as a percentage of total revenue increased
through the quarter ended March 31, 2000. The decrease in software license
revenues as a percentage of total revenues for the three months ended June 30,
2000 was due to a deferral of certain software license revenues to the third
quarter of 2000 and a significant increase in revenue from maintenance
contracts recorded in the quarter ended June 30, 2000.
Service revenues have increased each quarter except for a decrease in the
quarters ended September 30, 1999 and December 31, 1999 due to an increased
focus on selling software licenses rather than consulting services. The
increase in service revenues from the quarter ended March 31, 2000 to the
quarter ended June 30, 2000 was primarily due to the growth in our installed
base which has lead to increased maintenance contracts.
Gross Profits
Gross profits increased 143% from the quarter ended March 31, 1999 through
the quarter ended June 30, 2000. Gross profit growth exceeded the corresponding
growth in total revenues due to the proportionately higher growth in software
license revenues which have higher margins than those on service revenues.
Margins on software license revenues increased slightly from the quarter ended
March 31, 1999 through the quarter ended September 30, 1999. Margins on
software license revenues decreased in the fourth quarter of 1999, reflecting
the combined effect of increased third-party software license expense related
to an unusual server configuration with one of our larger customers and the
timing of purchases of media and packaging. Margins on software license
revenues increased in the quarter ended June 30, 2000 from the quarter ended
March 31, 2000 due to a lower cost of embedded database software. Margins on
service revenues decreased in the quarters ended September 30, 1999 and March
31, 2000 primarily due to the increased focus on growing software license
revenues and a decreased focus on growing service revenues, while maintaining a
consistent cost structure for our services organization. We expect service
gross margins to fluctuate on a quarterly basis depending on the mix of
services versus license revenues.
Operating Expenses
Our operating expenses have increased in each of the six quarters ended June
30, 2000 to $6.0 million in the quarter ended June 30, 2000 from $3.0 million
in the quarter ended March 31, 1999. These increases related primarily to
product development, increased marketing and incremental investments in our
internal infrastructure to support our growth. Generally, all department
expenses have declined relative to revenues as the growth in revenues outpaced
the growth in expenses. Sales and marketing expense as a percentage of revenues
increased in the second quarter of 2000 due to increased personnel expenses.
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Interest Income (Expense), Net
Quarter-to-quarter fluctuations primarily reflect interest on short term
investments of excess cash provided by equity financings which offset interest
expense on capital leases and borrowing under the working capital line of
credit, except for the fourth quarter of 1999 and the first quarter of 2000.
Liquidity and Capital Resources
We have funded our cash requirements primarily through founder investments,
exercises of options by former and existing employees, and private placements
of equity securities. Founder investments and exercise of stock options by
employees amounted to approximately $1.3 million through June 30, 2000. In 1995
and 1996, we raised a total of approximately $0.8 million through sales of
common stock to a group of individual investors. Through June 30, 2000, we have
raised approximately $28.5 million through the sale of preferred stock to
institutional and strategic investors in April 1997, December 1998 and April
2000. At June 30, 2000, we had cash, cash equivalents and short-term marketable
securities totaling approximately $11.4 million.
Net cash used in operating activities was $2.2 million, $2.4 million and
$7.7 million in 1997, 1998 and 1999, and $2.6 million for the six months ended
June 30, 2000. The 1997 and 1999 use of cash primarily reflects the loss on
operations, and increases in accounts receivable, partially offset by increases
in deferred revenues, accounts payable and accrued expenses. In 1998, the use
of cash primarily reflects the loss from operations offset by an increase in
deferred revenues, accounts payable and accrued expenses. For the six months
ended June 30, 2000, the use of cash from operations is a result of a net loss,
increases in accounts receivable and prepaid expenses, partially offset by
increases in deferred revenues, accounts payable and accrued expenses.
Net cash used in investing activities was approximately $416,000, $400,000
and $463,000 in 1997, 1998 and 1999, and $642,000 for the six months ended June
30, 2000. These funds were used to purchase computer and other equipment,
furniture and fixtures.
Net cash provided by financing activities was $2.9 million, $10.0 million
and $511,000 in 1997, 1998 and 1999. The primary source of financing activities
in 1997 and 1998 was from the issuance of Series B and C preferred stock. The
primary source of financing in 1999 was from the exercise of options for shares
of our common stock and borrowings on our line of credit. In the first six
months ended June 30, 2000, cash provided by financing activities amounted to
$14.6 million. This primarily reflects the issuance of Series D preferred stock
for $14.9 million, and the exercise of options for shares of our common stock
for $168,000, partially offset by a $350,000 pay down of our line of credit and
principal payments on capital lease obligations of $100,000.
We have a $2.5 million working capital line of credit with a financial
institution, which expires December 31, 2000. Borrowings under this line bear
interest at the bank's prime rate plus two percent on the first $1.5 million,
and prime rate plus four percent on the second tranche of $1.0 million. As of
June 30, 2000, there were no borrowings outstanding under the line. We are in
discussions with the lender to increase the line of credit to provide for
maximum borrowings of $3.5 million and to extend the expiration date. We cannot
assure you that we will be able to secure these modifications to the line of
credit on terms that are favorable to us, or at all.
We believe that our current cash and cash equivalents, together with the
proceeds of this offering, and available borrowings under our line of credit
and proposed increases to that line, will be sufficient to meet our anticipated
cash requirements for working capital and capital expenditures for at least the
next 12 months. If we require further capital to grow our business, execute our
operating plan, acquire complementary technologies or businesses at any time in
the future or for any other reason, we may seek to sell additional equity or
debt securities, which may result in additional dilution to our stockholders.
If additional funding is required, we cannot be certain that it will be
available on acceptable terms, if at all.
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<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
We develop products in the United States and market our products globally.
All of our sales are currently made in U.S. dollars. As a result, we have not
had any material exposure to factors such as changes in foreign currency
exchange rates. Because our sales are denominated in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets.
At June 30, 2000, our cash and cash equivalents consisted primarily of
demand deposits, U.S. government Federal Agency Notes and money market funds.
We did not hold any derivative financial instruments or long-term investments.
Our interest income and expense are sensitive to changes in the general level
of interest rates. In this regard, changes in interest rates can affect the
interest earned on our cash equivalents.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 was to be effective for fiscal years beginning
after June 15, 1999. However, in July 1999, the Financial Accounting Standards
Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS 137
defers for one year the effective date of SFAS 133 that will now apply to all
fiscal quarters of all fiscal years beginning after June 15, 2000. We believe
that the adoption of SFAS 133 will not have a material impact on our
consolidated financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We believe
that our revenue recognition policy is in compliance with the provisions of SAB
101. We believe that the adoption of SAB 101 will have no material effect on
our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 (Interpretation 44),
"Accounting for Certain Transactions Involving Stock Compensation--An
Interpretation of APB Opinion No. 25." Interpretation 44 clarifies the
application of APB Opinion No. 25 in certain situations, as defined.
Interpretation 44 is effective July 1, 2000, but covers certain events
occurring during the period after December 15, 1998, but before the effective
date. To the extent that events are covered by the period after December 15,
1998 but before the effective date, the effects of applying Interpretation 44
would be recognized on a prospective basis from the effective date. We believe
that the adoption of Interpretation 44 will have no impact on our financial
position or results of operations.
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<PAGE>
BUSINESS
Overview
We provide a highly scalable and flexible service level management software
solution that is designed to address the needs of service providers and large
enterprises. Our software is built on a distributed architecture and monitors,
analyzes and reports on the performance and quality of service of IT
infrastructures, which consist of network devices, servers and server-based
applications. Our solution offers customers a user-friendly interface to
proactively manage their IT resources by analyzing both global and specific
network resource activity levels and trends, anticipating future demand and
preparing customized reports.
As of September 30, 2000, we had over 400 customers worldwide, including
network service providers such as AT&T, BT, IBM and Verizon, and enterprises
such as FedEx, General Electric and Staples.
Industry Background
Increasing Importance and Complexity of Networks
Organizations are becoming increasingly reliant upon their communications
networks and networked applications to successfully execute their business
strategies. Driving this reliance on the communications infrastructure is the
extension of the corporate network to reach partners, suppliers and customers.
To compete in the global economy, corporations are increasingly moving their
business on-line and extending the network landscape beyond the boundaries of
local area networks. In addition, the proliferation and widespread adoption of
the Internet has expanded the role of networks beyond organizational
boundaries. While moving business on-line presents new market opportunities,
cost savings and more intimate customer and partner relationships, it has also
placed an enormous burden on the network resources. Not only is the
communications infrastructure inundated with new applications and increased
traffic flow, but the performance of the network has become more important than
ever. Network downtime now leads to lost productivity, lost sales and
deteriorated customer relations.
To support the rapidly expanding size and scope of communications
requirements, networks have evolved from separate infrastructures, carrying
voice or data traffic only, to an integrated infrastructure that must
accommodate the convergence of analog and digital voice, data and video
traffic. In order to meet these increased needs, service providers and
enterprises have expanded network infrastructures over time using a broad range
of equipment, technologies, protocols and network services. As network
infrastructures grow, service providers and enterprises face the challenge of
integrating and managing existing technologies, such as asynchronous transfer
mode (ATM), Internet protocol (IP), voice over IP, frame relay, code division
multiple access and digital subscriber line (DSL), with emerging technologies
such as optical dense wave division multiplexing and third generation wireless
access. The growth of networks, network complexity, and network data traffic
has forced organizations to confront significant challenges in efficiently and
cost-effectively managing their networks and applications.
Trend Toward Outsourced Networks
As a result of larger and more complex networks, the effective operation and
management of today's network infrastructure requires organizations to
continually invest in advancing technologies and maintain a group of personnel
with the skills necessary to manage the network, all of which may divert
resources away from the organization's core competencies. Accordingly,
enterprises are engaging network service providers and outsourcing all or part
of their network infrastructure. IDC estimates that worldwide managed network
services will grow from $17 billion in 1999 to over $36 billion in 2004. By
outsourcing the management of mission critical networks and network functions,
enterprises are freed to focus on their core competencies.
Increased Need for Differentiated Service Offerings
As the trend towards outsourcing draws new entrants to these markets, many
of the leading-edge service providers, including long distance carriers, cable
service providers, ISPs and competitive local exchange
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<PAGE>
carriers (CLECs), are spending heavily to introduce new services and to
differentiate the services they currently offer. These services include
Internet access, virtual private networks and high-speed web-based multimedia
communications. As a result, these service providers are bundling
infrastructure management solutions into their overall service packages as a
way to differentiate their offerings and attract new customers. The Gartner
Group has estimated that the overall market for network and systems management
software will grow from approximately $14.6 billion in 1999 to approximately
$28.8 billion in 2003, representing a compounded annual growth rate of 18%. In
particular, the markets for network management software and network service
management software will grow from an aggregate of $1.4 billion in 1999 to $3.1
billion in 2003, representing a compounded annual growth rate of 22%.
Businesses that are outsourcing their network infrastructures are demanding
guaranteed levels of performance through formal service level agreements (SLAs)
between service providers (either external or internal to the organization) and
service users. SLAs set performance objectives using measurements such as
service availability, application response times, through-put, error rates,
bandwidth utilization and mean time to repair or restore service. The use of
SLAs as a standard method for establishing performance criteria has created a
need for SLM software to enable service providers to differentiate and charge a
premium for their services. Furthermore, SLM software allows service providers
and enterprises to effectively manage and prioritize their IT resources by
providing the insight needed to build personalized services enabling service
providers to differentiate themselves from their competitors.
Increased Need to Integrate Support Systems
Service providers are working to integrate and automate their operational
support systems (OSS) such as order entry, provisioning and service activation,
as well as their business support systems (BSS) such as billing and customer
interaction, to create increased efficiencies and better address the needs of
their customers. For example, service providers seek to shorten the time from
customer order to service activation and to create new service bundles to fit a
customer's specific usage patterns. We believe that the data collection and
processing capabilities of SLM software are increasingly important for service
providers to meet their overall OSS, BSS and network management requirements.
Requirements for an Industry-Leading SLM Software Solution
With the growth in traffic and complexity of IT infrastructures, service
providers and large enterprises are demanding a SLM software solution that not
only effectively monitors, collects and reports information, but also can scale
as their IT infrastructures grow and is flexible enough to adapt to its ever
increasing complexities. Traditional network management software products are
limited in the number of data sources and the types of data within each source
that they can collect and analyze. In addition, traditional network management
products have primarily played a reporting role, focusing on historical and
present information, rather than predicting and planning for future network
needs. We believe that there is a significant market opportunity for a SLM
software solution that is:
. supported by a robust, scalable architecture to accommodate rapidly
growing and increasingly complex network infrastructures;
. designed with a distributed architecture to enable the collection and
analysis of data on a centralized or remote basis for global network
optimization;
. flexible enough to collect a broad range of configuration and performance
data from a wide range of data sources and to adapt to emerging
technologies;
. supported by an open data model which allows diverse and voluminous data
to be correlated and summarized, providing insight and predictive
information;
. highly customizable, allowing tailored presentation of information that
addresses the needs of the user; and
. able to integrate with OSS and BSS systems.
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The Trinagy Solution
We provide a highly scalable and flexible SLM software solution that is
designed to address the needs of service providers and large enterprises. Our
solution offers customers a user-friendly interface to proactively manage their
IT resources by analyzing global and specific network resource activity levels
and trends, anticipating future demand and preparing customized reports. We
believe that our solution provides the following key advantages to our
customers:
Scalable, distributed architecture. Our TREND software products are built on
a distributed architecture that allows data to be collected, processed and
analyzed locally, regionally or centrally. Because data typically is processed
at the local level, users can avoid the capacity limitations associated with a
single, centralized server. Our distributed architecture also makes our
solution highly scalable, which enables customers to deploy additional products
as their networks and IT systems expand or diversify. Further, it provides
customers with the ability to locate servers where they are needed rather than
where they are dictated to be placed by the software.
Flexibility of data acquisition. Our TREND software solution provides
flexibility of data acquisition by enabling enterprises and service providers
to poll a broad range of network performance data from heterogeneous data
sources within an organization's entire IT infrastructure. In addition, we
provide the tool sets necessary to let our customers design their own data
collection methods, ensuring a truly comprehensive view of all network and
application elements while substantially improving implementation schedules.
TREND products can collect performance data from non-standard or legacy
equipment via our DataPipe feature. In addition, network managers can readily
incorporate new types of equipment and technology as additional data sources
are added. This allows for additional flexibility in data acquisition to
accommodate the rapidly evolving nature of our customers' IT infrastructures
and the integration into OSS and BSS systems.
Robust analysis and reporting. Our software was designed since inception to
provide our customers with the ability to customize our products to meet their
needs. Raw data can be summarized and analyzed as appropriate. Customers can
also design reports based on a combination of specific metrics, such as
availability, utilization, reliability and latency, and other detailed
requirements that are unique to their own individual end users. Additionally,
customers can choose from a range of pre-defined reports. All of these reports
can be delivered via the web and can be built and customized using web-based
tools. TREND's distributed architecture allows service providers to easily
develop and maintain customized reporting. The robust reporting functionality
of our products enables our customers to differentiate their service value from
that offered by their competitors.
Increased revenue opportunities for service providers. The increasing
complexity and scale of networks create significant challenges for network
service providers to efficiently monitor and comply with service level
agreement requirements. We believe our TREND software products can increase
revenue opportunities for service providers by delivering to them the
information necessary to adjust network resources and charge users for these
services. Our software products enable service providers to proactively manage
service levels and reduce service level agreement violations that may result in
costly penalties. Our software helps service providers support performance
claims by providing them with ongoing monitoring capabilities and further
distinguish themselves by providing a depth of customizable reporting
capability that can be tailored to the service they are providing.
Proactive network planning capabilities. The information and reports we
supply on network performance and data traffic patterns enable network
engineers to more accurately predict future capacity and traffic shaping
requirements. For example, TREND Capacity Planning Reports identify components
of the IT infrastructure that will become overloaded and project the date on
which a particular network device will reach a capacity threshold, based on
historical usage and statistical methods. In addition, these reports can help
reduce costs by identifying underutilized resources, allowing IT managers to
re-allocate load to those resources and potentially eliminating or delaying the
need to purchase additional resources.
Increased benefits for end users. Our products enable network managers to
identify and resolve IT infrastructure problems before they impact the
performance of an end user's job. Network managers have
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greater control over the performance of the IT infrastructure that is critical
to an end user's productivity and an organization's competitiveness. In
addition, because our reports provide pertinent management information that can
be used to reduce the incidence of common network problems, network managers
can devote more of their time and resources to matters of strategic
performance.
Our Strategy
Our goal is to become the leading supplier of SLM software. To achieve this
goal, we have adopted a strategy with the following key elements:
Maintain a leadership position in the network service provider market. We
have designed our software since inception to address the specific needs of
network service providers. We believe that the SLM software market for network
service providers has only been lightly penetrated to date. We intend to expand
our market share by leveraging the expertise we have developed with clients
such as AT&T, BellSouth, IBM, NorthPoint Communications, Qwest, Rhythms and
SBC. We believe there is a significant market opportunity for a SLM software
solution that is an essential component of a service provider's OSS/BSS
infrastructure. We intend to expand our penetration into the service provider
market by continuing to offer solutions that not only address the service
provider's need to ensure SLAs, but that take an active role in providing
network intelligence directly to customers and all parts of the organization
that support customers.
Maintain and broaden our technology leadership. We believe that both our
technology, represented by our scalable, flexible and customizable products,
and our broad portfolio of service capabilities, are leaders in our industry.
Our flexible and open architecture and standardized, documented support
application programming interface allows for integration of additional network
and application performance management technologies into our products. For
example, TREND integrates with NetIQ's Pegasus product for application
performance. In addition, our open architecture allows TREND to integrate with
service providers' OSS/BSS applications. For example, TREND has been integrated
with Bridgewater's WideSpan product for narrowband and broadband access
provisioning and usage accounting. We intend to broaden our performance
management software solutions through our internal research and development
efforts, strategic relationships and technology acquisitions.
Leverage our existing customer base. As of September 30, 2000, we had over
400 customers worldwide, including network service providers such as AT&T, BT,
IBM and Verizon, and enterprises such as FedEx, General Electric and Staples.
Because our pricing model is linked to network size and growth, we have the
opportunity for incremental revenue as our customers' IT infrastructures
expand. We believe our customer base affords us a significant opportunity for
additional sales of current and future products, ongoing maintenance revenues,
and additional professional services. As our customers' IT infrastructures
change and grow, they may purchase additional database capacity, ReportPacks,
DataPipes, enhanced maintenance contracts and other services. We believe there
is a trend among service providers to provide more than network access and
explore new revenue-generating opportunities such as usage-based billing and
bundling of voice and data services. We will continue to leverage the
capabilities of our TREND solution to integrate with service providers' OSS/BSS
systems in order to meet this emerging demand.
Expand our indirect sales channel. We market and sell our products primarily
through our direct sales force. We intend to supplement our direct sales by
expanding our indirect sales channels through agreements with strategic
marketing partners, systems integrators, network equipment vendors, service
providers and OSS/BSS application providers. For example, earlier this year we
entered into a global pass-thru reseller agreement with Nortel Networks which
provides us with the opportunity to reach a much broader customer base through
Nortel Networks' global sales channel. Nortel Networks is selling TREND as a
complementary product to its Optivity network management offering. Managed
network service providers represent an additional opportunity to broaden our
channel reach. For example, we have an agreement with IBM to use TREND as part
of its managed network service offerings.
Expand our global presence. We have established a strong sales and support
presence in North America and Europe. We also have a presence in other major
markets of the world through our partners and intend to
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<PAGE>
expand our direct presence globally. Revenues from sales outside North America
represented 23% and 32% of our total revenues for the year ended December 31,
1999 and the six months ended June 30, 2000. We believe international markets
are still only lightly penetrated to date and present a substantial growth
opportunity.
Products
Our suite of TREND software products enables service providers and
enterprises to monitor, analyze and report on the performance and quality of
service of their IT infrastructure and to use this information to plan for
future network capacity and optimize their networks. Our solution is based on a
fully distributed, highly scalable architecture that allows organizations to
poll a broad range of network performance data from multiple heterogeneous data
sources within an organization's entire IT infrastructure. It is used in voice
and data networks for monitoring and managing resource efficiency and capacity,
error rates, bottlenecks and potential problems. By addressing the entire IT
infrastructure rather than isolated portions of a network, our TREND software
products provide organizations with the ability to measure and document service
level agreement requirements and manage the efficiency and performance of their
IT infrastructure.
Customers typically license TREND software in packages that include all the
components needed to have a fully running system, consisting of one or more
servers, clients, DataPipes and ReportPacks. These product packages are
licensed by database size. We believe that utilizing a pricing model based on
database size makes product selection and implementation easier for customers
because it does not require the customer to comprehensively survey the elements
to be monitored across the customer's IT infrastructure prior to
implementation. As a customer's IT infrastructure expands or diversifies, the
customer can increase database capacity, install additional DataPipes, add
supplementary Report Packs and install additional satellite servers.
The following graphic illustrates the components of our TREND solution:
[Description of TREND Solution Graphics]
The left half of this graphic is divided into three horizontal tiers
entitled from top-to-bottom, "Global," "Regional" and "Local." At the bottom of
the Local tier, two elliptical circles are stacked vertically, and entitled
from top to bottom "OSS/BSS System Data" and "SNMP/Non-SNMP Device Data."
Graphics in the shape of horizontal pipes labeled "DataPipe," two and three
respectively, are connected next to each elliptical circle with horizontal
lines. At the top portion of each DataPipe an arrow moves horizontally toward
four rectangular graphics labeled "TREND Server" located at the bottom portion
of the Local tier. At the top portion of each TREND Server in the Local Tier,
an arrow moves vertically toward two rectangular graphics also labeled "TREND
Server" located in the Regional Tier. A second arrow moves straight and to the
right from each of the four TREND Servers on the Local Tier and connect to an
image in the shape of a vertical rectangle with rounded corners labeled
"Network." At the top portion of each of the two TREND Servers located on the
Regional tier, an arrow moves vertically toward an image in the shape of a
square labeled "TREND Server" on the Global tier. A second arrow moves straight
and to the right from each of the two TREND Servers on the Regional Tier and
connect to the Network rectangle. Two arrows branch off from the TREND Server
on the Global tier. One arrow moves straight and to the right and connects to
the Network rectangle and the second arrow is a broken arrow dropping down to
the left and connects the TREND Server on the Global tier to the elliptical
circle on the top in the Local tier labeled "OSS/BSS" System Data. From the top
and bottom of the Network rectangle three images in the shape of squares are
connected to the Network rectangle with vertical lines labeled "TREND Clients."
From the right of the Network rectangle, two images in the shape of documents
appear vertically above each other, each connected to the Network rectangle
with arrows and labeled from top-to-bottom "TREND ReportPacks" and "Custom
Reports."
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TREND Servers. TREND servers provide the engine for storing, processing and
accessing data collected from servers, databases, applications and network
devices throughout the network. Data is automatically aggregated and
summarized, and stale data is deleted by the TREND server. The TREND server is
available in a range of database sizes to meet individual customers'
requirements. TRENDweb servers extract information from the database, provide
access to reports and generate reports on a scheduled basis. Multiple TREND and
TRENDweb servers can be distributed for a scalable approach that accommodates
virtually any network and extends to provide reporting on any defined data
source.
TREND Clients. TREND and TRENDweb clients provide interfaces to allow users
to manipulate data collection, design and display management reports, print
reports and distribute them via the web. Clients can be distributed to any
networked machine, further enhancing TREND's scalability.
TREND DataPipes. TREND DataPipes are distributed data collection
applications that allow users to efficiently poll any group of simple network
management protocol (SNMP)-manageable devices or collect data from non-SNMP or
legacy data sources, and to store collected data in a relational database. Once
processed, management information is readily accessible. This flexibility
extends the reporting capabilities of TREND software. TREND DataPipes allows
users to configure them to collect data from new devices.
TREND ReportPacks. TREND ReportPacks are standard, "out of the box"
performance management reports that form the basis for all TREND reports. These
reports can be accessed through TREND's graphical user interface (GUI), a web
interface or both. The report scheduling facility of TREND allows reports to be
scheduled as required and allows for flexible delivery of results to the
appropriate user via the web, a printer or user directory. ReportPacks are
available for specific technologies, such as ATM, frame relay and DSL, and
specific vendors, such as Cisco Systems and Nortel Networks.
ReportPacks automatically set up and deliver summary and exception reports
to the network administrator. Users install ReportPacks appropriate to the
specific types of devices or technologies on which they want to report. Once
installed, ReportPacks automatically discover the devices, determine what data
should be collected, define the frequency of data collection, control data
aggregation and statistical analysis to support reports, set thresholds for
exception conditions and provide comprehensive reports to the user. These
reports furnish the required information to assist network managers to oversee
daily network operations. As network behavior changes, exception reports
highlight the potential problems to the network manager. For each exception
condition, a drill-down report provides the details necessary for evaluating
and troubleshooting the problem.
TREND's reporting capabilities can also be customized to meet the needs of
individual users. Customers can design specific reports by modifying the pre-
defined ReportPacks or starting from scratch. For example, users can enhance
standard reporting capabilities to report on specific devices, fine tune
polling frequencies and define different data summarization processing.
Services
We offer our customers comprehensive services in the form of consulting,
support, maintenance and training. We charge for our services separately from
our licensing fees. Our customers typically purchase maintenance contracts at
the same time they license our software which entitles them to software
upgrades and support services. As of September 30, 2000, we employed 23 people
in our services organization.
Our service consultants help our customers deploy our software more
efficiently and effectively across large and complex networks. Our consultants
possess expertise in managing large, distributed networks as well as
implementing our software solutions. This expertise enables us to offer our
customers the ability to rapidly implement and utilize our software across
their networks.
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We offer technical support to customers via phone, e-mail and our website.
Our technical support team is dedicated to assisting our customers with
product-related questions in a prompt manner that will best meet their needs.
We currently offer four different levels of technical support contracts in
which customers can subscribe for services ranging from the most basic level of
maintenance to highly personalized ongoing support and quarterly on-site
maintenance visits.
We provide a number of training programs designed to ensure that our
customers are effectively educated to take full advantage of our software and
its features. We primarily teach our training classes at our headquarters in
Torrance, but make classes available at customer or local training sites when
necessary.
Technology
Our product architecture is built on a Sybase database platform and includes
a multi-database server design, highly efficient data collectors for SNMP and
non-SNMP data sources, sophisticated data aggregation, and web-enabled
reporting. The database can be accessed using any SQL-based method and with any
off-the-shelf reporting application that supports the SQL standard, such as
Excel or Crystal Reports.
TREND operates on any combination of IBM-AIX, HP-UX, Sun Solaris and Windows
platforms. With the Java-based TRENDweb application, TREND reports can be
accessed from any web browser that supports the Java environment or HTML-based
reports can be accessed from virtually any graphics-enabled web browser.
Customers
Our customers include service providers and large enterprises. In addition,
many of our enterprise customers act as service providers to their own
organizations. Through September 30, 2000 we have licensed our TREND software
solution to over 400 customers. The following customers have purchased software
licenses and services totaling at least $150,000 since January 1, 1999:
Service Providers
-----------------
AT&T Essent Kabelcom Bell Atlantic/Verizon
Bell Nexxia Global Crossing SBC Datacom
BellSouth IBM Swisscom
BT Nortel Networks Unisys
Cignal Global Communications NorthPoint Communications Verio/NTT DoCoMo
Deutsche Telekom NTL Qwest Communications
Digital Broadband Communications
Nuvo
Enterprises
-----------
Adelphia Business Systems Fidelity Micron PC
Comdisco Hewlett-Packard Siemens
General Electric ICG Staples
FedEx
AT&T and IBM represented 1% and 10% of our total revenues for 1999 and 13%
and 14% of our total revenues for the six months ended June 30, 2000.
Case Studies
AT&T Global Network Services
AT&T Global Network Services (AGNS) provides solutions that relieve
companies from the task of building and operating networks. AGNS, which
guarantees service levels to its customers, desired to expand the capabilities
of its existing network reporting system. AGNS requires massive system
scalability to address
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the varied reporting needs of its large customer base. AGNS chose TREND for its
ability to scale to large networks, and for the flexible nature of the TREND
reporting solution. When viewed over the Internet using TRENDweb, our reports
provide AGNS and its customers with a comprehensive view of the performance of
the overall network and each of its customers operating within the network.
Digital Broadband Communications
Digital Broadband Communications (DBC) is an Internet service provider that
offers advanced internetworking technologies and a comprehensive suite of
Internet, data, voice and video services. DBC required scalability via a
distributed architecture for capacity planning for upwards of one million
ports. DBC chose Trinagy's TREND software solution specifically for its open
architecture, and in particular TREND's ability to collect data from virtually
any data source. TREND is integrated with DBC's existing OSS/BSS systems, which
was crucial in the deployment of DBC's SLA reports. Using Trinagy's TRENDweb,
DBC's customers have the ability to access information about their network
performance directly via the web. DBC was able to customize the reports to
provide its customers with specific frame relay utilization, throughput and
response time graphs. The interface between TREND and DBC's OSS-based
provisioning system had the additional benefit of allowing DBC customer
profiles to be downloaded from DBC's provisioning system and correlated with
TREND performance data.
NorthPoint Communications
NorthPoint Communications is a national provider of high-speed DSL services.
As with many CLECs, performance reporting and capacity planning are of
paramount concern to NorthPoint. NorthPoint needed to understand the nature of
traffic across their network to better plan future growth requirements.
NorthPoint purchased TREND to gather comprehensive performance data from the
numerous and heterogeneous devices and circuits in this network.
Terabeam Networks
Terabeam Networks is a provider of fiberless broadband IP services over the
first and last mile link of global communications networks. Using its own
Fiberless Optical technology, Terabeam creates a point-to-multipoint network of
invisible light over a metropolitan area to connect local area networks (LANs)
and wide-area networks (WANs). As with many carriers, performance reporting and
service level monitoring are of paramount concern to Terabeam. Terabeam needed
visibility to the patterns of traffic that traverse its networks to plan for
growth and uphold service level agreements. In addition, Terabeam needed to
gather, aggregate and present performance and availability data in an
understandable format to support SLAs with its customers. Terabeam purchased
the TREND software solution in combination with our application response time
ReportPacks to gather comprehensive performance data from the numerous and
heterogeneous devices and circuits in its networks.
Sales and Marketing
We sell our software to network service providers and large enterprises
worldwide primarily through our direct sales organization. In addition, we have
established relationships with strategic marketing partners, systems
integrators, network equipment vendors, service providers and resellers to help
us achieve broader market penetration and enhance our sales and marketing
capabilities. As of September 30, 2000, we employed 66 people in our sales and
marketing organization and intend to increase the number of people in this
organization.
Direct sales. We currently organize our direct sales force into geographical
territories in North America and Europe. Our direct sales organization is made
up of inside sales representatives, field sales representatives
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and systems engineers. Our inside sales representatives complete lead
qualification and coordinate sales appointments. Our field sales
representatives interface with our customers directly and develop their
accounts. Our systems engineers interface technically with our customers. We
intend to expand our direct sales force and establish additional sales offices
both domestically and internationally.
Indirect sales. We currently have relationships with resellers and
distributors in both the international and North American markets. Our
resellers include WaveTech Wandel & Golterman, Dimension Data, Network Support
Systems, Southern View, Seki Technotron, NET Systems, SIMAC and Nuvo Networks.
We also have co-marketing arrangements with a number of technology leaders
including Bridgewater Systems, Copper Mountain Networks and NetIQ.
Marketing programs. Our marketing programs are designed to inform potential
customers about the capabilities and benefits of our products. Our marketing
efforts include participation in industry and trade shows, preparation of
competitive analyses, publication of technical and educational articles in
industry journals, sales training, advertising and other outbound programs.
Strategic Relationships
We have built strategic relationships with companies that help us provide a
sophisticated and technologically advanced network performance management
solution. In addition, we have developed relationships with companies that are
able to help us with the distribution and marketing of our software.
Nortel Networks
We have a global pass-thru reseller agreement with Nortel Networks. Under
the terms of the agreement, Nortel Networks has a worldwide, non-exclusive
right to license TREND and market TREND as one of its enterprise reporting
offerings to Optivity customers. Nortel Networks may sell TREND through its own
sales force as well as through resellers and distributors around the world. The
Company believes that this arrangement will provide Optivity/TREND users with a
more complete view of the performance and health of their customers' networks.
Bridgewater Systems
We have formed a strategic alliance with Bridgewater Systems to offer a
solution that packages real-time enforcement, management and interactive
reporting for wholesale, business and consumer Internet services. TREND imports
data from Bridgewater's WideSpan system, summarizes the data and generates
usage tracking, trending and performance management reports. The joint solution
allows service providers to correlate relevant network access and application
data from a single source and in turn, tailor services to the specific needs of
each customer, proactively manage service level agreements, and deliver on
established quality commitments. In addition, the combined solution includes
comprehensive accounting and usage data for correlation and consolidation of
network-wide accounting records and detailed usage and active session
reporting.
NetIQ
We have formed a strategic relationship with NetIQ to offer an end-to-end
performance reporting solution. NetIQ's Pegasus product tracks and gathers data
associated with the end user's performance experience, including application
performance. TREND captures this data and combines it with network traffic and
utilization data to produce an integrated TREND performance report. This
information helps network managers isolate performance problems and give an
end-to-end view of the client, server and network.
Network Harmoni
We have formed a strategic development and OEM relationship with Network
Harmoni. Network Harmoni is a software developer that delivers desktop and
server performance monitoring software agents for managing
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service level agreements and quality of service. Under the agreement, we will
resell Network Harmoni's SNMP agents under the TREND brand name to provide
information for application response and server monitoring reports.
Research and Development
We focus our research and development efforts on developing new products to
meet the evolving needs of our existing and potential customers by
incorporating new features, functionalities and technologies. We believe that
the timely development of new products and enhancements is essential to
maintaining our competitive position in the marketplace.
Our research and development team consists of staff members in our Torrance,
California, Reston, Virginia, and Nashua, New Hampshire facilities. As of
September 30, 2000, we had a total of 46 employees in our research and
development organization.
Our research and development costs for the years ended December 31, 1998 and
1999 and the six months ended June 30, 2000 were $4.0 million, $5.0 million and
$3.4 million. We anticipate that we will continue to increase our research and
development expenses as we hire additional personnel to develop new products
and to enhance our existing software. We expect that our focus for future
releases of our software will include expanded database compatibility and
continued improvements relating to ease of use, ease of integration, out of the
box solutions, migration to standards-based technologies and continued
improvements in performance and scalability. We are not supported by any
research grants or support programs.
Competition
Competition within the SLM software market has been and is expected to
remain intense and marked by rapid changes in technology and industry
standards, frequent new product introductions and increasing demands and
expectations by customers. To maintain and improve our competitive position, we
must continue to develop and introduce, on a timely and cost-effective basis,
new products and product features that keep pace with the technological
developments and emerging industry standards and address the increasingly
sophisticated needs of our customers. The principal competitive factors
affecting the market for our products are reputation, quality, performance,
price and customer support in addition to product features including
flexibility, scalability, rapid deployment time, interoperability,
functionality and ease of use.
Our primary source of competition comes from suppliers of comparable
products, including Concord Communications, CrossKeys Systems, InfoVista,
NetScout Systems and Quallaby. Other sources of actual or potential competition
include:
. suppliers of system management products, including BMC Software, Computer
Associates, Compuware, Hewlett-Packard and Tivoli Systems (an IBM
company);
. providers of network management products, such as Micromuse, Objective
Systems Integrators, Visual Networks and Lucent Technologies (through its
VitalSuite product);
. parties who act as outsourcers of network infrastructure management
services; and
. organizations' internal design and development teams that produce
customized applications for their specific needs.
Many of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do, and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have broader name recognition and more
extensive customer bases that they could leverage, thereby gaining market share
to our detriment. They may be able to undertake more extensive promotional
activities, adopt more aggressive pricing strategies, and offer purchasers more
attractive terms than we can. Our
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competitors may develop products that are superior to ours or that achieve
greater market acceptance. In addition, current and potential competitors may
establish cooperative relationships among themselves or with third parties to
enhance their products to address customer needs. Such competition could
materially and adversely affect our ability to obtain revenues from license and
services fees from new or existing customers on terms favorable to us. Further,
competitive pressures may require us to reduce the price of our software. In
any such case, our business, operating results and financial condition would be
adversely affected. We cannot assure you that we will be able to compete
successfully with existing or new competitors or that competition will not
adversely affect our business.
Intellectual Property and Other Proprietary Rights
Our success and ability to compete are dependent on our ability to develop
and maintain our proprietary technology. We rely on a combination of trademark,
trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology. We seek to protect our source code for
our software, documentation and other written materials under trade secret and
copyright laws. We license our products under signed license agreements, which
impose restrictions on the licensee's ability to utilize our products. Finally,
we seek to avoid disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source
code. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. In addition, the laws of many
countries do not protect our proprietary rights to the same extent as the laws
of the United States.
We currently rely on software that we have licensed from a number of
suppliers, including Merant, Allaire and Sybase. These licenses may not
continue to be available to us on commercially reasonable terms or at all. It
may be difficult for us to replace any third-party software if a vendor seeks
to terminate our license to the software. If these licenses become unavailable
to us on reasonable terms or at all, our business would be materially and
adversely affected. In addition, the operation of our products would be
impaired if errors occur in the third-party software that we license. It may be
more difficult for us to correct any errors in third-party software because the
software is not within our control. Accordingly, our business would be
adversely affected in the event of any errors in this software. In the future,
we expect to license other third-party technologies to enhance our products,
meet evolving customer needs or adapt to changing technology standards. Failure
to license, or the loss of any license of necessary technologies could result
in delays or reductions of shipments of our products until equivalent software
is identified, licensed and integrated or developed by us.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is
possible that in the future, third parties may claim that we or our current or
potential future products infringe upon their intellectual property. We expect
that software product developers, providers of Internet-based software
applications and providers of network performance solutions will increasingly
be subject to infringement claims as the number of products and competitors in
our industry segment grows and the functionality of products in different
industry segments overlap. Any claims, with or without merit, could be time
consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business.
Employees
As of September 30, 2000, we had 147 full time employees, including 66 in
sales and marketing, 46 in research and development, 23 in services and 12 in
administrative. Our future success will depend in part upon our ability to
attract, train and retain, integrate and motivate highly qualified sales,
technical and management personnel, for whom competition is intense. From time
to time, we also employ independent contractors to support our services,
product development and sales and marketing organizations. None of our
employees are represented by any collective bargaining unit, and we have never
experienced a work stoppage. We believe our employee relations are good.
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Facilities
Our primary administrative, sales, marketing and research and development
facility is located in Torrance, California and consists of approximately
23,000 square feet of office space held under a lease that expires in October
2005. As of September 30, 2000, we also leased offices in Nashua, New
Hampshire, Reston, Virginia and Berkshire, United Kingdom. We believe our
existing facilities meet our current needs and that we will be able to obtain
additional commercial space as needed.
Legal Proceedings
Michael McCoy, our Chief Executive Officer from August 1998 to June 1999,
has asserted claims against us relating to his termination. Specifically, Mr.
McCoy alleges that he is entitled to options for 675,000 shares of common
stock, and an unspecified amount of compensation for salary and benefits. We
believe Mr. McCoy's claims are without merit. On or about September 1, 2000, we
initiated an arbitration proceeding under the terms of his employment agreement
for a determination of our dispute. Mr. McCoy has subsequently asserted a
counter-claim in the arbitration proceeding alleging causes of action for
breach of contract, fraud and negligent misrepresentation seeking unspecified
monetary damages. While we believe that Mr. McCoy's claims are without merit
and will oppose them vigorously, the ultimate outcome is uncertain.
Although we are not currently a party to any other material litigation, we
may from time to time become involved in litigation relating to claims arising
from our ordinary course of business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
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MANAGEMENT
Directors and Executive Officers
The names, ages and positions of our directors and officers as of September
30, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David P. Woodall...... 50 President, Chief Executive Officer and Director
David J. Kaufman...... 47 Chairman, Chief Technology Officer and Director
Joseph M. Feig........ 58 Treasurer and Chief Financial Officer
Paul H. Madick........ 36 Secretary and General Counsel
Victor W. Mak......... 40 Vice President of Engineering
Dale E. Quayle........ 40 Vice President of Sales
Peter Hoernes......... 39 Vice President of Services and Customer Support
Stephen P. Mank....... 44 Vice President of Marketing and Business Development
Dennis A. Kirshy...... 57 Director
Douglas R. Korn....... 38 Director
Kenneth J. Biba....... 50 Director
Abraham Hepner........ 69 Director
Stephen J. Clearman... 49 Director
</TABLE>
Executive Officers
David P. Woodall has served as our President and Chief Executive Officer
since June 1999 and has served as a director since May 2000. From November 1998
to June 1999, Mr. Woodall served as our Executive Vice President. From November
1994 to June 1998, Mr. Woodall was the founder and served as Chief Executive
Officer of Datacraft Americas, a network integration company. Mr. Woodall holds
a B.A. in Psychology from Rutgers College and an M.B.A. from Nova University.
David J. Kaufman has served as our Chief Technology Officer since September
1998 and has served as our Chairman of the Board since founding our company in
November 1988. From November 1988 to August 1998, Mr. Kaufman served as our
President and Chief Executive Officer. Mr. Kaufman holds a B.A. in economics
and an M.S. in computer science from the University of California, Los Angeles.
Joseph M. Feig has served as our Treasurer and Chief Financial Officer since
April 1998. From April 1986 to April 1998, Mr. Feig served as President of JMF
Associates, a financial consulting firm. Mr. Feig holds a B.S. in chemical
engineering from Columbia University and an M.B.A. from Boston University.
Paul H. Madick has served as our General Counsel and Secretary since April
1996. From September 1990 to April 1996, Mr. Madick served as an associate and
later a partner of the Law Offices of E. Leonard Fruchter. Mr. Madick holds a
B.A. in economics from the University of California, Los Angeles and a J.D.
from Pepperdine University School of Law.
Victor W. Mak has served as our Vice President of Engineering since February
2000. From April 1994 to February 2000, Mr. Mak served as Chief Technology
Officer and Vice President of Engineering for DSET Corporation, a provider of
telecommunications network management solutions. Mr. Mak holds a B.S. in
electrical engineering from the University of Toronto, and an M.S. and Ph.D. in
electrical engineering from Stanford University.
Dale E. Quayle has served as our Vice President of Sales since April 2000.
From November 1999 to April 2000, Mr. Quayle served as our Vice President of
Sales and Marketing, and from April 1999 to November 1999, Mr. Quayle served as
our Vice President of North American Sales. From November 1990 to March 1999,
Mr. Quayle served as Vice President of Sales and Marketing of Artios
Corporation, a provider of hosted business-to-business data integration
services for enterprises and exchanges. Mr. Quayle holds a B.S. in business and
economics from Illinois State University.
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Peter Hoernes has served as our Vice President of Services and Customer
Support since January 2000. From April 1999 to January 2000, Mr. Hoernes served
as a District Manager for AT&T. From June 1986 to April 1999, Mr. Hoernes
served in various positions at IBM. Mr. Hoernes holds a B.S. in computer
science from Marist College and an M.S. in artificial intelligence and computer
science from Rensselaer Polytechnic Institute.
Stephen P. Mank has served as our Vice President of Marketing and Business
Development since April 2000. From July 1999 to January 2000, Mr. Mank served
as Vice President of IP Services of Newbridge Networks, a company that designs,
manufactures, markets and services end-to-end networking solutions. From June
1998 to April 1999, Mr. Mank served as Chief Executive Officer and Chief
Operating Officer of Hayes Corporation, a company that manufactures computer
communication products. Hayes filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code in October 1998, and in April 1999 a
motion was filed to convert the Chapter 11 proceeding to a Chapter 7
liquidation. From April 1993 to February 1998, Mr. Mank served as Vice
President of Marketing and Business Development of Xyplex, an enterprise
network component provider. Mr. Mank holds a B.A. from the College of Social
Studies of Wesleyan University and an M.B.A. in marketing management and
finance from the University of Southern California.
Directors
Dennis A. Kirshy has served as a member of our board of directors since
November 1996. Mr. Kirshy is a private investor and has advised and invested in
small technology companies in the networking, Internet networking and computer
industries since February 1993. Mr. Kirshy is a member of the board of
directors of Network Engines, Inc., a developer and marketer of server
appliances. Mr. Kirshy is also a director of several privately held companies
in the networking and computer peripherals industries. Mr. Kirshy holds a B.S.
in electrical engineering from the New York Institute of Technology and an
M.B.A. from New York University.
Douglas R. Korn has served as a member of our board of directors since April
2000. Since January 1999, Mr. Korn has served as a Managing Director of Bear,
Stearns & Co. Inc. From January 1994 to December 1998, Mr. Korn served as
managing director of Eos Partners, L.P. Mr. Korn is also a director of several
privately held companies in the Internet infrastructure and consumer products
industries. Mr. Korn holds a B.S.E. in business from the University of
Pennsylvania and an M.B.A. from Harvard Business School.
Kenneth J. Biba has served as a member of our board of directors since July
1996. Mr. Biba has served as Managing Director of The Value Group, a financial
services firm, since January 1996 and has served as President of HighGain
Technologies, a technology consulting firm, since June 1994. Mr. Biba serves on
the board of directors of Xircom, Inc., a provider of mobile networking and
information access solutions for mobile PC users, and is Chairman of Industrial
Solid Propulsion, a vendor of consumer aerospace products. Mr. Biba holds a
B.S. in physics and an M.S. in computer science from Case Western Reserve
University.
Abraham Hepner has served as a member of our board of directors since April
1994 and as an independent consultant to us from April 1994 to May 1999. Since
1983, Mr. Hepner has been an independent management consultant, advising
companies in the technology, telecommunications and other industries.
Mr. Hepner holds an M.S. in chemical engineering from Universidad Autonoma de
Mexico.
Stephen J. Clearman has served as a member of our board of directors since
April 1997. Since August 1989, Mr. Clearman has served as a member of the board
of directors of MemberWorks, a company that designs and manages innovative
membership programs. Since May 1988, Mr. Clearman has served as a member of the
board of directors of World Access. Since May 1984, Mr. Clearman has served as
a General Partner of Geocapital Partners, a venture capital management firm.
Mr. Clearman holds a B.A. in mathematics from Haverford College, an M.S. in
electrical engineering from Columbia University, and a J.D. from Harvard Law
School.
Except for David J. Kaufman and Paul H. Madick, who are brothers-in-law,
there are no family relationships among any of our directors or executive
officers.
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Board of Directors
Our board of directors is currently comprised of seven directors. Prior to
the closing of the offering, the holders of our Series B and Series D preferred
stock, each voting as a separate series, were each entitled to elect one
director. Messrs. Clearman and Korn were elected to the board of directors
pursuant to these rights. Upon the closing of this offering, these board
representation rights will terminate and no stockholders will have any special
rights with respect to board representation.
Upon completion of this offering, our board of directors will be divided
into three classes as nearly equal in size as possible with staggered three-
year terms: Class I, whose term will expire at the annual meeting of
stockholders to be held in 2002, Class II, whose term will expire at the annual
meeting of stockholders to be held in 2003, and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2004. The Class I
directors will be Messrs. Hepner and Woodall, the Class II directors will be
Messrs. Clearman and Biba, and the Class III directors will be Messrs. Kirshy,
Kaufman and Korn. At each annual meeting of stockholders, beginning with the
2002 annual meeting, the successors to the directors whose terms will then
expire will be elected to serve from the time of their election and
qualification until the third annual meeting following their election or until
their successors have been duly elected and qualified, or until their earlier
resignation or removal. The classification of our board of directors could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of Trinagy.
Committees of the Board of Directors
Compensation Committee. Our compensation committee is composed of three
outside directors who review and make recommendations to our board of directors
concerning salaries and incentive compensation for our directors, officers and
employees. The compensation committee also administers our employee benefit
plans. The current members of our compensation committee are Messrs. Clearman,
Kirshy and Korn.
Audit Committee. The current members of our audit committee are Messrs.
Biba, Hepner and Korn. The audit committee reviews our internal accounting and
auditing procedures, reviews our audit and examination results and procedures,
consults with our management and our independent public accountants prior to
the presentation of our financial statements to stockholders, and makes
recommendations to the board of directors about selecting independent public
accountants.
Director Compensation
Directors currently do not receive any cash compensation from us for their
services as members of the 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 stock plans. On May 3,
1999, each of Messrs. Biba, Clearman, Hepner and Kirshy was granted an option
to purchase 18,750 shares of our common stock at an exercise price of $1.33 per
share. On May 31, 2000, each of Messrs. Kirshy and Hepner was granted an option
to purchase 13,500 shares of our common stock at an exercise price of $6.67 per
share. On June 1, 2000, Mr. Biba was granted an option to purchase 13,500
shares of our common stock at an exercise price of $6.67 per share. The
foregoing options vest in equal monthly installments over a 12 month period
from the date of grant. Option grants to directors are at the discretion of
management, and we have no specific plans regarding amounts to be granted to
its directors in the future. See "--Employee Benefit Plans."
During fiscal 1999, each of Messrs. Biba, Hepner and Kirshy received an
aggregate of $15,000 for management consulting services that they provided to
us.
Compensation Committee Interlocks and Insider Participation
Our compensation committee currently consists of Messrs. Clearman, Kirshy
and Korn. On June 6, 2000, Mr. Kirshy replaced Mr. Biba as a member of our
compensation committee. None of our executive officers
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serves as a director or member of the compensation committee or other board
committee performing equivalent functions of another entity that has one or
more executive officers serving on our board of directors or our compensation
committee.
For information regarding transactions with some of the members of our
compensation committee or by entities affiliated with them, see "--Certain
Transactions."
Executive Compensation
The following table summarizes the compensation we paid during the fiscal
year ended December 31, 1999 to our Chief Executive Officer and each of our
four other most highly compensated executive officers as well as our former
Chief Executive Officer and our former Vice President of Engineering. These
individuals are referred to as the "named executive officers" in this
prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
----------------------------- ---------------------
Name and Principal Other Annual Securities Underlying All Other
Position Salary Bonus Compensation Options (#) Compensation
------------------ -------- ------- ------------ --------------------- ------------
<S> <C> <C> <C> <C> <C>
David P. Woodall........ $192,500 $53,405 $ -- 292,500 $5,034
President and Chief
Executive Officer
David J. Kaufman........ 170,000 70,835 -- -- 5,478
Chairman and Chief
Technology Officer
Joseph M. Feig.......... 166,400 38,893 -- -- 5,285
Chief Financial Officer
and Treasurer
Michael Procopio........ 132,000 20,667 -- -- 5,055
Vice President of
Technology Planning
Paul H. Madick.......... 129,500 20,341 -- -- 5,320
Secretary and General
Counsel
Michael McCoy........... 116,667 32,500 -- -- 3,965
Former President and
Chief Executive Officer
James Medlock........... 112,211 130,131 -- 30,000 1,505
Former Vice President
of Engineering
</TABLE>
The amounts in the column entitled "All Other Compensation" consist of
medical insurance premiums of $1,485, $3,948, $5,000, $5,021, $5,251, $5,286
and $5,444 paid by us on behalf of Messrs. Medlock, McCoy, Woodall, Procopio,
Feig, Madick and Kaufman and term life insurance premiums in the amount of $17
paid by us on behalf of Mr. McCoy, $20 paid by us on behalf of Mr. Medlock and
$34 paid by us on behalf of each of Messrs. Woodall, Kaufman, Feig, Procopio
and Madick.
Mr. Woodall became our President and Chief Executive Officer in June 1999.
Mr. McCoy served as our President and Chief Executive Officer until June 1999.
Mr. Medlock served as our Vice President of Engineering until July 1999. Mr.
Procopio, our Vice President of Technology Planning, began reporting to our
Vice President of Marketing and Business Development in April 2000.
Option Grants in Last Fiscal Year
The following table provides summary information regarding stock options
granted to each of the named executive officers in fiscal 1999. The information
regarding stock options granted to the named executive officers as a
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percentage of total options granted to employees in 1999 is based on options to
purchase a total of 1,904,972 shares that were granted to employees,
consultants and directors in fiscal 1999. No stock appreciation or stock
purchase rights were granted in fiscal 1999.
Options were granted at an exercise price equal to the fair market value of
our common stock as determined by the board of directors on the date of grant.
The potential realizable values set forth in the table below assume that the
fair market value of our common stock on the date of grant will appreciate at
the indicated rate compounded annually for the entire six-year term of the
option and that the option is exercised and sold on the last day of its term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not reflect
our projections or estimates of future stock price growth.
All options indicated in the table below have a six year term. The options
vest as to 25% of the shares one year from the vesting commencement date and
the remaining shares vest at the rate of 1/48 of the shares at the end of each
month thereafter, provided that the optionee remains our employee or a
consultant to us. In addition, Messrs. Woodall and Feig have agreements that
provide for acceleration of vesting under certain conditions as described in
"--Employment Agreements and Change of Control Arrangements."
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Price Expiration -----------------------
Name Granted Fiscal Year Per Share Date 5% 10%
---- ---------- ------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David P. Woodall........ 292,500 15.4% $1.33 6/14/05 $ 132,637 $ 300,909
David J. Kaufman........ -- -- -- -- -- --
Joseph M. Feig.......... -- -- -- -- -- --
Michael Procopio........ -- -- -- -- -- --
Paul H. Madick.......... -- -- -- -- -- --
Michael McCoy........... -- -- -- -- -- --
James Medlock........... 30,000 1.6 1.33 2/10/05 13,604 30,862
</TABLE>
Mr. Medlock resigned as our Vice President of Engineering on July 1999. None
of these options vested prior to Mr. Medlock's resignation and therefore were
terminated pursuant to his option award agreement.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information for each of the named
executive officers concerning the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 1999. It also sets forth
values for "in-the-money" options that represent the positive spread between
the exercise prices of outstanding options and $1.33 which was the fair market
value of our common stock as of December 31, 1999 as determined in good faith
by our board of directors.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Shares Options at Fiscal Year End Fiscal Year End
Acquired Value ---------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David P. Woodall........ -- $ -- 95,813 579,938 $ 15,330 $45,990
David J. Kaufman........ -- -- 206,250 123,750 153,000 19,800
Joseph M. Feig.......... -- -- 60,000 52,500 9,600 8,400
Michael Procopio........ -- -- 46,875 65,625 7,500 10,500
Paul H. Madick.......... -- -- 70,625 19,375 41,300 3,100
Michael McCoy........... -- -- -- -- -- --
James Medlock........... 52,500 8,400 -- -- -- --
</TABLE>
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Employee Benefit Plans
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan was approved by our board of directors and
stockholders in May 2000. A total of 1,200,000 shares of common stock have been
reserved for issuance under the plan. As of September 30, 2000, awards to
purchase an aggregate of 1,055,625 shares of common stock were outstanding
under the plan, no shares of common stock had been purchased pursuant to
exercises of stock options and stock purchase rights and 144,375 shares were
available for future grant.
Our 2000 Stock Incentive Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, to
employees and nonstatutory stock options and stock purchase rights to
employees, including officers and directors, and to non-employee directors and
consultants. Unless terminated sooner, this plan will terminate automatically
in October 2010.
Our 2000 Stock Incentive Plan is administered by our compensation committee
and, thus, the compensation committee determines the terms of the options or
stock purchase rights granted, including the exercise price, the number of
shares subject to each option or stock purchase right, the vesting and the form
of consideration payable upon such exercise. In addition, the board has the
authority to amend, suspend or terminate the plan, provided that no such action
may affect any share of common stock previously issued and sold or any option
previously granted and then outstanding under the plan.
Options and stock purchase rights granted under our 2000 Stock Incentive
Plan are not generally transferable by the recipient. During the lifetime of
the recipient, each option and stock purchase right is exercisable only by the
recipient. The plan provides that options granted thereunder must generally be
exercised within 30 days of the end of recipient's status as our employee or
consultant, or within six months after his or her termination by death or
disability, but in no event later than the expiration of the option's ten year
term.
When we issue common stock upon exercise of options under the 2000 Stock
Incentive Plan, the agreement evidencing the grant may provide that we have an
option to repurchase an employee's stock on the voluntary or involuntary
termination of the employee's employment for any reason, including death or
disability. If we exercise the repurchase option, the purchase price paid per
share will equal the original price paid by the recipient and may be paid by
cancellation of the recipient's outstanding indebtedness to us, if any. This
repurchase option must be exercised within 90 days following termination. Our
option to repurchase the common stock will terminate once we successfully sell
our common stock to the public or any successor to our corporation successfully
sells its stock to the public.
The exercise price of any incentive stock options granted under this plan
and any nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue
Code, must be at least equal to the fair market value of our common stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the terms of such
incentive stock option must not exceed five years. The term of all other
options granted under the plan may not exceed ten years.
Our 2000 Stock Incentive Plan also provides that in the event of our merger
with or into another corporation or a sale of substantially all of our assets,
each option or right shall terminate unless assumed by the successor
corporation.
1998 Incentive Stock Option Plan
Our 1998 Incentive Stock Option Plan was approved by our board of directors
in April 1998 and by our stockholders in May 1998. A total of 1,200,000 shares
were reserved for issuance under the plan. As of September 30, 2000, there were
987,563 options outstanding under this plan. Options granted under the 1998
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Incentive Stock Option Plan are exercisable for a period of six years from the
date of grant. Options granted under this plan vest as to 25% one year from the
date of grant and the remaining shares vest as to 1/48 each month thereafter.
When we issue common stock upon the exercise of options, the optionee is
required to execute an agreement granting us the right to repurchase the issued
shares at fair market value upon the occurrence of certain events, including
termination of employment, death or disability. The agreement evidencing the
grant may provide that we have a repurchase option exercisable upon the
voluntary or involuntary termination of an employee's employment for any
reason, including death or disability. If we exercise the repurchase option,
the board of directors will determine the fair market value of the stock. The
repurchase option must be exercised within 90 days after we become aware of the
triggering event. Our option to repurchase the common stock will terminate once
we successfully sell our common stock to the public or any successor to our
corporation successfully sells its stock to the public. Upon a merger or
consolidation of our company, option holders under the 1998 Incentive Stock
Option Plan have the right to receive an equivalent amount of the surviving
company's stock upon exercise of their options.
1997 Incentive Stock Option Plan
Our 1997 Incentive Stock Option Plan was approved by our board of directors
and stockholders in May 1997. A total of 750,000 shares were reserved for
issuance under the plan. As of September 30, 2000, there were 635,000 options
outstanding under this plan. The terms of the options issued under the 1997
Incentive Stock Option Plan are essentially the same as those issued under the
1998 Plan.
1996 Incentive Stock Option Plan
Our 1996 Incentive Stock Option Plan was approved by our board of directors
and stockholders in May 1996. A total of 750,000 shares were reserved for
issuance under the plan. Options granted under the 1996 Incentive Stock Option
Plan are exercisable for a period of four years from the date of grant. In
addition, options granted pursuant to this plan vest as to 50% one year from
the date of grant and the remaining shares vest two years after the date of
grant. As of September 30, 2000, there were 465,097 options outstanding under
this plan. Other than the exercise period and vesting schedules, the terms of
the options issued under the 1996 Incentive Stock Option Plan are essentially
the same as those issued under the 1998 Plan.
1995 Incentive Stock Option Plan
Our 1995 Incentive Stock Option Plan was approved by our board of directors
in October 1995 and by our stockholders in December 1995. A total of 750,000
shares were reserved for issuance under the plan. Options granted under the
1995 Incentive Stock Option Plan vest as to 50% one year after the date of
grant and the remaining shares vest two years after the date of grant. As of
September 30, 2000, there were 517,500 options outstanding under this plan.
Other than the vesting schedules, the terms of the options issued under the
1995 Incentive Stock Option Plan are essentially the same as those issued under
the 1998 Plan.
2001 Stock Incentive Plan
Prior to the effectiveness of this offering, we plan to adopt a 2001 Stock
Incentive Plan. Subject to stockholder approval, the plan will become effective
immediately upon completion of this offering. A total of 2,500,000 shares of
common stock will be reserved for the grant of stock options and other equity
incentive awards under the 2001 Stock Incentive Plan. Annual increases will be
added to the 2001 Stock Incentive Plan equal to 5% of all outstanding shares of
our common stock or a lesser amount determined by our board of directors. As of
the date of this prospectus, no options or other equity incentive awards have
been granted under the 2001 Stock Incentive Plan.
The administrator has the authority to select individuals who are to receive
options or other equity incentive awards under the 2001 Stock Incentive Plan
and to specify the terms and conditions of options or other equity incentive
awards granted (including whether or not such options are incentive or
nonstatutory
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stock options), the vesting provisions, the term and the exercise price. The
2001 Stock Incentive Plan provides that we may grant incentive stock options
within the meaning of Section 422 of the Internal Revenue Code to employees,
including our officers and employee directors, and we may grant nonstatutory
stock options to employees and consultants, including non-employee directors.
The exercise price of incentive stock options granted under the 2001 Stock
Incentive Plan shall equal the fair market value of our common stock on the
date of grant (except in the case of grants to any person holding more than 10%
of the total combined voting power of all classes of our or any of our parent's
or subsidiaries' stock in which case the exercise price shall equal 110% of the
fair market value on the date of grant). The exercise price of nonqualified
stock options shall not be less than 85% of the fair market value on the date
of grant (except in the case of grants to any person holding more than 10% of
the total combined voting power of all classes of our or any of our parent's or
subsidiaries' stock in which case the exercise price shall equal 110% of the
fair market value on the date of grant). Option holders may pay for an exercise
in cash or other consideration, including a promissory note, as approved by the
administrator.
Generally, options granted under the 2001 Stock Incentive Plan (other than
those granted to non-employee directors) will vest at a rate of 25% of the
shares underlying the option after one year and the remaining shares vest in
equal monthly portions thereafter, such that all shares are vested after four
years. Unless otherwise provided by the administrator, an option granted under
the 2001 Stock Incentive Plan generally expires 10 years from the date of
grant. Upon the optionee's termination of employment or service with us or any
of our affiliates without cause, the option will terminate in three months.
Upon the optionee's termination of employment or service with us or any of our
affiliates for cause, the option may be terminated immediately. Upon the
optionee's death or disability, the option will terminate 12 months after the
optionee's death or disability. In addition, options granted under our 2001
Stock Incentive Plan are not generally transferable by the optionee except by
will or the laws of descent and distribution and generally are exercisable
during the lifetime of the optionee only by such optionee.
In the event we merge with or into another corporation or dispose of all or
substantially all of our assets, or in the event of other transactions in which
our stockholders before the transaction own less than 50% of the total combined
voting power of all our outstanding securities after the transaction, all
outstanding awards under the 2001 Stock Incentive Plan will terminate unless
they are assumed or equivalent awards are substituted by the successor
corporation or any of its parents or subsidiaries.
2001 Employee Stock Purchase Plan
We expect to adopt our 2001 Employee Stock Purchase Plan prior to this
offering. Subject to stockholder approval, the plan will become effective
immediately upon completion of this offering. This purchase plan will provide
employees with an opportunity to purchase our common stock through accumulated
payroll deductions. A total of 1,000,000 shares of common stock will be
reserved for issuance under the purchase plan.
Under the plan, the board of directors from time to time may resolve to
appoint the full board to administer the plan, or delegate the administration
of the plan to a committee. In either case, the administrator has full and
exclusive authority to interpret and apply the terms of the purchase plan and
determine who may be eligible to participate in it.
Employees are generally eligible to participate in the purchase plan if they
have been employed by us or any participating subsidiary for at least 24
months, and work at least 20 hours per week and more than five months in any
calendar year. However, an employee may not be granted an option to purchase
stock under the purchase plan if, by participating in the plan, the employee
would:
. own stock constituting five percent or more of the total combined voting
power or value of all classes of our capital stock; or
. obtain rights to purchase stock under all of our employee stock purchase
plans accruing at a rate in excess of $25,000 worth of stock per year.
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The purchase plan, which is intended to qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended, contemplates consecutive, overlapping six-month offering periods. The
offering periods generally will start on the first trading day on or after
January 1 and July 1 of each year, except for the first such offering period,
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or before December 31,
2001.
The purchase plan permits participants to purchase up to 2,000 shares of
common stock per offering period through payroll deductions of between 1% and
10% of the participant's compensation, which for purposes of the purchase plan
is comprised of the participant's base salary, overtime, commissions and cash
bonuses from the company. Amounts deducted and accumulated by the participant
are used to purchase shares of common stock at the end of each offering period,
at a price of 85% of the lower of the fair market value of the common stock at
the beginning or end of the offering period. Participants may end their
participation at any time during an offering period, whereupon they will
receive all amounts deducted pursuant to the plan. Participation ends
automatically upon termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, a successor corporation
may either assume or substitute for each outstanding purchase right. If the
successor corporation refuses to assume or substitute for the outstanding
purchase rights, the offering period then in progress may be shortened, and an
accelerated exercise date will be set by the administrator in its sole
discretion.
The administrator may set and change all applicable offering periods,
exchange rates, and procedural rules of the purchase plan in its sole
discretion. The administrator may also amend any part of the purchase plan
provided that no option holders would be adversely affected by such amendment.
Finally, the administrator may terminate the purchase plan, provided that its
participants are allowed a final opportunity to exercise their remaining
accrued purchase rights. The purchase plan will terminate automatically in 2020
if not sooner terminated by the administrator.
401(k) Plan
We sponsor a defined contribution plan intended to qualify under Section
401(k) of the Internal Revenue Code. All employees are generally eligible to
participate and may enter the 401(k) plan as of January 1 or July 1 of each
year. Participants may make pre-tax contributions to the plan of up to 16% of
their eligible pay, subject to a statutorily prescribed annual limit.
Participants are fully vested in their contributions and the investment
earnings. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
Employment Agreements and Change of Control Arrangements
On June 14, 1999, we entered into an employment agreement with David P.
Woodall, our President and Chief Executive Officer. Under the agreement, Mr.
Woodall receives an annual base salary of $200,000, with a target bonus of up
to $65,000 per year, payable on a quarterly basis. The agreement has an initial
term of two years, with automatic one year renewals unless either party gives
the other party notice that it does not intend to renew the agreement within 90
days of the termination date. Under the agreement, Mr. Woodall received options
to purchase 292,500 shares of our common stock at an exercise price of $1.33
per share. The option vests 25% one year from the date of grant, and then vests
as to 1/48th each month thereafter. If Mr. Woodall is terminated without cause
after a change of control of our company, all unvested options will vest
immediately. If his pay is reduced by more than 20% after a change in control,
then 50% of his remaining unvested options will vest immediately. Mr. Woodall
may terminate the employment agreement at any time with thirty days' advance
notice. If we terminate Mr. Woodall's employment without cause, he will receive
six months' salary. The agreement also provides that if Mr. Woodall does not
renew the employment agreement, for a period of two years after ending his
employment with us, he will not perform similar work in
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areas where we do business, or hire our employees to do work that is similar to
their work for us. If we do not renew the employment agreement, then similar
restrictions will apply for six months.
On April 16, 1999, we entered into an employment agreement with David J.
Kaufman, our Chairman and Chief Technology Officer. Under the agreement, Mr.
Kaufman receives an annual base salary of $180,000, with a target bonus of up
to $72,000 per year, payable on a quarterly basis. The agreement had an initial
term of one year, with automatic one year renewals unless either party gives
the other party notice that it does not intend to renew the agreement within 90
days of the termination date. Mr. Kaufman may terminate the employment
agreement at any time with thirty days' advance notice. If we terminate Mr.
Kaufman's employment for cause, he will receive one month's base pay, a
continuation of any car allowance, and 30 days' continuance of any company-
provided insurance. If he is terminated without cause, he will be entitled to
receive six months' salary and employee benefits for an additional 90 days. Mr.
Kaufman also agreed that if he does not renew the employment agreement, for a
period of two years after terminating his employment with our company he will
not perform similar work in areas where we do business, or hire our employees
to do work that is similar to their work for us. If we do not renew the
employment agreement, then similar restrictions will apply for six months.
On April 16, 1998, we entered into an employment agreement with Joseph M.
Feig, our Treasurer and Chief Financial Officer. Under the initial agreement,
Mr. Feig received an annual base salary of $156,000, with a target bonus of up
to $39,000 per year, payable on a quarterly basis. The agreement had an initial
term of one year, with automatic one year renewals unless either party gives
the other party notice that it does not intend to renew the agreement within 60
days of the termination date. Mr. Feig may terminate the employment agreement
at any time with thirty days' advance notice. If we terminate Mr. Feig's
employment for cause, he will receive one month's base pay, a continuation of
any car allowance, and 30 days' continuance of any company-provided insurance.
If he is terminated without cause, or if we breach the employment agreement, he
will receive six months' salary either in a lump sum or as it would normally
become due, and employee benefits for an additional 90 days. Mr. Feig's
employment agreement provides that if there is a change of control of our
company and Mr. Feig's responsibilities are downgraded, Mr. Feig is entitled to
receive the greater of six months' salary or the amount of salary remaining
under the employment agreement. In addition, pursuant to Mr. Feig's option
agreement for 90,000 shares of our common stock, Mr. Feig has the right to the
immediate vesting of all unvested options upon a change of control of our
company and a downgrade of his responsibilities.
Limitation of 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:
. a breach of the duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an act related to the unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law; and
. transactions from which the director or officer derived an improper
personal benefit.
The limitation of liability provided in our certificate of incorporation
does not affect the availability of equitable remedies such as injunctive
relief or rescission.
Our bylaws provide that we will indemnify our directors, officers, employees
and agents to the maximum extent permitted by Delaware law. We believe that the
indemnification provided in our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any current or former officer, director, employee
or other agent of our company, or of
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another enterprise if serving at our request, for any liability arising out of
his or her actions in that capacity, regardless of whether we would have the
power to indemnify him or her against liability under the provisions of
Delaware law.
Prior to the effectiveness of this offering, we intend to enter into
agreements to indemnify our directors and officers, in addition to the
indemnification provided for in our bylaws. These agreements, among other
things, will require us to indemnify our directors and officers for any and all
expenses including attorneys fees, and including any federal, state, local or
foreign taxes imposed on them as a result of the actual or deemed receipt of
any payments under the indemnification agreement, judgments, fines, penalties
and amounts paid in settlement (if such settlement is approved in advance by
us, which approval will not be unreasonably withheld) of any action, suit or
proceeding, including any action by or in the right of Trinagy arising out of
the individual's status as a director, officer, employee, or agent of Trinagy,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request and to advance expenses incurred by the
individual in connection with any proceeding against the individual with
respect to which the individual may be entitled to indemnification by us. We
believe that our certificate of incorporation, bylaw provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
We currently maintain insurance on behalf of our directors and officers
insuring them against liabilities that they may incur in such capacities or
arising out of such status.
At present, we are not aware of any pending litigation or proceeding
involving a director or officer in which indemnification is required or
permitted, and we are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification.
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CERTAIN TRANSACTIONS
The following is a description of transactions in the last three years to
which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements which are otherwise described
under "Management."
In April 1997, we sold an aggregate of 1,441,592 shares of our Series B
preferred stock at a price per share of $2.36 to Geocapital IV, L.P., an entity
affiliated with Geocapital IV Management, L.P. Upon consummation of this
offering, the Series B preferred stock will automatically convert into common
stock on a 3 for 2 basis. Geocapital IV, L.P., owns, either beneficially or of
record, more than five percent of our voting securities. In addition, Mr.
Clearman, one of our directors, is a general partner of Geocapital Management
IV, L.P. Geocapital IV, L.P., is also entitled to registration rights with
respect to the common stock issued or issuable upon conversion of its Series B
preferred stock.
In May 1998, we issued a convertible promissory note to Geocapital IV, L.P.,
an entity affiliated with Geocapital IV Management, L.P. In August 1998, we
issued an additional convertible promissory note to Geocapital IV, L.P. with
substantially the same terms and conditions as the May 1998 promissory note.
Geocapital IV, L.P., owns, either beneficially or of record, more than five
percent of our voting securities. Mr. Clearman, one of our directors, is a
general partner of Geocapital IV Management, L.P. In exchange for both
convertible promissory notes, Geocapital IV, L.P. loaned us an aggregate of
$2,000,000, which we were required to repay by May 1, 1999, plus interest at a
rate equal to 10% per annum. In addition, we also agreed to issue Geocapital
IV, L.P., two warrants, each to purchase 95,340 shares of our common stock, at
a price of $1.57 per share. In December 1998, the convertible promissory notes
were subsequently converted into shares of our Series C preferred stock, as
discussed below.
In December 1998, we sold an aggregate of 986,437 shares of our Series C
preferred stock at price per share of $8.11 to Bay Networks, Inc. (now Nortel
Networks NA, Inc.). Nortel Networks owns, either beneficially or of record,
more than five percent of our voting securities. In connection with their
purchase of shares of Series C preferred stock, we granted the Series C holders
the right to designate an observer to attend all of our board of directors
meetings. The Series C holders designated Mark De La Vega, an officer of Nortel
Networks, as their observer. Upon consummation of this offering, the Series C
preferred stock will automatically convert into common stock on a 3 for 2
basis. Nortel Networks is also entitled to registration rights with respect to
the common stock issued or issuable upon conversion of its Series C preferred
stock.
In addition, in December 1998, we sold an aggregate of 258,049 shares of our
Series C preferred Stock to Geocapital IV, L.P., an entity affiliated with
Geocapital IV Management, L.P. In exchange for the purchase of these shares,
and pursuant to the terms of our Series C preferred stock purchase agreement,
Geocapital IV, L.P. converted two promissory notes executed by us, in favor of
Geocapital IV, L.P., in the aggregate principal amount of $2,000,000. Upon
consummation of this offering, the Series C preferred stock will automatically
convert into common stock on a 3 for 2 basis. Geocapital IV, L.P., owns, either
beneficially or of record, more than five percent of our voting securities. In
addition, Mr. Clearman, one of our directors, is a general partner of
Geocapital IV Management, L.P. Geocapital IV, L.P., is also entitled to
registration rights with respect to the common stock issued or issuable upon
conversion of its Series C preferred stock.
In December 1998 we entered into an OEM agreement with Nortel Networks. In
February 2000, the OEM agreement was mutually terminated and replaced with a
global pass-thru reseller agreement. Pursuant to the terms of the global pass-
thru reseller agreement, Nortel Networks has a worldwide, non-exclusive right
to license our TREND software products. Payments under these agreements totaled
approximately $1 million. Nortel Networks owns, either beneficially or of
record, more than five percent of our voting securities.
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In July 1999, The Everest Group, Inc., an entity affiliated with Mr. Kaplan,
received $154,390 in real estate commissions for real estate brokerage services
provided in connection with the relocation of our corporate offices to
Torrance, California. These commissions were paid by the landlord. Mr. Kaplan
owns, either beneficially or of record, more than five percent of our voting
securities. In addition, Mr. Kaplan holds a one-third interest in The Everest
Group.
Since 1997, we have licensed products and provided services in the ordinary
course of business totaling approximately $1.3 million to Nortel Networks.
In April 2000, we sold an aggregate of 1,282,114 shares of our Series D
preferred stock at a price per share of $9.36 to DTALK Acquisition Corp., an
entity affiliated with Bear, Stearns & Co. Inc. Upon consummation of this
offering, the Series D preferred stock will automatically convert into common
stock on a 3 for 2 basis. The holders of the Series D preferred stock, voting
as a single class, were allotted one seat on our board of directors, currently
filled by Mr. Korn, who is a managing director of Bear, Stearns & Co. Inc.
These shares were subsequently transferred to Bear Stearns Merchant Banking
Partners II, L.P. and affiliated entities. The holders of these shares are
entitled to registration rights with respect to the common stock issued or
issuable upon conversion of its Series D preferred stock.
We plan to enter into an indemnification agreement with each of our current
and future executive officers and directors.
See the description of certain change of control agreements entered into
with some of our officers described under "Management--Employment Agreements
and Change of Control Agreements."
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PRINCIPAL STOCKHOLDERS
The following table shows information about the beneficial ownership of our
common stock as of September 30, 2000 and as adjusted to reflect the sale of
shares offered by this prospectus. It shows shares beneficially owned by each
of the following:
. each person or group of affiliated persons known by us to beneficially
own more than 5% of our outstanding common stock;
. each of our directors;
. each of the named executive officers; and
. all directors and executive officers as a group.
We have determined the beneficial ownership shown on this table in
accordance with the rules of the Securities and Exchange Commission. Under
those rules, if a person held options or warrants to purchase shares of our
common stock that were currently exercisable or exercisable within 60 days of
September 30, 2000 those shares are included in that person's reported holdings
and in the calculation of the percentage of our common stock owned. The
percentage of beneficial ownership as of September 30, 2000 and after this
offering is based on 12,170,604 shares of common stock outstanding as of
September 30, 2000, assuming conversion of all shares of preferred stock
outstanding on that date into common stock on a 3 for 2 basis, and shares of
common stock outstanding after this offering. To our knowledge, each person
named in the table has sole voting and investment power over the shares listed
by that person's name, except where we have shown otherwise in the footnotes or
where community property laws affect ownership rights. Except where we show
otherwise, the address of each of the persons in this table is: c/o Trinagy,
Inc., 19191 S. Vermont Ave., 9th Floor, Torrance, California 90502.
<TABLE>
<CAPTION>
Percentage
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Geocapital IV, L.P. (1)........................ 2,740,141 22.2% %
Bear Stearns Merchant Banking Partners II, L.P.
and affiliated entities (2)................... 1,923,171 15.8
Nortel Networks NA, Inc. (3)................... 1,479,655 12.2
David J. Kaufman (4)........................... 1,455,105 11.6
Fred Kaplan (5)................................ 812,532 6.7
David P. Woodall (6)........................... 196,809 1.6
Joseph M. Feig (7)............................. 76,123 *
Michael Procopio (8)........................... 101,155 *
Paul H. Madick (9)............................. 99,999 *
Michael McCoy (10)............................. -- *
James Medlock (11)............................. -- *
Dennis A. Kirshy (12).......................... 342,000 2.8
Douglas R. Korn (13)........................... -- *
Kenneth J. Biba (14)........................... 241,875 2.0
Abraham Hepner (15)............................ 231,000 1.9
Stephen J. Clearman (16)....................... 18,000 *
All directors and executive officers as a group
(14 persons) (17)............................. 2,851,271 21.2%
</TABLE>
--------
* Represents less than 1% of the outstanding common stock.
(1) The address of Geocapital IV, L.P. is One Bridge Plaza, Fifth Floor, Fort
Lee, New Jersey 07024. Includes 190,680 shares subject to a warrant
exercisable within 60 days of September 30, 2000.
55
<PAGE>
(2) Includes 881,095 shares held by Bear Stearns Merchant Banking Partners II,
L.P., 161,476 shares held by Bear Stearns Merchant Banking Investors II,
L.P., 440,299 shares held by BSMB Employee I, L.P. and 440,299 shares held
by BSMB Employee II, L.P. The address of these entities is c/o The Bear
Stearns Companies Inc., 245 Park Avenue, New York, New York 10167.
(3) The address of Nortel Networks is 4401 Great America Parkway, Santa Clara,
California 95052.
(4) Includes 247,500 shares subject to options exercisable within 60 days of
September 30, 2000. Also includes 72,255 shares owned by Mr. Kaufman's
spouse and 75,000 shares subject to options held by Mr. Kaufman's spouse
that are exercisable within 60 days of September 30, 2000.
(5) Includes 95,913 shares owned by the Fred Kaplan & Associates Retirement
Trust and 15,000 shares owned by the Zanini/Kaplan/Potach Family Stock
Trust, for each of which Mr. Kaplan serves as trustee. The address for Mr.
Kaplan is 806 Pearl Street, Redondo Beach, California 90277.
(6) Includes 196,809 shares subject to options exercisable within 60 days of
September 30, 2000.
(7) Includes 76,123 shares subject to options exercisable within 60 days of
September 30, 2000.
(8) Includes 72,655 shares subject to options exercisable within 60 days of
September 30, 2000.
(9) Includes 99,999 shares subject to options exercisable within 60 days of
September 30, 2000.
(10) Mr. McCoy served as our President and Chief Executive Officer until June
1999.
(11) Mr. Medlock served as our Vice President of Engineering until July 1999.
(12) Includes 18,000 shares held by Mr. Kirshy's spouse and 205,500 shares
subject to options exercisable within 60 days of September 30, 2000.
(13) Mr. Korn is a managing director of Bear, Stearns & Co. Inc.
(14) Includes 61,875 shares subject to options exercisable within 60 days of
September 30, 2000.
(15) Includes 25,500 shares subject to options exercisable within 60 days of
September 30, 2000.
(16) Includes 18,000 shares subject to options exercisable within 60 days of
September 30, 2000. Mr. Clearman, one of our directors, is a general
partner of Geocapital IV Management, which is the general partner of
Geocapital IV, L.P. Geocapital IV Management, has sole voting and
dispositive authority over the shares held by Geocapital IV, L.P. Mr.
Clearman does not have voting or dispositive authority over these shares
and disclaims beneficial ownership except to the extent of his pecuniary
interest in these shares.
(17) Includes an aggregate of 1,256,730 shares subject to options and warrants
exercisable within 60 days of September 30, 2000.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.0001 par value per share, and
5,000,000 shares of preferred stock, $.0001 par value per share. The following
is a summary of the material features of our capital stock. The following
summary does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws to be effective upon
completion of this offering, each of which is included as an exhibit to the
registration statement of which this prospectus is a part, and by the
provisions of applicable law.
Common Stock
As of September 30, 2000, after giving effect to the conversion of all
outstanding shares of preferred stock into common stock, there were 12,170,604
shares of common stock outstanding held of record by 95 stockholders. After
giving effect to the sale of common stock offered hereby, there will be shares
of common stock outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock have no preemptive rights or rights to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and non-assessable.
Preferred Stock
Pursuant to our amended and restated certificate of incorporation that will
be filed upon completion of this offering, our board of directors will have the
authority, without further action by the stockholders, to designate and issue
up to 5,000,000 shares of preferred stock in one or more series. Our board of
directors will also be able to designate the powers, preferences, privileges
and relative participating, optional or special rights and the qualifications,
limitations or restrictions of each series of preferred stock, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the rights of
the common stock. Our board of directors, without stockholder approval, can
issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in control of our company or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of our common stock, and may
adversely affect the voting and other rights of the holders of our common
stock. Upon the closing of this offering, there will be no shares of preferred
stock outstanding and we have no present plans to issue any of the preferred
stock.
Registration Rights
We have granted registration rights to some of our stockholders. Assuming
conversion of all outstanding preferred stock into common stock upon completion
of this offering, the holders of 6,470,579 shares of our common stock and the
holders of warrants to purchase 190,680 shares of our common stock, or their
respective transferees, have the right under certain circumstances to have
these shares registered under the Securities Act. These rights are provided
under the terms of agreements between us and the holders of these securities.
Subject to the limitations of those agreements, these registration rights
include the following:
. The holders of at least 25% of these securities then outstanding, or
holders of at least 50% of common stock issued upon conversion of Series
D preferred stock, may require, on two occasions beginning six months
after the date of this prospectus, that we use our best efforts to
register these securities for public resale, provided that the
anticipated aggregate offering price of such public resale, net of any
underwriters' discounts or commissions, would exceed $5 million.
57
<PAGE>
. If we register any of our common stock either for our own account or for
the account of other security holders, the holders of these securities
are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering, provided that these holders
may not be reduced below one third of the total number of shares
included in the offering.
. The holders of these securities may also require us, not more than twice
in any 12 month period, to register all or a portion of these securities
on Form S-3 when the use of that form becomes available to us, provided
among other things, that the proposed aggregate selling price, net of
any underwriters' discounts or commissions, is at least $1 million.
We will be responsible for paying all registration expenses other than
underwriting discounts and commissions, and the holders selling their shares
will be responsible for paying all selling expenses.
Anti-Takeover Provisions of Delaware Law and our Charter and Bylaws
Charter Documents
Provisions of our amended and restated charter and amended and restated
bylaws, each of which will be effective upon completion of this offering, may
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of our company.
These provisions are expected to discourage coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
our company to first negotiate with us. These provisions could limit the price
investors might be willing to pay in the future for our common stock and could
have the effect of delaying or preventing a change in control. We believe that
the benefits of increased protection of our ability to negotiate with the
proponent of an unfriendly or unsolicited acquisition proposal outweigh the
disadvantages of discouraging these proposals because, among other things,
negotiation may result in an improvement of their terms. These provisions could
limit the price that investors might be willing to pay in the future for shares
of our common stock. These provisions include:
. division of the board of directors into three separate classes;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, subject to limitations prescribed by law, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The issuance of preferred stock, while providing flexibility
in connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law. This
is an anti-takeover law that restricts transactions and business combinations
between a corporation and an interested stockholder owning 15% or more of the
corporation's outstanding voting stock, for a period of three years from the
date the stockholder becomes an interested stockholder. With some exceptions,
unless the transaction is approved by the board of directors and the holders of
at least two-thirds of the outstanding voting stock of the corporation,
excluding shares held by the interested stockholder, this law prohibits
significant business transactions such as a merger with, disposition of assets
to, or receipt of disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the interested
stockholder's proportionate ownership
58
<PAGE>
of any class or series of the corporation's stock. The statutory ban does not
apply if, upon consummation of the transaction in which any person becomes an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation. This calculation does not include
shares held by persons who are both directors and officers or by employee stock
plans.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock into the public market,
including shares issued upon exercise of outstanding options and warrants,
could adversely affect prevailing market prices of our stock. Sales of
substantial amounts of our common stock into the public market after
contractual restrictions lapse could adversely affect the prevailing market
price and our ability to raise capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding based upon shares outstanding as of September 30, 2000, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants. Of these shares, the shares of common stock
sold in this offering will be freely tradable without restriction under the
Securities Act unless purchased by our "affiliates," as that term is defined
under the Securities Act and the regulations promulgated thereunder. The
remaining 12,170,604 shares will become eligible for public sale as follows:
<TABLE>
<CAPTION>
Approximate Number
of Shares Eligible
Date for Future Sale Comment
---- ------------------ -------
<S> <C> <C>
Date of this prospectus...................... 362,792
90 days after the date of this prospectus.... 141,750 Shares saleable under
Rule 701.
180th day after the date of this prospectus.. 8,974,353 Lock-up expires. Shares
saleable under Rule 144
and Rule 701.
Various dates thereafter..................... 2,691,709 Restricted securities held
for one year or less as of
the 180th day after the
date of this prospectus.
</TABLE>
In addition, we had 5,163,937 shares subject to outstanding options at
September 30, 2000. We intend to register, prior to the expiration of the lock-
up agreements, all of the shares of common stock reserved for issuance under
our stock option and employee stock purchase plans. This registration will
permit the resale of shares by non-affiliates in the public market without
registration beginning on the expiration of the lock-ups.
Lock-up Agreements with the Underwriters
Each of our executive officers and directors, and most of our stockholders
and option holders, have signed lock-up agreements under which they agreed,
subject to certain exceptions, not to sell, transfer or dispose of, directly or
indirectly, any shares of our common stock without the prior consent of Bear,
Stearns & Co. Inc. for a period of 180 days after the date of this prospectus.
We have entered into a similar agreement with the representatives of the
underwriters. Bear Stearns may, in its sole discretion, at any time and without
notice, release all or any portion of the shares subject to lock-up agreements;
however, Bear Stearns does not have any current plans to effect such a release.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for a period of at least one year would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
. 1% of the then outstanding shares of our common stock, which will equal
approximately shares immediately after this offering; or
. the average weekly trading volume in our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
60
<PAGE>
Sales under Rule 144 are also subject to provisions relating to manner of
sale and notice requirements and the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold
immediately upon completion of this offering, subject to the lock-up agreements
described above.
Rule 701
In general, any of our employees, directors, officers, consultants or
advisors who purchases shares from us under Rule 701 in connection with a
written compensatory plan or contract before the effective date of the offering
is entitled to resell these shares 90 days after the effective date of the
offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates" subject only to the manner of sale restrictions of Rule 144 and by
"affiliates" under Rule 144 without compliance with its one-year minimum
holding requirement. Of the shares of common stock held by existing
stockholders as of September 30, 2000, 619,063 shares will be eligible for
resale pursuant to Rule 701.
Registration Rights
After this offering, the holders of 6,470,579 shares of our common stock and
the holders of warrants to purchase 190,680 shares of our common stock, or
their respective transferees, will be entitled to certain rights with respect
to registration of such 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). Please see "Description of Capital Stock--
Registration Rights" for a description of those shares entitled to
registration.
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement among the
underwriters and us, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., CIBC World Markets Corp., Wit
SoundView Corporation and C.E. Unterberg, Towbin, has severally agreed to
purchase from us the aggregate number of shares of our common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc...............................................
CIBC World Markets Corp...............................................
Wit SoundView Corporation.............................................
C.E. Unterberg, Towbin................................................
--------
Total...............................................................
========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent public accountants and the
accuracy of the representations and warranties made by us in the underwriting
agreement. Under the underwriting agreement, the underwriters are committed to
purchase and pay for all of the above shares of our common stock if any are
purchased.
Public Offering Price
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price located on the cover page of this prospectus
and at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common stock is offered
subject to receipt and acceptance by the underwriters and subject to other
conditions, including the right to reject orders in whole or in part. The
underwriters have informed us that the underwriters do not expect to confirm
sales of common stock to any accounts over which they exercise discretionary
authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in this offering, the underwriting compensation
to be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Initial public offering price............. $ $ $
Underwriting discounts and commissions
payable by us............................ $ $ $
Proceeds, before expenses, to us.......... $ $ $
</TABLE>
62
<PAGE>
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock. We estimate total expenses
payable by us in connection with this offering, other than the underwriting
discounts and commissions referred to above, will be approximately $ .
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.
Indemnification and Contribution
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of such liabilities.
Lock-Up Agreements
Our executive officers and directors, and most of our stockholders and
option holders have agreed that they will not offer, sell or agree to sell,
directly or indirectly, or otherwise dispose of any shares of our common stock
in the public market without the prior written consent of Bear, Stearns & Co.
Inc. for a period of 180 days from the date of this prospectus. This consent
may be given at any time with or without public notice. In addition, we have
agreed that, for a period of 180 days from the date of this prospectus, we will
not, without the prior written consent of Bear, Stearns & Co. Inc., offer, sell
or otherwise dispose of any shares of our common stock, except in connection
with this offering, upon conversion of our outstanding convertible preferred
stock, upon the exercise of currently outstanding stock options and for the
grant and exercise of options under, or the issuance and sale of shares
pursuant to, our equity compensation plans. There are no agreements to release
any of these lock-ups prior to the expiration of the lock-up period.
Nasdaq National Market Quotation
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock was
determined by negotiations between us and the representatives of the
underwriters. Among the factors considered in those negotiations, the primary
factors were our results of operations in recent periods, estimates of our
prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. Our common stock has been approved for listing on the Nasdaq
National Market under the trading symbol "TRGY". We cannot assure you, however,
that an active or orderly trading market will develop for the common stock or
that the common stock will trade in the public market subsequent to this
offering at or above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock.
The underwriters may over-allot shares of our common stock in connection
with this offering, thus creating a short position for their own account. Short
sales involve the sale by the underwriters of a greater number of shares than
they are committed to purchase in the offering. A short position may involve
either "covered" short sales or "naked" short sales. Covered short sales are
sales made in an amount not greater than
63
<PAGE>
the underwriters' over-allotment option to purchase additional shares in the
offering described above. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. In determining the source of shares to close the covered
short position, the underwriters will consider, among other things, the price
of shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. Sales in
excess of the over-allotment option are naked short sales. The underwriters
must close out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price of the shares in
the open market after pricing that could adversely affect investors who
purchase in the offering.
Accordingly, to cover these short sales positions or to stabilize the market
price of our common stock, the underwriters may bid for, and purchase, shares
of our common stock in the open market. These transactions may be effected on
the Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may also reclaim selling concessions allowed to an
underwriter or dealer. Similar to other purchase transactions, the
underwriters' purchases to cover the syndicate short sales or to stabilize the
market price of our common stock may have the effect of raising or maintaining
the market price of our common stock or preventing or mitigating a decline in
the market price of our common stock. As a result, the price of the shares of
our common stock may be higher than the price that might otherwise exist in the
open market. No representation is made as to the magnitude or effect of any
such stabilization or other activities. The underwriters are not required to
engage in these activities and, if commenced, may end any of these activities
at any time.
Reserved Share Program
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of common stock to be sold in this
offering for sale to our directors, officers, employees, business associates,
vendors and related persons. Purchases of reserved shares are to be made
through an account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns
& Co. Inc.'s procedures for opening an account and transacting in securities.
The number of shares available for sale to the general public will be reduced
to the extent that any reserved shares are purchased. Any reserved shares not
purchased by our directors, officers, employees, business associates, vendors
and related persons will be offered by the underwriters to the general public
on the same terms as the other shares offered by this prospectus.
Electronic Prospectus
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit SoundView Corporation's strategic partner, E*Trade
Securities, Inc., and may be made available on web sites maintained by other
underwriters or selected dealers.
64
<PAGE>
LEGAL MATTERS
Morrison & Foerster LLP, Irvine, California, will pass upon the validity of
the common stock offered hereby for us. Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Austin, Texas, will pass upon certain legal matters
in connection with this offering for the underwriters.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999, and
for each of the three years in the period ended December 31, 1999, included in
this prospectus and elsewhere in the registration statement, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments filed with
this registration statement, under the Securities Act with respect to the
common stock to be sold under this prospectus. Prior to the offering we were
not required to file reports with the SEC. This prospectus does not contain all
the information set forth in the registration statement. For further
information about us and the shares of common stock to be sold in the offering,
please refer to the registration statement. Statements made in this prospectus
concerning the contents of any contract, agreement or other document filed as
an exhibit to the registration statement are summaries of the terms of such
contract, agreement or document and are not necessarily complete. Complete
exhibits have been filed with the registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
facility maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-732-0330. The registration statement and other
information filed with the SEC is available at the web site maintained by the
SEC on the worldwide web at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)............... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
F-1
<PAGE>
The accompanying consolidated financial statements retroactively reflect a 3
for 2 stock split of the Company's common stock and the reincorporation of the
Company. The opinion below is in the form which we expect to issue upon
consummation of the stock split and reincorporation, which are described in
Note 12 of the Notes to the Consolidated Financial Statements.
Arthur Andersen LLP
Los Angeles, California
October 24, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Trinagy, Inc.:
We have audited the accompanying consolidated balance sheets of Trinagy,
Inc., formerly DeskTalk Systems, Inc., (a Delaware corporation) and subsidiary
as of December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trinagy, Inc. and
subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Los Angeles, California
April 11, 2000
(except with respect to the matters in Note 12,
as to which the date is October 24, 2000)
F-2
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1998 1999 2000
----------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................. $ 7,672,071 $ 20,316 $11,368,052
Accounts receivable, net of allowance for
doubtful accounts of $88,000, $295,000
and $628,000 as of December 31, 1998,
1999 and June 30, 2000 (unaudited),
respectively............................. 1,474,618 3,456,001 3,543,731
Prepaid expenses.......................... 207,037 299,162 691,272
----------- ---------- -----------
Total current assets.................... 9,353,726 3,775,479 15,603,055
Property and Equipment, net................. 814,713 990,280 1,325,277
Other Assets................................ 43,616 215,522 173,181
----------- ---------- -----------
$10,212,055 $4,981,281 $17,101,513
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
------------------------- June 30, Equity (Deficit)
1998 1999 2000 June 30, 2000
----------- ------------ ------------ ----------------
(unaudited) (unaudited)
(Note 7)
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit......... $ -- $ 350,000 $ --
Accounts payable....... 788,049 1,171,592 1,363,584
Accrued expenses....... 1,310,012 1,612,253 2,303,499
Deferred revenue....... 2,045,399 2,517,290 3,866,431
Current portion of
capital lease
obligations........... 147,150 147,908 104,267
Other current
liabilities........... 89,780 313,849 294,808
----------- ------------ ------------
Total current
liabilities......... 4,380,390 6,112,892 7,932,589
Deferred rent.......... -- 245,107 226,986
Capital lease
obligations, net of
current portion....... 90,197 143,949 87,344
----------- ------------ ------------
Total liabilities.... 4,470,587 6,501,948 8,246,919
----------- ------------ ------------
Commitments and
Contingencies (Note 6)
Stockholders' Equity
(Deficit):
Preferred stock--
Undesignated, $0.0001
par value; 5,000,000
shares authorized; no
shares issued or
outstanding at
December 31, 1998,
1999 and June 30,
2000; no shares
outstanding pro
forma................. -- -- -- $ --
Preferred stock--
Series B, $0.0001 par
value;1,525,424
shares authorized;
1,525,424 shares
issued and
outstanding at
December 31, 1998,
1999 and June 30,
2000; no shares
outstanding pro
forma................. 3,545,213 3,545,213 3,545,213 --
Preferred stock--
Series C, $0.0001 par
value; 1,244,486
shares authorized;
1,244,486 shares
issued and
outstanding at
December 31, 1998,
1999 and June 30,
2000, respectively;
no shares outstanding
pro forma............. 10,092,782 10,092,782 10,092,782 --
Preferred stock--
Series D, $0.0001 par
value; 1,602,642
shares authorized; no
shares issued and
outstanding at
December 31, 1998 and
1999, 1,602,642
shares issued and
outstanding at
June 30, 2000; no
shares outstanding
pro forma............. -- -- 14,887,121 --
Common stock, $0.0001
par value;
100,000,000 shares
authorized;
4,572,720, 5,224,287
and 5,413,812 shares
issued and
outstanding at
December 31, 1998,
1999 and June 30,
2000; 11,972,640
shares outstanding
pro forma............. 457 522 541 1,197
Additional paid in
capital............... 1,990,727 2,350,561 5,595,882 34,120,342
Deferred
compensation.......... -- -- (2,900,175) (2,900,175)
Accumulated deficit.... (9,887,711) (17,509,745) (22,366,770) (22,366,770)
----------- ------------ ------------ ------------
Total stockholders'
equity (deficit).... 5,741,468 (1,520,667) 8,854,594 $ 8,854,594
----------- ------------ ------------ ============
$10,212,055 $ 4,981,281 $ 17,101,513
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------- --------------------------
(unaudited)
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses..... $ 3,602,352 $ 4,524,020 $ 6,911,675 $ 2,641,608 $ 5,826,138
Services.............. 1,134,451 1,953,462 3,389,848 1,729,946 2,137,742
----------- ----------- ----------- ------------ ------------
Total revenues...... 4,736,803 6,477,482 10,301,523 4,371,554 7,963,880
----------- ----------- ----------- ------------ ------------
Cost of Revenues:
Software licenses..... 274,562 451,151 616,184 213,321 375,031
Services(1)........... 395,577 1,237,799 2,013,500 960,148 1,528,276
----------- ----------- ----------- ------------ ------------
Total cost of
revenues........... 670,139 1,688,950 2,629,684 1,173,469 1,903,307
----------- ----------- ----------- ------------ ------------
Gross profit........ 4,066,664 4,788,532 7,671,839 3,198,085 6,060,573
----------- ----------- ----------- ------------ ------------
Operating Expenses:
Sales and
marketing(1)......... 3,259,479 4,674,757 8,019,348 3,340,814 6,097,267
Research and
development(1)....... 1,368,228 3,958,491 4,994,633 2,192,828 3,395,718
General and
administrative(1).... 1,685,518 1,715,021 2,427,359 1,068,152 1,354,612
Stock-based
compensation(1)...... -- 410,000 -- -- 177,540
----------- ----------- ----------- ------------ ------------
Total operating
expenses........... 6,313,225 10,758,269 15,441,340 6,601,794 11,025,137
----------- ----------- ----------- ------------ ------------
Operating loss...... (2,246,561) (5,969,737) (7,769,501) (3,403,709) (4,964,564)
Interest
income/(expense), net.. (7,062) (166,817) 150,757 125,475 114,308
Other income/(expense),
net.................... 17,285 (1,859) 463 468 --
----------- ----------- ----------- ------------ ------------
Loss before
provision for
income taxes....... (2,236,338) (6,138,413) (7,618,281) (3,277,766) (4,850,256)
Provision for income
taxes.................. 6,595 1,800 3,753 3,753 6,769
----------- ----------- ----------- ------------ ------------
Net loss................ $(2,242,933) $(6,140,213) $(7,622,034) $ (3,281,519) $(4,857,025)
=========== =========== =========== ============ ============
BASIC AND DILUTED NET
LOSS PER SHARE......... $ (0.53) $ (1.39) $ (1.16) $ (0.71) $ (0.69)
=========== =========== =========== ============ ============
Shares used in computing
basic and diluted net
loss per share......... 4,213,806 4,424,820 6,552,019 4,594,992 7,055,938
=========== =========== =========== ============ ============
PRO FORMA BASIC AND
DILUTED NET
LOSS PER SHARE
(UNAUDITED)............ $ (0.71) $ (0.36)
=========== ============
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 10,706,884 13,614,766
=========== ============
------------------------
(1) The following summarizes the departmental allocation of stock-based compensation:
Cost of revenues........ $ -- $ 33,750 $ -- $ -- $ 18,900
Operating expenses:
Sales and marketing... -- 127,500 -- -- 75,087
Research and
development.......... -- 217,500 -- -- 76,148
General and
administrative....... -- 31,250 -- -- 7,405
----------- ----------- ----------- ------------ ------------
Total stock-based
compensation....... $ -- $ 410,000 $ -- $ -- $ 177,540
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock
Preferred Stock Preferred Stock Preferred Stock --------------------------------------
Series B Series C Series D Additional
-------------------- --------------------- --------------------- Paid-in Deferred
Shares Amount Shares Amount Shares Amount Shares Par Capital Compensation
--------- ---------- --------- ----------- --------- ----------- --------- ---- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1997............ 1,525,424 $3,545,213 -- $ -- -- $ -- 4,310,968 $431 $1,504,638 $ --
Net loss........ -- -- -- -- -- -- -- -- 410,000 --
Issuance of
stock for cash.. -- -- -- -- -- -- 261,752 26 76,089 --
Conversion of
long-term debt
to preferred
stock .......... -- -- 258,049 2,092,777 -- -- -- -- -- --
Issuance of
preferred stock
Series C........ -- -- 986,437 8,000,005 -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ----------- --------- ---- ---------- -----------
Balance,
December 31,
1998............ 1,525,424 3,545,213 1,244,486 10,092,782 -- -- 4,572,720 457 1,990,727 --
Net loss........ -- -- -- -- -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- -- -- 651,567 65 359,834 --
--------- ---------- --------- ----------- --------- ----------- --------- ---- ---------- -----------
Balance,
December 31,
1999............ 1,525,424 3,545,213 1,244,486 10,092,782 -- -- 5,224,287 522 2,350,561 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- --
Issuance of
preferred stock
Series D for
cash
(unaudited),
net............. -- -- -- -- 1,602,642 14,887,121 -- -- -- --
Stock-based
compensation
charge
(unaudited)..... -- -- -- -- -- -- -- -- 3,077,715 (3,077,715)
Amortization of
stock-based
compensation
charge
(unaudited)..... -- -- -- -- -- -- -- -- -- 177,540
Exercise of
common stock
options
(unaudited)..... -- -- -- -- -- -- 189,525 19 167,606 --
--------- ---------- --------- ----------- --------- ----------- --------- ---- ---------- -----------
Balance, June
30, 2000
(unaudited)..... 1,525,424 $3,545,213 1,244,486 $10,092,782 1,602,642 $14,887,121 5,413,812 $541 $5,595,882 $(2,900,175)
========= ========== ========= =========== ========= =========== ========= ==== ========== ===========
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
------------- -------------
<S> <C> <C>
Balance,
December 31,
1997............ $ (3,747,498) $ 1,302,784
Net loss........ (6,140,213) (5,730,213)
Issuance of
stock for cash.. -- 76,115
Conversion of
long-term debt
to preferred
stock .......... -- 2,092,777
Issuance of
preferred stock
Series C........ -- 8,000,005
------------- -------------
Balance,
December 31,
1998............ (9,887,711) 5,741,468
Net loss........ (7,622,034) (7,622,034)
Exercise of
common stock
options......... -- 359,899
------------- -------------
Balance,
December 31,
1999............ (17,509,745) (1,520,667)
Net loss
(unaudited)..... (4,857,025) (4,857,025)
Issuance of
preferred stock
Series D for
cash
(unaudited),
net............. -- 14,887,121
Stock-based
compensation
charge
(unaudited)..... -- --
Amortization of
stock-based
compensation
charge
(unaudited)..... -- 177,540
Exercise of
common stock
options
(unaudited)..... -- 167,625
------------- -------------
Balance, June
30, 2000
(unaudited)..... $(22,366,770) $ 8,854,594
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------- ------------------------
(unaudited)
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss............... $(2,242,933) $(6,140,213) $(7,622,034) $(3,281,519) $(4,857,025)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Provision for doubtful
accounts.............. 128,387 41,699 206,718 29,685 333,157
Depreciation and
amortization.......... 233,624 504,419 532,534 255,511 307,330
Non-cash compensation
charges for stock
options............... -- 410,000 -- -- 177,540
Changes in assets and
liabilities:
Accounts receivable.. (773,948) 143,136 (2,188,101) (435,588) (420,887)
Prepaid expenses..... (26,415) (103,025) (92,125) 657 (392,110)
Other assets......... (8,718) (22,914) (171,906) (41,960) 42,341
Accounts payable..... 41,611 552,917 383,543 94,160 191,992
Accrued expenses..... 348,811 726,735 302,241 (217,540) 691,246
Deferred revenue..... 136,918 1,383,919 471,891 (172,934) 1,349,141
Other current
liabilities......... (21,169) 72,259 477,510 81,201 (37,162)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (2,183,832) (2,431,068) (7,699,729) (3,688,327) (2,614,437)
----------- ----------- ----------- ----------- -----------
Cash Flows from
Investing Activities:
Purchases of property
and equipment......... (415,620) (400,204) (463,300) (195,000) (642,327)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (415,620) (400,204) (463,300) (195,000) (642,327)
----------- ----------- ----------- ----------- -----------
Cash Flows from
Financing Activities:
Principal payments of
capital lease
obligations........... (144,187) (185,052) (198,625) (46,789) (100,246)
Principal payments of
long-term debt........ (145,318) -- -- -- --
Advances (payments)
under line of credit.. -- -- 350,000 -- (350,000)
Proceeds from issuance
of convertible
debentures............ -- 2,092,777 -- -- --
Proceeds from issuance
of common stock....... 55,000 76,115 359,899 71,875 167,625
Proceeds from issuance
of preferred stock,
net of issuance
costs................. 3,545,213 8,000,005 -- -- 14,887,121
Repurchase of preferred
stock Series A ....... (440,695) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 2,870,013 9,983,845 511,274 25,086 14,604,500
----------- ----------- ----------- ----------- -----------
Net (Decrease) Increase
in Cash and Cash
Equivalents............ 270,561 7,152,573 (7,651,755) (3,858,241) 11,347,736
Cash and Cash
Equivalents, beginning
of period.............. 248,937 519,498 7,672,071 7,672,071 20,316
----------- ----------- ----------- ----------- -----------
Cash and Cash
Equivalents, end of
period................. $ 519,498 $ 7,672,071 $ 20,316 $ 3,813,830 $11,368,052
=========== =========== =========== =========== ===========
Supplemental Disclosure
of Cash Flow
Information:
Cash paid for:
Interest............... $ 64,456 $ 87,371 $ 28,380 $ 12,216 $ 80,868
----------- ----------- ----------- ----------- -----------
Income taxes........... $ 6,595 $ 1,800 $ 3,753 $ 3,753 $ 6,769
=========== =========== =========== =========== ===========
Supplemental Disclosure
of Non-Cash Investing
and Financing
Activities:
Conversion of
convertible debentures
to preferred stock
Series C ............. $ -- $ 2,092,777 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Conversion of long-term
debt to common stock.. $ 168,072 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Conversion of preferred
stock Series A to
common stock.......... $ 100,001 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Acquisitions of new
equipment under
capital lease
obligations........... $ 365,036 $ -- $ 253,135 $ 150,751 $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Trinagy, Inc. (formerly DeskTalk Systems, Inc.) (the Company) and its
wholly-owned subsidiary was founded in November 1988. In September 2000, the
Company began doing business under the name Trinagy. The Company expects to
reincorporate in Delaware as Trinagy, Inc. prior to the closing of its
anticipated initial public offering (Note 12).
The Company develops, markets and supports TREND network management software
for data collection, aggregation, storage and reporting, to facilitate network
availability and capacity planning. The Company also offers maintenance,
consulting and training services in support of its customers' use of its
software products. The Company sells its software and services in North America
and internationally, primarily through a direct sales force and also through
technologically proficient resellers.
During the years ended December 31, 1997, 1998, 1999 and the six month
period ended June 30, 2000, the Company incurred losses of $2,242,933,
$6,140,213, $7,622,034 and $4,857,025, respectively, and had an accumulated
deficit of $22,366,770 at June 30, 2000 (unaudited). The success of the
Company's future operations is dependent, in part, upon the Company's ability
to: (i) generate additional sales of its TREND product and related services
and/or to develop follow on products and services; (ii) monitor and control
operating costs; and (iii) obtain additional capital. In April 2000, the
Company completed a round of financing for approximately $15 million, which
will be used to fund operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Trinagy, Inc.
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in the accompanying consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Basis of Presentation
The unaudited consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These unaudited
consolidated financial statements reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the results of operations, changes in cash flows and financial
position as of and for the periods presented. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto, appearing
elsewhere herein. The results for the interim periods presented are not
necessarily indicative of results to be expected for a full year.
F-8
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
Revenue Recognition
The Company generates revenues from licensing its software products directly
to end-users and indirectly through sublicense fees from resellers. The Company
also generates revenues from sales of post-contract support (PCS), consulting
and training services performed for customers who license its products.
The Company accounts for revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2
With Respect to Certain Transactions," issued by the American Institute of
Certified Public Accountants. As such, revenues from perpetual software license
agreements are recognized provided that all of the following conditions are
met: a signed purchase order has been received, the software has been
delivered, there are no material uncertainties regarding customer acceptance,
collection of the resulting receivable is deemed probable and no other
significant vendor obligations exist. Revenues from PCS are deferred and
recognized ratably over the term of the support period, generally one year.
Consulting revenues are primarily related to implementation services performed
on a time and material basis under separate service agreements for the
installation of the Company's software products. Revenues from consulting and
training services are deferred and recognized as the respective services are
performed.
Cost of license revenues consists primarily of amounts related to database
license royalties, product media, manuals, packaging materials and related
shipping costs. Cost of service revenues consists primarily of salaries,
benefits, materials and allocated overhead costs incurred in providing
telephone support, consulting services and training to customers.
Business Risk and Concentrations of Credit Risk
A significant portion of the Company's revenues is generated from its TREND
software products and related services. Any factor adversely affecting the
pricing of, demand for or market acceptance of the TREND product could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade and other
receivables. Management believes that the concentration of credit risk with
respect to trade receivables is mitigated as the Company's customer base
consists primarily of Fortune 1000 companies.
The Company had sales to one customer representing 13 percent, 14 percent
and 10 percent of total revenues, for the years ended December 31, 1997, 1998
and 1999, respectively. For the six months ended June 30, 2000 (unaudited), the
Company had sales to two customers representing an aggregate of 27 percent of
total revenues.
The Company has historically generated a significant portion of its revenues
from licenses to customers in the service provider industry. For the years
ended December 31, 1997, 1998 and 1999, revenues from service providers
represented 63 percent, 61 percent and 75 percent of total revenues,
respectively. For the six months ended June 30, 1999 and 2000 (unaudited),
revenues from service providers represented 70 percent and 68 percent of total
revenues, respectively. The Company expects that a significant portion of its
revenues will continue to be attributable to the licensing of products to
customers in the service provider industry. Any significant change in the
service provider industry could have a material impact on the Company's results
of operations.
For the years ended December 31, 1997, 1998 and 1999 and the six months
ended June 30, 1999 and 2000 (unaudited), the Company had sales outside of
North America representing, 9 percent, 17 percent, 23 percent, 23 percent and
32 percent of total revenues, respectively.
F-9
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
initial maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives, generally three years for
computer equipment, seven years for furniture and fixtures and five years for
office equipment. Maintenance and repairs are charged to operations as
incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in other income or loss for the applicable period.
Capitalized Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," software development costs are capitalized from the time
the product's technological feasibility has been established until the product
is released for sale to the general public. During the years ended December 31,
1997, 1998, 1999 and for the six month periods ended June 30, 1999 and 2000
(unaudited) no software development costs were capitalized due to the fact that
the costs incurred between achieving technological feasibility and product
release were minimal. Research and development costs, including the design of
product enhancements, are expensed as incurred.
Research and Development Costs
Research and development costs are segregated based on (i) identification of
specific costs and (ii) allocations from general and administrative expenses
using estimates of time incurred for research and development activities.
Income Taxes
Deferred taxes are provided utilizing the liability method as prescribed by
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards, and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, a fair value based method of accounting for stock-based
compensation plans. As permitted under SFAS No. 123, the Company has elected to
comply with the statement's pro forma disclosure requirements and continue to
account for stock-based compensation plans using an intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
F-10
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
Net Loss Per Share
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows:
<TABLE>
<CAPTION>
Year Ended December 31, Six months ended June 30,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic and diluted net
loss per share:
Net loss.............. $(2,242,933) $(6,140,213) $(7,622,034) $ (3,281,519) $ (4,857,025)
=========== =========== =========== ============ ============
Basic and diluted net
loss per share......... $ (0.53) $ (1.39) $ (1.16) $ (0.71) $ (0.69)
=========== =========== =========== ============ ============
Shares used in computing
basic and diluted net
loss per share......... 4,213,806 4,424,820 6,552,019 4,594,992 7,055,938
=========== =========== =========== ============ ============
Pro forma basic and
diluted net loss per
share:
Shares used in
computing basic and
diluted net loss per
share................ 6,552,019 7,055,938
Unaudited pro forma
adjustment to reflect
the assumed
conversion of
convertible preferred
stock................ 4,154,865 6,558,828
----------- ------------
Shares used in
computing unaudited
pro forma basic and
diluted net loss per
share................ 10,706,884 13,614,766
=========== ============
Unaudited pro forma
basic and diluted net
loss per share......... $ (0.71) $ (0.36)
=========== ============
</TABLE>
Potentially dilutive common stock options and warrants have been excluded
from the computation of basic and diluted net loss per share because their
inclusion would be antidilutive.
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including the pro forma effects of the
automatic conversion of the Company's convertible preferred stock into shares
of common stock on a 3 for 2 basis, effective upon the closing of the
Company's initial public offering, as if such conversion occurred at the
beginning of the year for which the preferred stock offering occurred. Pro
forma stockholders' equity at June 30, 2000, as adjusted for the conversion of
the convertible preferred stock, is disclosed on the balance sheet.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities," which
is effective for fiscal years beginning after June 15, 2000 as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133
establishes accounting and reporting standards for derivative instruments. The
statement requires that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value, and that
changes in the derivative's fair value be recognized currently in the earnings
unless specific hedge accounting criteria are met. The Company did not have
any derivative instruments as of December 31, 1997, 1998, 1999 and as of June
30, 2000 (unaudited) and believes that the adoption of SFAS No. 133 will not
have a material impact on its financial statements.
F-11
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. SAB 101, as amended by SAB
101A and SAB101B, is required to be implemented no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company believes
that its revenue recognition policy is in compliance with the provisions of SAB
101 and that the adoption of SAB 101 will have no material impact on the
Company's financial position or the results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25." The Interpretation clarifies the application of APB Opinion
No. 25 in certain situations, as defined. The Interpretation is effective July
1, 2000, but covers certain events occurring during the period after December
15, 1998, but before the effective date. To the extent that events covered by
the period after December 1998 but before the effective date, the effects of
applying this Interpretation would be recognized on a prospective basis from
the effective date. The adoption of this new Interpretation will have no
material impact on the Company's financial position or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1998 1999 2000
---------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment...................... $1,502,840 $ 2,033,021 $ 2,447,860
Furniture and fixtures.................. 135,082 220,523 312,400
Office equipment and leasehold
improvements........................... 37,380 138,192 273,804
---------- ----------- -----------
1,675,302 2,391,736 3,034,064
Less--Accumulated depreciation.......... (860,589) (1,401,456) (1,708,787)
---------- ----------- -----------
$ 814,713 $ 990,280 $ 1,325,277
========== =========== ===========
</TABLE>
3. ACCRUED EXPENSES
Accrued expenses consist of the following as of:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Recruiting and relocation..................... $ 336,900 $ 80,025 $ 142,500
Bonuses....................................... 275,631 271,687 409,694
Vacation...................................... 197,068 353,089 458,239
Commissions................................... 129,193 480,180 493,631
Travel........................................ 115,516 10,000 71,200
Legal......................................... 77,593 107,986 160,077
Salaries and wages............................ 47,051 28,818 159,367
Other......................................... 131,060 280,468 408,791
---------- ---------- ----------
$1,310,012 $1,612,253 $2,303,499
========== ========== ==========
</TABLE>
F-12
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
4. LINES OF CREDIT AND LONG-TERM DEBT
In December 1999, the Company obtained a $2,500,000 working capital line of
credit that bears interest at the bank's prime rate plus two percent on the
first $1,500,000 of borrowings and prime plus four percent on borrowing in
excess of $1,500,000. The line of credit expires on December 31, 2000. As of
December 31, 1999, there was an outstanding balance of $350,000. No amounts
were outstanding as of June 30, 2000 (unaudited).
During 1998, the Company issued two interest bearing convertible debentures
in the aggregate amount of $2,000,000. During 1998, the principal balance and
$92,777 in accrued interest were converted into 258,049 shares of Series C
preferred stock at the stated conversion rate of $8.11 per share. No
convertible debentures remained outstanding as of December 31, 1998 or 1999 or
June 30, 2000 (unaudited).
5. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current tax expense:
Federal.................................................. $ -- $ -- $ --
State.................................................... 6,595 1,800 3,753
------ ------ ------
$6,595 $1,800 $3,753
====== ====== ======
</TABLE>
The components of net deferred tax asset at December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards...................... $ 2,538,324 $ 5,340,452
Depreciation.......................................... (107,210) (33,224)
----------- -----------
2,431,114 5,307,228
Valuation allowance................................... (2,431,114) (5,307,228)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $14.9 million for federal and approximately $3.3 million for
state tax reporting purposes, which expire beginning in 2006 and 2000,
respectively. The realization of future tax benefits from utilization of the
net operating loss carryforward may be subject to certain limitations as a
result of ownership changes that have occurred and may occur in the future.
As of December 31, 1998 and 1999, a valuation allowance has been recorded to
completely offset the carrying value of such deferred tax asset due to the
uncertainty surrounding the timing of realizing the benefits of its favorable
tax attributes in future tax returns.
F-13
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facility and certain equipment under noncancellable
operating lease agreements. Rent expense for such leases totaled $144,627,
$311,913 and $674,205 in 1997, 1998 and 1999, respectively. Rent expense for
the six months ended June 30, 1999 and 2000 (unaudited) was $249,283 and
$415,065, respectively.
Future minimum lease payments for capital and operating leases at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
------------------------ ---------- --------
<S> <C> <C>
2000.................................................... $ 693,069 $165,761
2001.................................................... 464,173 113,851
2002.................................................... 467,845 33,896
2003.................................................... 450,123 --
2004.................................................... 437,179 --
Beyond.................................................. 364,316
---------- --------
Total minimum lease payments.......................... $2,876,705 313,508
==========
Amount representing interest--4.0 to 20.3 percent....... (21,651)
--------
Present value of minimum lease payments................. 291,857
Less--Current portion................................... 147,908
--------
$143,949
========
</TABLE>
The cost of fixed assets under capital leases and the related accumulated
depreciation amounted to $606,686 and $401,228, respectively, as of December
31, 1998 and $743,382 and $491,404, respectively, as of December 31, 1999.
In October, 1999, in exchange for its occupancy commitment for six years
for the Company's headquarters, the landlord provided a turnkey facilitation
incentive of $300,000. The incentive is being amortized over the term of the
lease, with the unamortized balances in other current and long term
liabilities.
Employment Agreements
The Company entered into employment agreements with key management
personnel. These agreements provide for a defined level of compensation and
additional compensation in the form of bonuses based on performance. The
agreements also provide for severance benefits in the event of termination
without cause, change in control, and a downgrading of responsibilities, as
defined in the agreements.
Litigation
Michael McCoy, the Company's Chief Executive Officer from August 1998 to
June 1999, has asserted claims against the Company relating to his
termination. Specifically, Mr. McCoy alleges that he is entitled to options
for 675,000 shares of common stock, and an unspecified amount of compensation
for salary and benefits. The Company believes Mr. McCoy's claims are without
merit. On or about September 1, 2000, the Company initiated an arbitration
proceeding under the terms of his employment agreement for a determination of
this dispute. Mr. McCoy has subsequently asserted a counter-claim in the
arbitration proceeding alleging causes of action for breach of contract, fraud
and negligent misrepresentation seeking unspecified monetary damages. The
Company
F-14
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
believes that Mr. McCoy's claims are without merit and will oppose them
vigorously. Because the outcome of this litigation is uncertain, no provision
for loss has been recognized in the consolidated financial statements. The
Company does not expect the outcome of this matter to have a material adverse
effect on the Company's financial position or results of operations; however,
the ultimate outcome of this proceeding is uncertain.
The Company is involved in various other legal proceedings and claims
arising in the ordinary course of business, none of which, in the opinion of
management, is expected to have a material adverse effect on the Company's
financial position or results of operations.
7. PREFERRED STOCKHOLDERS' EQUITY
In 1997, the Company authorized and issued 1,525,424 shares of Series B
preferred stock, and sold the shares for approximately $3,600,000. In 1998, the
Company designated 1,244,486 shares of Series C preferred stock, sold 986,437
shares for $8,000,005 and issued 258,049 shares in consideration of the
cancellation of convertible, interest-bearing debentures with a total principal
amount in excess of $2,000,000. In 2000, the Company authorized and issued
1,602,642 shares of Series D preferred stock, and sold the shares for
approximately $15,000,000. The Company has no Series A preferred stock
outstanding.
The rights, preferences and privileges of the Series B, Series C and Series
D preferred stock, collectively the Preferred Stock, are as follows:
Conversion
The holders may convert their Preferred Stock into common stock at any time.
The conversion rate is one to one, subject to adjustment if there is any split,
reverse split or similar adjustment in the common stock. The conversion rate
will also adjust upward if the company issues new equity securities below a
determined price. The Preferred Stock will convert into common stock
automatically if the Company has a "qualified public offering," as defined in
the agreement. See Note 12, "Subsequent Events" for a description of a split in
the Company's common stock that affects the conversion rate of the Preferred
Stock.
Dividends
If the Company declares any dividend, the Series B, C and D preferred stock
holders are entitled to receive an annual amount of $0.354, $1.217 and $1.404
per share, respectively, before any dividends are paid to common holders. The
right to preferential dividend payment is shared on a pro rata basis among the
series of Preferred Stock. The right to payment is on an annual basis and does
not cumulate if dividends are not declared. As of June 30, 2000 no dividends
have been declared on Preferred Stock.
Liquidation Preference
On a liquidation or winding up of the Company, holders of Series B preferred
stock will be entitled to receive $2.36 per share, plus 15 percent per annum
accruing from the date of issuance, plus any redemption dividends payable;
holders of the Series C preferred stock will be entitled to receive $8.11 per
share, plus 15 percent per annum accruing from the date of issuance; and
holders of the Series D preferred stock will be entitled to receive $9.36 per
share, plus 15 percent per annum accruing from the date of issuance, plus any
redemption dividends payable. If insufficient funds exist to pay the full
amount of the liquidation preference of all Preferred Stock holders, the
remaining funds will be distributed ratably among preferred holders in
proportion to the liquidation preference amounts.
F-15
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
Voting Rights
Holders of Preferred Stock vote along with holders of common stock on an as-
converted basis. In addition, the Series B preferred stock holders and the
Series D preferred stock holders have the right, voting as separate classes, to
elect one director for each series. The Preferred Stock holders voting as a
single class can elect a seventh member of the board of the directors. The
Series C preferred stock holders have the right to appoint an observer to
attend board meetings.
Redemption
The Series B and Series D preferred stock will be redeemable at the option
of the holders on the earlier to occur of April 18, 2004 or the Company's
"change in control," which is defined as the acquisition by an unaffiliated
party of 51 percent of the Company's voting stock or a merger or consolidation
in which the Company is not the survivor and the Company's common stock holders
receive cash or securities of another entity. The redemption price received by
the Series B preferred stockholders will be the greater of the fair market
value of the common stock into which it is convertible, or the sum of $2.36 per
share plus $0.354 per share per annum. The redemption price received by the
Series D preferred stockholders will be the greater of the fair market value of
the common stock into which it is convertible, or $9.36 per share plus 15
percent per annum compounded annually and computed from the date of issuance.
If the Company fails to redeem any of the Series B or Series D preferred
stock when required to do so, redemption dividends in the amount of 16 percent
per annum, increasing 2 percent per quarter, will accrue on the unredeemed
stock from the day of failure to redeem.
The holders of Preferred Stock have registration rights associated with the
common stock issuable on conversion of their Preferred Stock.
Conversion of Preferred Stock
The unaudited pro forma stockholders' equity at June 30, 2000 and the
unaudited pro forma net loss per share and weighted average number of common
shares outstanding for the period ended June 30, 2000 reflects the conversion
on a 3 for 2 basis of all outstanding preferred stock into 6,558,828 shares of
common stock.
8. STOCK OPTIONS AND WARRANTS
The Company has five stock option plans permitting the Company to grant
options to purchase up to 4,650,000 shares of common stock to employees,
directors and consultants. The plans' provisions allow for the grant of
incentive stock options at an exercise price equal to the fair market value as
of the date of grant as determined by the Board of Directors. During 1998, all
outstanding options issued pursuant to the 1990 and 1995 Incentive Stock Option
Plans were amended whereby the expiration date of such stock options was
extended from four years from the date of the option grant to six years from
the date of the option grant, resulting in a stock-based compensation charge of
$410,000.
Options generally become exercisable either (i) over a four year period,
with 25 percent vesting one year from the date of grant and the remainder
vesting ratably over the remaining three years or (ii) over a two year period
with 50 percent vesting at the end of year one and the remaining shares vesting
at the end of year two. All options issued subsequent to December 31, 1996
expire six years from the date of grant. Options available for future grant
under these plans totaled 950,630 at June 30, 2000 (unaudited). Additional
option grants outside of the plans are made at the discretion of the Board of
Directors. As of June 30, 2000 (unaudited), the Company has issued 1,615,650
stock options to directors and outside consultants outside of the formal stock
option plans.
F-16
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
The following is a summary of stock option activity for the years ended
December 31, 1997, 1998, 1999 and the six months ended June 30, 2000
(unaudited):
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Outstanding, December 31, 1996..................... 2,113,500 $0.58
Granted.......................................... 1,128,750 1.13
Canceled......................................... (577,500) 1.01
Exercised........................................ (90,000) 0.61
Expired.......................................... (30,000) 0.67
---------- -----
Outstanding, December 31, 1997..................... 2,544,750 0.72
Granted.......................................... 2,526,150 1.17
Canceled......................................... (757,924) 1.09
Exercised........................................ (261,752) 0.29
---------- -----
Outstanding, December 31, 1998..................... 4,051,224 0.96
Granted.......................................... 1,904,972 1.32
Canceled......................................... (1,182,501) 1.19
Exercised........................................ (651,573) 0.55
---------- -----
Outstanding, December 31, 1999..................... 4,122,122 1.13
Granted.......................................... 1,370,625 2.05
Canceled......................................... (282,975) 1.23
Exercised........................................ (189,525) 0.89
---------- -----
Outstanding, June 30, 2000 (unaudited)............. 5,020,247 $1.38
========== =====
</TABLE>
Stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
------------------------------
Contractual
Exercise Shares Shares Life Exercise
Price Outstanding Exercisable (years) Price
---------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$0.33 127,500 127,500 1.14 $0.33
0.37 225,000 225,000 1.00 0.37
0.67 202,500 202,500 0.23 0.67
1.00 322,500 322,500 0.90 1.00
1.17 1,619,250 469,473 4.54 1.17
1.33 1,608,722 49,727 5.47 1.33
1.57 16,650 16,650 4.66 1.57
--------- --------- ---- -----
$0.33-1.57 4,122,122 1,413,350 2.26 $1.13
========= ========= ==== =====
</TABLE>
Based on the provisions of SFAS No. 123, the Company has calculated the fair
value of options granted utilizing the Black-Scholes option-pricing model. The
weighted average fair value of options granted in 1997, 1998, 1999 and the six
months ended June 30, 2000 (unaudited) was $0.31, $0.26, $0.35 and $4.96,
respectively. The following assumptions were used in determining the weighted
average fair value of options granted in 1997, 1998, 1999 and the six months
ended June 30, 2000 (unaudited), respectively: no dividend yield; volatility of
effectively zero for the years ended December 31, 1997, 1998 and 1999 and 70
percent for the six months ended June 30, 2000; risk-free interest rate of 6.25
percent, 5.12 percent, 6.10 percent and 6.32 percent, respectively; and an
expected term of 5 years.
F-17
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
If the Company had elected to adopt SFAS No. 123 by recognizing the fair
value of stock-based compensation, the Company's pro forma net loss would have
approximated $2,360,831, $6,393,745, $7,945,534 and $6,806,038 for the years
ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 2000
(unaudited), respectively. The impact of applying SFAS No. 123 in this pro
forma disclosure is not necessarily indicative of the effect on income in the
future.
The Company accounts for employee and director stock options in accordance
with the provisions of APB No. 25 and complies with the disclosure requirements
of SFAS No. 123.
Under APB No. 25, compensation expense is recognized based upon the amount
by which the fair value of the underlying common stock exceeds the exercise
price of the stock options at the measurement date, which in the case of
employee stock options is typically the date of grant. For financial reporting
purposes, the Company has determined that the deemed fair market value on the
date of grant of certain employee stock options was in excess of the exercise
price of the options. This amount is recorded as deferred compensation and is
classified as a reduction of stockholders' equity and is amortized as a charge
to operations over the vesting period of the applicable options. The vesting
period is generally four years. The fair value per share used to calculate
deferred compensation was derived by reference to the Series D preferred stock
value and the Company's proposed initial public offering price. Consequently,
the Company recorded deferred stock compensation of $3,077,715 for the six
months ended June 30, 2000 (unaudited). Amortization recognized for the six
months ended June 30, 2000, (unaudited) totaled $177,540.
During 1997, the Company granted warrants to purchase 21,427 shares of the
Company's common stock for $1.17 per share. During 1998, the Company granted
warrants to purchase 190,680 shares of the Company's common stock for $1.57 per
share. During 1999, the Company granted additional warrants to purchase
27,744 shares of the Company's common stock for $5.41 per share. These warrants
were granted to a bank in return for the extension of a line or credit. The
imputed value of these warrants is immaterial. The warrants expire in May 2005
and December 2006, respectively. No warrants were exercised during 1998 or
1999.
9. RELATED PARTY TRANSACTION
Effective December 1998, the Company entered into an agreement to develop
software for a principal stockholder of the Company's Series C preferred stock.
Under terms of the agreement, the Company has received $850,000 as prepayment
for product sales, royalties and reimbursement of product development expenses.
Product sales, royalties and product development expenses are offset against
the prepaid amount as incurred or recognized in accordance with terms of the
agreement. During 1999, the Company recorded $150,000 in product sales and
$100,000 was recorded as a reimbursement of product development expenses. At
December 31, 1999, $600,000 remained on the balance sheet as a customer
prepayment.
In July 1999, the Company's corporate office landlord paid approximately
$154,390 in real estate commissions to the Everest Group, Inc. an entity
affiliated with a common stockholder. The commission was paid for real estate
brokerage services provided in connection with the relocation of the corporate
office.
The Company has a worldwide reseller agreement with one of its common
stockholders. Total sales to this reseller were $436,682, $21,107, $663,881,
$420,815 and $525,659 for the years ended December 31, 1997, 1998, 1999 and for
the six months ended June 30, 1999 and 2000 (unaudited), respectively. Accounts
receivable due from this reseller were $485,906, $5,950, $270,405, $350,000 and
$47,808 for those same periods, respectively.
F-18
<PAGE>
TRINAGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
10. PROFIT SHARING PLAN
Effective January 1, 1997, the Company implemented a Cash or Deferred Profit
Sharing Plan under Section 401(k) of the Internal Revenue Code (IRC) for
employees meeting certain service requirements. Eligible employees can
contribute up to 16 percent of their compensation, subject to certain
restrictions in accordance with the IRC. Employer contributions are made at the
Company's discretion. No employer contributions were made during the years
ended December 31, 1998 or 1999.
11. SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by
the chief operating decision maker, or decision making group, in making
decisions how to allocate resources and assess performance. The Company's chief
decision making group, as defined under SFAS 131, is the Executive Management
Committee. To date, the Executive Management Committee has viewed the Company's
operations as principally one segment; software licenses and related services.
As a result, the financial information disclosed herein, materially represents
all of the financial information related to the Company's principal operating
segment. Revenues from outside of North America were $0.4 million, $1.1
million, $2.3 million, $1.0 million and $2.6 million for the years ended
December 31, 1997, 1998, 1999, and the six months ended June 30, 1999 and 2000
(unaudited), respectively. The Company's revenues from outside of North America
were primarily generated from customers in Europe. Revenues from European
customers accounted for 9 percent, 17 percent, 23 percent, 22 percent and 32
percent of total revenues for the years ended December 31, 1997, 1998, 1999,
and the six months ended June 30, 1999 and 2000 (unaudited), respectively.
Substantially all of the Company's assets are located in the United States.
12. SUBSEQUENT EVENTS (UNAUDITED)
Proposed Initial Public Offering
Subsequent to June 30, 2000, the Company has proposed the filing of a Form
S-1 Registration Statement with the Securities and Exchange Commission to sell
common stock to the public (the IPO). There can be no assurance that the
Company's proposed IPO will be successful.
Reincorporation and Capital Structure
The Company expects to reincorporate in Delaware prior to completion of the
IPO. Upon completion of the IPO, the Company intends to amend the certificate
of incorporation to authorize 100,000,000 shares of Common Stock, $0.0001 par
value and 5,000,000 shares of undesignated preferred stock, $0.0001 par value.
Stock Split
In connection with a proposed initial public offering of the Company's
Common Stock the Company will effect a 3 for 2 stock split of its Common Stock.
All shares and per share amounts have been restated and retroactively reflect
this stock split. As a result of the IPO, all outstanding shares of Series B, C
and D preferred stock will convert automatically into common stock on a 3 for 2
basis.
F-19
<PAGE>
================================================================================
Prospective investors may rely only on the information contained in this pro-
spectus. Neither Trinagy nor any underwriter has authorized anyone to provide
prospective investors with different or additional information. This prospectus
is not an offer to sell nor is it seeking an offer to buy these securities in
any jurisdiction where such offer or sale is not permitted. The information
contained in this prospectus is correct only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of these
securities.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 30
Management............................................................... 42
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 65
Experts.................................................................. 65
Where You Can Find Additional Information................................ 65
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 2001 (25 days after the date of this prospectus), all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
[LOGO OF TRINAGY, INC. APPEARS HERE]
Shares
Common Stock
------------
PROSPECTUS
------------
Bear, Stearns & Co. Inc.
CIBC World Markets
Wit SoundView
C.E. Unterberg, Towbin
, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the Offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
Registration fee....................................................... $19,800
NASD filing fee........................................................ 8,000
Nasdaq National Market listing fee..................................... 95,000
Printing and Engraving expenses........................................ *
Legal fees and expenses................................................ *
Blue Sky qualification fees and expenses............................... *
Accounting fees and expenses........................................... *
Directors' and Officers' liability insurance........................... *
Transfer agent and registrar fees...................................... *
Miscellaneous.......................................................... *
-------
Total................................................................ $ *
=======
</TABLE>
--------
* To be supplied by amendment.
Item 14. Indemnification of Directors and Officers
Under Section 145 of the General Corporation Law of the State of Delaware,
Trinagy has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Trinagy's Bylaws
(Exhibits 3.3 and 3.4 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
Trinagy's Certificate of Incorporation (Exhibits 3.1 and 3.2 hereto)
provides that the liability of its directors for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law. Pursuant to
Delaware law, this includes elimination of liability for monetary damages for
breach of the directors' fiduciary duty of care to Trinagy and its
stockholders. These provisions do not eliminate the directors' duty of care
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to Trinagy, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
any transaction from which the director derived an improper personal benefit,
and for payment of dividends or approval of stock repurchases or redemptions
that are unlawful under Delaware law. The provision also does not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Prior to the effective date of the Registration Statement, Trinagy will have
entered into agreements with its directors and its executive officers that
require Trinagy to indemnify these persons against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that the person is or was a director or officer of Trinagy or any of
its affiliated enterprises, provided the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of Trinagy and, with respect to any criminal proceeding, had no
reasonable cause to believe that person's conduct was unlawful. The
indemnification agreements also establish procedures that will apply if a claim
for indemnification arises under the agreements. A form of such indemnification
agreement is filed as Exhibit 10.1 hereto.
II-1
<PAGE>
Trinagy intends to obtain in conjunction with the effectiveness of the
Registration Statement a policy of directors' and officers' liability insurance
that insures its directors and officers against the cost of defense, settlement
or payment of a judgment under some circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Trinagy and its
officers and directors for certain liabilities arising under the Securities Act
or otherwise.
Item 15. Recent Sales of Unregistered Securities
We have issued securities during the past three years as described below.
Shares of common stock reflect a 3 for 2 split to be effected prior to
completion of this offering and all shares of preferred stock will convert on a
3 for 2 basis upon completion of this offering.
(1) On December 8, 1998, pursuant to Rule 506 under the Securities Act, we
sold an aggregate of 1,244,486 shares of our Series C preferred stock to Bay
Networks, Inc. and Geocapital IV, L.P., each an accredited investor within the
meaning of Rule 501(a) under the Securities Act, for an aggregate purchase
price of $10,092,782.
(2) On April 19, 2000, pursuant to Rule 506 under the Securities Act, we
sold 1,602,642 shares of our Series D preferred stock to DTALK Acquisition
Corp. and Signal Equity Partners, L.P., each an accredited investor within the
meaning of Rule 501(a) under the Securities Act, for an aggregate purchase
price of $15,000,729.
(3) In May and August 1998, we issued two warrants, each to purchase 95,340
shares of our common stock, to Geocapital IV, L.P., an accredited investor
within the meaning of the Securities Act, in connection with a loan agreement,
for an exercise price of $1.57 per share.
(4) We have issued shares of our common stock to three accredited investors
upon the exercise of their options pursuant to Section 4(2) and Rule 506 under
the Securities Act as follows:
<TABLE>
<CAPTION>
Number Aggregate
of Exercise
Date Shares Price
---- ------- ---------
<S> <C> <C>
June 16, 1999................................................. 150,000 $50,000
October 20, 1999.............................................. 81,324 $27,108
December 13, 1999............................................. 165,000 $55,000
</TABLE>
(5) Since October 25, 1997, we have issued 1,387,690 shares of our common
stock to employees, consultants and directors upon the exercise of options at
prices ranging from $0.33 to $1.33 per share.
(6) We have from time to time granted stock options to employees,
consultants and directors. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
Range of
Number Exercise
of Shares Prices
--------- -----------
<S> <C> <C>
1997...................................................... 371,250 $1.17
1998...................................................... 2,241,150 $1.17
1999...................................................... 1,945,471 $1.17-$1.33
2000...................................................... 1,793,250 $1.33-$3.00
</TABLE>
We offered and sold the securities referred to in paragraphs 5 and 6 above
in reliance upon exemptions from registration pursuant to either (i) Section
4(2) of the Securities Act as transactions not involving any public offering;
(ii) Regulation D under the Securities Act, or (iii) Rule 701 under the
Securities Act. With respect to all transactions listed in this Item 15, all
purchasers of the above securities acquired said shares for investment purposes
only and all stock certificates reflect the appropriate legends. No
underwriters were involved in connection with the sales of securities referred
to in this Item 15.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant as currently in effect
Form of Restated Certificate of Incorporation of Registrant to be
*3.2 filed on the closing of the offering
3.3 Bylaws of Registrant as currently in effect
Form of First Amended and Restated Bylaws to be adopted on the closing
*3.4 of the offering
Specimen Certificate of Registrant's Common Stock, par value $.0001
*4.1 per share
*5.1 Opinion of Morrison & Foerster LLP
*10.1 Form of indemnification agreement to be entered into by Registrant
with each of executive officers and directors
10.2 Loan and Security Agreement among DeskTalk Systems, Inc. and DeskTalk
Systems International, LLC, jointly and severally, and TransAmerica
Business Credit Corporation dated December 9, 1999
10.3 Employment Agreement between DeskTalk Systems, Inc. and David P.
Woodall dated June 14, 1999
10.4 Employment Agreement between DeskTalk Systems, Inc. and Joseph M. Feig
dated April 16, 1998
10.5 Employment Agreement between DeskTalk Systems, Inc. and David J.
Kaufman dated April 16, 1999
+10.6 Commercial Application Partner Agreement between DeskTalk Systems,
Inc. and Sybase, Inc. dated June 26, 1996, as amended
+10.7 Distributor License Agreement between DeskTalk Systems, Inc. and
Merant Inc. dated July 15, 2000, as amended
+10.8 Software OEM Agreement between DeskTalk Systems, Inc. and Allaire
Corporation dated August 7, 2000
+10.9 Pass-Thru Reseller Agreement between DeskTalk Systems, Inc. and Nortel
Networks NA Inc. dated February 29, 2000
10.10 Standard Office Lease between DeskTalk Systems, Inc. and Arden Realty
Limited Partnership dated July 27, 1999
10.11 1995 Incentive Stock Option Plan, as amended
*10.12 1996 Inventive Stock Option Plan
10.13 1997 Incentive Stock Option Plan
10.14 Second Amended and Restated Registration Rights Agreement of DeskTalk
Systems, Inc., dated as of April 11, 2000
10.15 Supplemental Shareholders Agreement of DeskTalk Systems, Inc., dated
as of April 11, 2000
10.16 Warrant Agreement, dated as of May 1, 1998, between DeskTalk Systems,
Inc. and GeoCapital IV, L.P.
10.17 Warrant Agreement, dated as of August 21, 1998, between DeskTalk
Systems, Inc. and GeoCapital IV, L.P.
10.18 1998 Incentive Stock Option Plan
10.19 2000 Stock Incentive Plan
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*10.20 2001 Stock Incentive Plan
*10.21 2001 Employee Stock Purchase Plan
11.1 Statement of computation of net income per share and pro forma net
income per share (see Note 1 of Notes to Consolidated Financial
Statements)
21.1 Subsidiaries of the Registrant
*23.1 Consent of Morrison & Foerster LLP (included in its opinion filed as
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
(b) Consolidated Financial Statement Schedules
All financial statement schedules have been omitted either because they are
not required or are not applicable, or the required information is shown in the
consolidated financial statements or related notes.
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.
Insofar as indemnification for liabilities arising under the 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Torrance,
County of Los Angeles, State of California, on October 24, 2000.
TRINAGY, INC.
/s/ David P. Woodall
By: _________________________________
David P. Woodall
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of David P. Woodall, Joseph M. Feig and
Paul H. Madick as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462 promulgated
under the Securities Act, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David P. Woodall President, Chief Executive October 24, 2000
____________________________________ Officer and Director
David P. Woodall (Principal Executive
Officer)
/s/ Joseph M. Feig Treasurer and Chief October 24, 2000
____________________________________ Financial Officer
Joseph M. Feig (Principal Financial and
Accounting Officer)
/s/ David J. Kaufman Chairman of the Board, October 24, 2000
____________________________________ Director
David J. Kaufman
/s/ Kenneth J. Biba Director October 24, 2000
____________________________________
Kenneth J. Biba
/s/ Stephen J. Clearman Director October 24, 2000
____________________________________
Stephen J. Clearman
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Abraham Hepner Director October 24, 2000
____________________________________
Abraham Hepner
/s/ Dennis A. Kirshy Director October 24, 2000
____________________________________
Dennis A. Kirshy
/s/ Douglas R. Korn Director October 24, 2000
____________________________________
Douglas R. Korn
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant as currently in effect
Form of Restated Certificate of Incorporation of Registrant to be
*3.2 filed on the closing of the offering
3.3 Bylaws of Registrant as currently in effect
Form of First Amended and Restated Bylaws to be adopted on the closing
*3.4 of the offering
Specimen Certificate of Registrant's Common Stock, par value $.0001
*4.1 per share
*5.1 Opinion of Morrison & Foerster LLP
*10.1 Form of indemnification agreement to be entered into by Registrant
with each of executive officers and directors
10.2 Loan and Security Agreement among DeskTalk Systems, Inc. and DeskTalk
Systems International, LLC, jointly and severally, and TransAmerica
Business Credit Corporation dated December 9, 1999
10.3 Employment Agreement between DeskTalk Systems, Inc. and David P.
Woodall dated June 14, 1999
10.4 Employment Agreement between DeskTalk Systems, Inc. and Joseph M. Feig
dated April 16, 1998
10.5 Employment Agreement between DeskTalk Systems, Inc. and David J.
Kaufman dated April 16, 1999
+10.6 Commercial Application Partner Agreement between DeskTalk Systems,
Inc. and Sybase, Inc. dated June 26, 1996, as amended
+10.7 Distributor License Agreement between DeskTalk Systems, Inc. and
Merant Inc. dated July 15, 2000, as amended
+10.8 Software OEM Agreement between DeskTalk Systems, Inc. and Allaire
Corporation dated August 7, 2000
+10.9 Pass-Thru Reseller Agreement between DeskTalk Systems, Inc. and Nortel
Networks NA Inc. dated February 29, 2000
10.10 Standard Office Lease between DeskTalk Systems, Inc. and Arden Realty
Limited Partnership dated July 27, 1999
10.11 1995 Incentive Stock Option Plan, as amended
*10.12 1996 Inventive Stock Option Plan
10.13 1997 Incentive Stock Option Plan
10.14 Second Amended and Restated Registration Rights Agreement of DeskTalk
Systems, Inc., dated as of April 11, 2000
10.15 Supplemental Shareholders Agreement of DeskTalk Systems, Inc., dated
as of April 11, 2000
10.16 Warrant Agreement, dated as of May 1, 1998, between DeskTalk Systems,
Inc. and GeoCapital IV, L.P.
10.17 Warrant Agreement, dated as of August 21, 1998, between DeskTalk
Systems, Inc. and GeoCapital IV, L.P.
10.18 1998 Incentive Stock Option Plan
10.19 2000 Stock Incentive Plan
*10.20 2001 Stock Incentive Plan
*10.21 2001 Employee Stock Purchase Plan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
11.1 Statement of computation of net income per share and pro forma net
income per share (see Note 1 of Notes to Consolidated Financial
Statements)
21.1 Subsidiaries of the Registrant
*23.1 Consent of Morrison & Foerster LLP (included in its opinion filed as
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
