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Exhibit 99.1
Cautionary Factors Under the
Private Securities Litigation Reform Act of 1995
We desire to take advantage of the "safe harbor" provisions contained
in the Private Securities Litigation Reform Act of 1995 (the "Act"). This Form
10-K contains statements, which are intended as "forward-looking statements"
within the meaning of the Act. The words or phrases "expects", "will continue",
"is anticipated", "we believe", "estimate", "projects", "hope" or expressions of
a similar nature denote forward-looking statements. Those statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from historical results or results presently anticipated or
projected. Those risks and uncertainties include those discussed in this Exhibit
99.1. We wish to caution you not to place undue reliance on forward-looking
statements. The factors listed in this Exhibit 99.1 have affected the Company's
performance in the past and could affect future performance. Those factors
include, but are not limited to, the risk that a product may not be available
when expected or may contain technical difficulties; uncertain demand for new or
existing products; the impact of competitor's advertising, products or pricing;
availability of sources of financing; economic developments, both domestically
and internationally; new accounting standards; risks associated with the
acquisition and integration of new businesses; risks related to the
diversification into new Internet software and information technology business;
and, the impact of the initiation, defense and resolution of litigation. Anyone
deciding to invest in our common stock will take on financial risk. In deciding
whether to invest, individuals should carefully consider the factors included in
this Exhibit 99.1 and other information publicly available to them. If we are
unable to implement our plans successfully, we may lose our investment in one or
more of the programs described in this Exhibit 99.1.
OUR LIMITED OPERATING HISTORY IN THE INTERNET MARKETPLACE AND EVOLVING REVENUE
MODEL MAKE IT DIFFICULT TO EVALUATE WHETHER WE CAN GENERATE OR SUSTAIN REVENUES.
We acquired our first hosting and Information Technology (IT)
consulting operation in December 1998 and we first launched our VerticalXchange
Platform in October 1999; thus we have a limited operating history in the
Internet marketplace. In addition, our revenue model is evolving, which,
together with our limited operating history in the Internet market, makes
evaluating our future prospects very difficult. Currently, our revenues are
generated primarily from our RSPNetwork subsidiary for IT professional services
and "commodity hosting." In the future, we expect to generate a greater
percentage of our revenue from multiple sources, including e-commerce and
business services, Service Level Agreements within our VerticalXchange Platform
at B2BXchange.net, online advertising, and an array of customization and
integration services which are dependent upon our Commerce Environment Operating
System (CEOS) and its evolving Application Programmers Interface (API). Should
we run into delays or technical problems with our CEOS/API Strategy, our
opportunity and investments to date could be lost. We may not be able to
generate or sustain revenues or successfully build e-commerce or business
services revenue. If we do not create and sustain revenue or build e-commerce or
business services revenue, Service Level Agreement revenue, or advertising
revenue, including revenue from our applications and alliance partner e-commerce
applications, our business, financial condition and operating results will
suffer.
WE HAVE HAD OPERATING LOSSES IN THE PAST AND MAY INCUR LOSSES IN THE FUTURE.
For the fiscal year ending June 30, 2000, Continuing Operations
generated start-up operating losses (excluding the Digital Graphics Unit's
divestiture) of $21.7 million. We may continue to incur losses in the future
since we intend to derive substantially most of our revenues from the upgrade of
customers from free use of our B2BXchange service to an enhanced service where
they are charged monthly fees for Service Level Agreements, transaction fees and
customization fees. If customers fail to find enough value or ease of use in our
VerticalXchange model, they may decline to use, or cease using, the enhanced
services. Failure to meet customer expectations may effect our branding efforts
and damage our reputation. We expect to incur significant sales and marketing,
research and development, and general and administration expenses; tenant
improvement costs; capital
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equipment expenditures; business development and acquisition costs; amortization
expenses from future acquisitions; and third party content and product
integration costs. If we do become profitable, it may be difficult to sustain
profitability for any length of time.
WE EXPECT OUR OPERATING EXPENSES TO INCREASE.
Our limited operating history in the Internet marketplace makes
predicting our future operating results, including operating expenses,
difficult. Some of our expenses are fixed, including non-cancelable agreements,
equipment leases and real estate leases. If our revenues do not increase, we may
not be able to compensate by reducing expenses in a timely manner. Our revenues
may not grow or may not even continue at their current level. In addition, we
plan to increase our operating expenses significantly to:
. launch additional communities within our VerticalXchange Platform;
. increase our internal sales and marketing operations;
. enhance our technologies;
. develop and deploy our e-commerce initiatives;
. design and integrate a scalable online VerticalXchange Platform;
. enter into additional sponsorship agreements;
. broaden our customer support capabilities; and
. pursue technology, marketing and distribution alliances.
We also expect our expenses to increase significantly due to the impact
of amortization expense and other charges resulting from completed and future
acquisitions. Our alliance partners may also begin to charge us for providing
content, applications and other services to our VerticalXchange Platform. If any
of these expenses are not accompanied by increased revenues, our business,
financial condition and operating results would be harmed.
OUR QUARTERLY RESULTS MAY FLUCTUATE.
We expect that our quarterly operating results will fluctuate
significantly due to many factors, including:
o the uncertain adoption of the Internet as an e-commerce and
advertising medium;
o dependence on development and adoption of the e-commerce market;
o the level of demand for our products and services;
o intense and increased competition;
o our ability to develop, introduce and market new products and
services, as well as enhancements to our existing products and
services, on a timely basis;
o our dependence on content providers;
o license fees payable to content providers;
o uncertain acceptance of our Internet content;
o management of our growth; and
o risks associated with past and future acquisitionso
Many of these factors are beyond our control.
OUR COMMON STOCK PRICE IS LIKELY TO REMAIN HIGHLY VOLATILE.
The market price of our common stock has been and will likely continue
to be highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected relative valuations substantially above historical levels. During
the same period, such companies' stocks have also been highly volatile and have
recorded lows well below such historical highs. Our stock may not trade at the
same levels as other Internet stocks, and Internet stocks in general may not
sustain their current market prices.
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Factors that could cause such volatility may include, among other
things:
o actual or anticipated variations in quarterly operating results;
o announcements of technological innovations;
o new sales models or new products or services;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet industry;
o changes in the market valuations of other Internet companies;
o failure to meet analysts' expectations;
o announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
o capital commitments;
o additions or departures of key personnel;
o sales of common stock;
o a lack of buyers for our stock once we finish or abandon our
Stock Repurchase Plan; and
o stock market price and volume fluctuations, which are
particularly common among highly volatile securities of Internet
companies.
Many of these factors are beyond our control. These factors may cause
the market price of our common stock to fall, regardless of our operating
performance.
MARKETING MAY NOT GENERATE THE EXPECTED NUMBER OF NEW CUSTOMERS OR MAY BE
DISCONTINUED.
We use marketing programs to create traffic on our VerticalXchange
Platform and consequently, to generate revenues. These marketing programs may
not generate the expected number of new customers.
WE MAY ULTIMATELY BE UNABLE TO COMPETE IN THE MARKET FOR INTERNET PRODUCTS AND
SERVICES, ADVERTISING AND E-COMMERCE.
The market for Internet products and services, advertising and
e-commerce is intensely competitive, evolving and subject to rapid technological
change. We expect competition to intensify as current competitors expand their
product and service offerings and new competitors enter the market. Barriers to
entry are minimal, and competitors can launch new Web sites at a relatively low
cost. We expect to compete for a share of a customer's advertising budget with
online services and traditional off-line media, such as print publications and
trade associations. Several companies offer competitive business models to our
VerticalXchange Platform. We expect that additional companies will offer
competing products on a standalone or portfolio basis.
The market for e-commerce solutions in global markets, although at an
early stage of development, is also intensely competitive, evolving and subject
to rapid technological and other change.
Our competitors in the global markets vary in size and in the scope and
breadth of the services and features offered and include, but are not limited
to:
. other B2B market makers;
. on-line catalog aggregators;
. on-line surplus auction companies;
. enterprise software companies;
. e-procurement providers; and
. vertical content providers.
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We expect the intensity of competition to increase in the future as the amount
of e-commerce transacted over the Internet grows. Increased competition may
result in reduced margins and loss of market share, either of which could
seriously harm our business.
Many of our competitors have longer operating histories, greater brand
recognition and greater financial, technical, marketing and other resources than
we do, and may have well-established relationships with our existing and
prospective customers. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. Our competitors may also develop
Internet products or services that are superior to, or have greater market
acceptance than, ours. If we are unable to compete successfully against our
competitors, our business, financial condition and operating results may be
negatively impacted.
WE MAY NOT REALIZE ANY RETURN ON OUR CURRENT PROGRAMS AND INVESTMENTS, AND MAY
EVEN LOSE ENTIRE INVESTMENTS UNDERTAKEN IN CONNECTION WITH STRATEGIC
RELATIONSHIPS.
In connection with strategic relationships that we enter, we are
increasingly asked to make equity investments in the companies with whom we form
relationships. We may never realize any return on these investments, which may
exceed $1.0 million. In fact, we may lose our entire investment, which would
materially and adversely affect our business and financial condition. The
success of any such investment is far from certain, given that our partners have
limited financial and other resources, yet are subject to many of the same risks
and uncertainties that we face in our business, including limited operating
histories, evolving revenue models and uncertain market acceptance of their
products and services. Moreover, we are often unable to require terms and
conditions of the investment (e.g., board membership or observer rights) that
are particularly favorable to us vis-a-vis other investors. Allocating our
financial resources to these types of investments, rather than reinvesting those
funds in our own business, may ultimately cause our business to suffer.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
A key component of our growth strategy is expected to be the
acquisition or partnering with professional service firms that meet our goals
for strategic growth and expansion. The successful implementation of this
acquisition strategy will depend on our ability to identify suitable acquisition
candidates, acquire such companies on acceptable terms and integrate their
operations successfully with those of ours. There can be no assurance that we
will be able to continue to identify additional suitable acquisition candidates
or that we will be able to acquire such candidates on acceptable terms.
Moreover, in pursuing acquisition opportunities we may compete with other
companies with similar growth strategies, certain of which competitors may be
larger and have greater financial and other resources than us. Competition for
these acquisition candidates may also result in increased prices of acquisitions
and a diminished pool of companies available for acquisition. Acquisitions also
involve a number of other risks, including adverse effects on our reported
operating results from increases in goodwill amortization, acquired in-process
technology, stock compensation expense and increased compensation expense
resulting from newly hired employees, the diversion of management attention,
potential disputes with the sellers of one or more acquired entities and the
possible failure to retain key acquired personnel. Lack of client satisfaction
or performance problems with an acquired firm could also have a material adverse
impact on our reputation as a whole, and any acquired company could
significantly under-perform relative to our expectations. We may realize little
or no return on our investment in an acquired company and may even lose our
entire investment and incur significant additional losses. For all of these
reasons, our pursuit of an overall acquisition strategy or any individual
pending or future acquisition may have a material adverse effect on our
business, financial condition, results of operations and prospects. To the
extent we choose to use cash consideration for acquisitions in the future, we
may be required to obtain additional debt or equity financing, and there can be
no assurance that such financing will be available on favorable terms, if at
all. As we issue stock to complete future acquisitions, existing stockholders
will experience further ownership dilution. The market may have a negative
reaction to our acquisition resulting in a decline of our share price.
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Acquisitions are also subject to numerous risks including, without
limitation, the following:
o acquisitions may cause a disruption in our ongoing business,
distract our management and other resources and make it difficult
to maintain our standards, controls and procedures;
o we may acquire companies in markets in which we have little
experience;
o we may not be able to retain key employees from acquired
companies;
o we may not be able to integrate the services, products and
personnel of any acquisition successfully into our operations;
o we may be required to incur debt or issue equity securities,
which may be dilutive to existing shareholders, to pay for
acquisitions;
o we may not realize any return on our investment and may even lose
our entire investment and incur significant additional losses;
o our share price could decline following the market's reaction to
our acquisitions;
o our amortization expense will increase as a result of
acquisitions; and
o our interest or other deductions may be disallowed for federal
income tax purposes.
INTEGRATION OF ACQUIRED BUSINESS MAY STRAIN MANAGEMENT RESOURCES AND SUBJECT US
TO ADDITIONAL EXPENSES.
During December 1998 we completed the acquisition of K & R Technical
Services, Inc. Our future performance will depend on our ability to integrate
selected assets from this and other acquired businesses, which, even if
successful, may take a significant period of time, may place a significant
strain on our management and resources, and could subject us to additional
expenses during the integration process and to the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
businesses, ability to retain key employees from acquired businesses, the
potential disruption of our ongoing business, the inability of management to
maximize our financial and strategic position through the successful
incorporation of acquired personnel and clients, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and clients as a result of any integration of new management
personnel. There can be no assurance that the services, technologies, key
personnel and businesses of the acquired business(es) will be effectively
integrated into our business or service offerings, or that such integration will
not adversely affect our business, financial condition, results of operations or
prospects. There can also be no assurance that any acquired services,
technologies or businesses will contribute at anticipated levels to our sales or
earnings, or that the sales and earnings from combined business(es) will not be
adversely affected by the integration process. Because the K&R Technical
Services acquisition was completed in December 1998, we are currently facing all
of these challenges and our ability to meet them over the long term and in
volume has not been fully established. The failure to integrate such
acquisitions successfully could have a material adverse effect on our business,
financial condition, results of operations and prospects.
OUR ONLINE VERTICALXCHANGE PLATFORM MAY NOT BE SUCCESSFUL IF IT IS NOT ADOPTED
BY A SIGNIFICANT NUMBER OF SUPPLIERS AND BUYERS
We are attempting to build a business-to-business destination for
e-commerce with our VerticalXchange Platform. If we do not successfully attract
significant numbers of sellers and buyers who have industry-specific business
requirements for our VerticalXchange Platform to allow us to transition free
subscribers into paying customers, our VerticalXchange Platform will not be
widely accepted, which in turn would limit the growth of our e-commerce revenues
and could adversely affect our business, financial condition and operating
results. Whether we can retain and attract buyers and suppliers will depend in
large part on our ability to design, develop and implement a secure,
user-friendly application with features and functionality that buyers and
suppliers find attractive in an e-commerce solution and that provides
substantial value to its users over their traditional business methods. Even
after we enhance our VerticalXchange Platform, suppliers and buyers may continue
purchasing and selling products through traditional procurement methods, rather
than adopting our Internet-based solution. Suppliers and buyers also may not use
our VerticalXchange Platform if they do not perceive it as a neutral marketplace
that does not favor one participant over another.
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ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN.
The growth of Internet advertising requires validation of the Internet
as an effective advertising medium. This validation has not yet fully occurred.
Acceptance of the Internet among advertisers will also depend on growth in the
commercial use of the Internet. If widespread commercial use of the Internet
does not develop, or if the Internet does not develop as an effective and
measurable medium for advertising, our business, financial condition and
operating results could suffer. No standards have been widely accepted to
measure the effectiveness of Internet advertising. If such standards do not
develop, businesses may be reluctant to advertise on the Internet. Our business,
financial condition and operating results would suffer if the market for
Internet advertising fails to develop or develops slower than expected.
IF OUR ADVERTISING REVENUE MODEL IS NOT SUCCESSFUL, OUR BUSINESS MAY SUFFER.
We plan to implement a program in which revenues will be generated from
the sale of advertising on our VerticalXchange Platform. If we are not
successful in drawing significant numbers of subscribers and customers to our
VerticalXchange Platform to make advertising attractive to Small companies,
Medium-sized businesses and Enterprise workgroups ("SME companies") and other
businesses, our revenues may suffer. Our ability to build and increase our
advertising revenues depends on many factors, including without limitation:
o advertisers' acceptance of the Internet as a legitimate
advertising medium;
o the development of a large base of users on our VerticalXchange
Platform who possess demographic characteristics attractive to
advertisers; and
o the expansion of our sales force.
Other factors could also affect our advertising revenues. For example,
widespread use of "filter" software programs that limit access to storefront
advertising from the Internet user's browser could reduce advertising on the
Internet, which would impair our business, financial condition and operating
results.
OUR INTERNET CONTENT MAY NOT ATTRACT USERS
Our future success depends in part upon our ability to deliver
compelling Internet content about various industries that will attract users
with demographic characteristics valuable to other participants in our
VerticalXchange Platform. If we are unable to develop Internet content that
attracts a loyal user base possessing demographic characteristics attractive to
industry participants and advertisers, it could impair our business, financial
condition and operating results. In addition, we may be unable to anticipate or
respond to rapidly changing buyer preferences to attract enough users to our
VerticalXchange Platform. Internet users can freely navigate and instantly
switch among a large number of Web sites. Many of these Internet sites offer
original content. It may therefore be difficult for us to distinguish our
content and attract users.
DEPENDENCE ON THIRD PARTY CONTENT PROVIDERS
We rely on third parties, such as trade publications and news wires, to
provide some of the content for our VerticalXchange Platform. It is critical to
our business that we maintain and build our existing relationships with content
providers. We may not be able to maintain relationships with the third parties
we depend upon to provide the content for our VerticalXchange Platform, which
could result in decreased traffic on our VerticalXchange Platform and decreased
revenue. Many of our agreements with content providers are for initial terms of
one to two years. The content providers may choose not to renew the agreements
or may terminate the agreements early if we do not fulfill our contractual
obligations, including our payment obligations. If a significant number of
content providers terminate our agreements with them, it could result in
decreased traffic on our VerticalXchange Platform and decreased advertising
revenue. Because our agreements with certain of our content providers are
nonexclusive, a competitor could offer content similar to or the same as ours.
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THE LICENSE FEES WE PAY TO CONTENT PROVIDERS MAY INCREASE.
If licensing fees to content providers increase, our business,
financial condition and operating results may be negatively impacted. These
license fees may increase as competition for such content increases. Our content
providers may not enter into new agreements with us on terms similar to those in
our current agreements.
IF WE DO NOT DEVELOP THE "B2XCHANGE," "RSPNETWORK" BRANDS AND OUR
VERTICALXCHANGE PLATFORM AND OTHER BRANDS, OUR REVENUES COULD DECREASE.
To be successful, we must establish and strengthen the brand awareness
of the "B2BXchange" and "RSPNetwork" brands, as well as the brands associated
with each individual VerticalXchange (e.g. myManufacturingXchange.com). In
addition, we must strive for "RSPNetwork brand extension" through any
acquisitions that we may make. If our brand awareness is weakened, it could
decrease the attractiveness of our product offerings to VerticalXchange
participants and advertisers, which could result in decreasing revenues. We
believe that brand recognition will become more important in the future with the
rapidly growing number of Internet sites worldwide. Our brand awareness could be
diluted, which could impair our business, financial condition and operating
results if users do not perceive our products and services to be of high
quality.
WE MAY NOT BE ABLE TO EFFECT OUR GROWTH STRATEGY IF WE ARE UNABLE TO COMPLETE
FUTURE ACQUISITIONS.
We plan to grow a portion of our business through acquisitions. We may
not be able to identify suitable acquisition candidates available for sale at
reasonable prices or on reasonable terms. Even if we are able to identify an
appropriate acquisition candidate, we may not be able to negotiate the terms of
the acquisition successfully, finance the acquisition or integrate the acquired
business, products or technologies into our existing business operation. If we
are unable to complete future acquisitions, our business, financial condition
and operating results could be negatively impacted.
RISK OF FAILURE OF OUR COMPUTER AND COMMUNICATIONS HARDWARE SYSTEMS
The performance of our computer and communications hardware systems is
critical to our business and reputation and our ability to process transactions,
provide high quality customer service and attract and retain customers,
suppliers, users and strategic partners. Any system interruptions that cause our
VerticalXchange Platform to be unavailable to users may reduce the
attractiveness of our product offerings to participants, advertisers, buyers and
suppliers and could impair our business, financial condition and operating
results. We maintain our Network Operating Center computer systems in our
facilities in Cedar Falls, Iowa and our co-location and development data centers
in Minneapolis, Minnesota. We currently have an additional co-location
relationship with AboveNet Communications in San Jose, California, which
represents a "deployment in process" as of October 2000. While we have taken
these steps to insure redundancy and 24/7 online service, interruptions could
result from natural disasters as well as power loss, telecommunications failure
and similar events which are largely beyond our control. Such events could
severely damage our business.
CAPACITY LIMITS ON OUR TECHNOLOGY, TRANSACTION PROCESSING SYSTEM, SCALABILITY
AND NETWORK HARDWARE AND SOFTWARE MAY BE DIFFICULT TO PROJECT AND WE MAY NOT BE
ABLE TO EXPAND AND UPGRADE OUR SYSTEMS TO ADEQUATELY MEET THE DEMANDS OF
INCREASED USE.
As traffic in our VerticalXchange Platform increases, we may be
required to expand and upgrade our technology, transaction processing systems
and network hardware and software. We may not be able to accurately project the
rate of increase in our VerticalXchange Platform. In addition, we may not be
able to expand and upgrade our systems and network hardware and software
capabilities to accommodate increased use of our VerticalXchange
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Platform. If we do not appropriately upgrade our systems and network hardware
and software, our reputation, business, financial condition and operating
results will suffer.
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, WHICH WE MAY NOT BE
ABLE TO KEEP UP WITH IN A COST-EFFECTIVE WAY.
Our market is characterized by rapid technological change and frequent
new product announcements. Significant technological changes could render our
existing VerticalXchange Platform technology obsolete. If we are unable to
respond to these developments successfully or do not respond in a cost-effective
way, our business, financial condition and operating results will suffer. To be
successful, we must adapt to our rapidly changing market by continually
improving the responsiveness, services and features of our VerticalXchange
Platform, by developing new features to meet customer needs and by successfully
developing and introducing new versions of our Internet-based e-commerce
business model on a timely basis. Our success will depend, in part, on our
ability to develop, acquire or license leading technologies useful in our
business, enhance our existing services and develop new services and technology
that address the needs of our customers. We will also need to respond to
technological advances and emerging industry standards in a cost-effective and
timely basis.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL WHO WE MAY NOT BE ABLE TO RETAIN, AND
WE MAY NOT BE ABLE TO HIRE ENOUGH OF THE RIGHT PERSONNEL TO MEET OUR HIRING
NEEDS.
We believe that our success depends on continued employment of our
senior management team. If one or more members of our senior management team
were unable or unwilling to continue in their present positions, our business,
financial condition and operating results could be materially adversely
affected. Eight members of our senior management and other employees have
employment agreements. We carry key person life insurance on certain, but not on
all, of our senior management personnel.
Our success also depends on having a highly trained technical staff,
sales force. We will need to continue to hire additional personnel as our
business grows. A shortage in the number of trained technical people could limit
our ability to design, develop and implement our Internet solutions, and to
increase revenues.
We plan to expand our employee base to manage our anticipated growth.
Competition for personnel, particularly for employees with technical expertise,
is intense. Our business, financial condition and operating results will be
impaired if we cannot hire and retain suitable personnel.
OUR SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH IS
UNCERTAIN.
Business-to-business e-commerce is a new and emerging business practice
that remains largely untested in the global marketplace and depends on the
increased acceptance and use of the Internet as a medium of commerce. If
e-commerce does not grow or grows more slowly than expected, our business will
suffer. Our long-term success depends on widespread market acceptance of
e-commerce.
A number of factors could prevent such acceptance, including the
following:
o buyers may be unwilling to shift their purchasing from
traditional vendors to online vendors;
o the necessary network infrastructure for substantial growth in
usage of the Internet may not be adequately developed;
o customers and suppliers may be unwilling to use online vendors
due to security and confidentiality concerns;
o increased government regulation or taxation may adversely affect
the viability of e-commerce;
o insufficient availability of telecommunication services or
changes in telecommunication services could result in slower
response times or inconsistent service quality;
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o adverse publicity and concerns about the security and
confidentiality of e-commerce transactions could discourage its
acceptance and growth;
o lack of human contact that current traditional suppliers provide;
and
o lack of availability of cost-effective, high-speed Internet
service.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING E-
COMMERCE.
The secure transmission of confidential information over the Internet
is essential to maintaining customer and supplier confidence. Concerns regarding
security of transactions and transmitting confidential information over the
Internet may negatively impact our e-commerce business. We believe that concern
regarding the security of confidential information transmitted over the
Internet, such as credit card numbers, prevents many potential customers from
engaging in on-line transactions. If we do not add sufficient security features
to future product releases, our products may not gain market acceptance or we
may incur additional legal exposure. We have included basic security features in
some of our products to protect the privacy and integrity of customer data, such
as password requirements for access to portions of our VerticalXchange Platform.
We currently use authentication technology, which requires passwords and other
information to prevent unauthorized persons from accessing a customer's
information. We also use encryption technology, which transforms information
into a "code" designed to be unreadable by third parties, to protect
confidential information such as credit card numbers in commerce transactions.
Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more prevalent (and consequently
becomes the focus of our development of direct marketing products), our
customers will become more concerned about security. If we do not adequately
address these concerns, this could impair our business, financial condition and
operating results.
LIMITED INTERNET INFRASTRUCTURE MAY AFFECT SERVICE.
The accelerated growth and increasing volume of Internet traffic may
cause performance problems, which would slow the adoption of our Internet-based
VerticalXchange Platform. The growth of Internet traffic due to very high
volumes of use over a relatively short period of time has caused frequent
periods of decreased Internet performance, delays and, in some cases, system
outages. This decreased performance is caused by limitations inherent in the
technology infrastructure supporting the Internet and the internal networks of
Internet users. If Internet usage continues to grow rapidly, the infrastructure
of the Internet and its users may be unable to support the demands of growing
e-commerce usage, and the Internet's performance and reliability may decline. If
our existing or potential customers experience frequent outages or delays on the
Internet, the adoption or use of our Internet-based, e-commerce business model
may grow more slowly than we expect or even decline. Our ability to increase the
speed and reliability of our Internet-based business model is limited by and
depends upon the reliability of both the Internet and the internal networks of
our existing and potential customers. As a result, if improvements in the
infrastructure supporting both the Internet and the internal networks of our
customers and suppliers are not made in a timely fashion, we may have difficulty
obtaining new customers or maintaining our existing customers, either of which
could reduce our potential revenues and have a negative impact on our business,
results of operations and financial condition.
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WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND MAY INFRINGE THE
PROPRIETARY RIGHTS OF OTHERS.
Proprietary rights are important to our success and our competitive
position. We do not have any issued patents for Internet technology as yet. As
of August 31, 2000, we have numerous trademarks registered with the United
States Patent and Trademark Office ("PTO") or pending registration. Although we
seek to protect our proprietary rights, we may be unable to protect our
trademarks and other proprietary rights adequately or to prevent others from
claiming violations of their trademarks and other proprietary rights. Effective
copyright and trademark protection may be unavailable or limited in certain
countries, and the global nature of the Internet makes it impossible to control
the ultimate destination of our work. We also license content from third
parties, which makes it possible that we could become subject to infringement
actions based upon the content licensed from those third parties. We generally
obtain representations as to the origin and ownership of such licensed content
and indemnification from those third parties; however, this may not adequately
protect us. Any of these claims, regardless of their merit, could subject us to
costly litigation and the diversion of our technical and management personnel.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER
THE INTERNET.
We may be subject to legal claims relating to the content in our
VerticalXchange Platform, or the downloading and distribution of such content.
For example, while we specifically deny access on B2BXchange.net for such
content, persons may bring claims against us if material that is inappropriate
for viewing by young children can be accessed from our VerticalXchange Platform.
Claims could also involve matters such as defamation, invasion of privacy and
copyright infringement. Providers of Internet products and services have been
sued in the past, sometimes successfully, based on the content of material. In
addition, some of the content provided on our VerticalXchange Platform is drawn
from data compiled by other parties, including governmental and commercial
sources. If our content is improperly used or if we supply incorrect
information, it could result in unexpected liability. Our insurance may not
cover claims of this type, or may not provide sufficient coverage. Our business,
financial condition and operating results could suffer materially if costs
resulting from these claims are not covered by our insurance or exceed our
coverage.
WE MAY REQUIRE ADDITIONAL CAPITAL FOR OUR OPERATIONS, WHICH COULD HAVE A
NEGATIVE EFFECT ON OUR SHAREHOLDERS.
As of June 30, 2000, we had $39.6 million cash on hand, largely as a
result of the sale of the Digital Graphics Business Unit (DGBU). We anticipate
that these funds will enable us to build awareness of and foster participation
in our VerticalXchange Platform. If we are unable to generate revenues from both
B2BXchange or to increase revenues significantly from RSPNetwork operations, we
may need to raise additional funds in the future.
If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our shareholders will
be reduced, shareholders may experience additional dilution and these securities
may have powers, preferences and rights that are senior to those of the rights
of our common stock. We cannot be certain that additional financing will be
available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
expansion, promote our brand identity, take advantage of acquisition
opportunities, develop or enhance services or respond to competitive pressures.
Any inability to do so could have a negative effect on our business, revenues,
financial condition and results of operations.
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OUR COMMON STOCK MAY BECOME DILUTED.
We have outstanding a large number of stock options and warrants to
purchase our Common Stock. To the extent such options or warrants are exercised,
there may be further dilution. We expect to seek additional acquisitions in
pursuing our strategies and intend to grant additional stock options and stock
bonuses to the employees of the acquired companies. For these reasons, our
acquisition program will result in further ownership dilution to investors.
OUR SHAREHOLDER RIGHTS PLAN AND MINNESOTA LAW MAY MAKE ACQUISITION BY A
THIRD-PARTY MORE DIFFICULT
Our Board has adopted a Shareholder Rights Agreement. The Shareholder
Rights Agreement was adopted to provide our board of directors an opportunity to
assess and evaluate any takeover bid, and in the event a bid is made, to provide
the board with an appropriate period of time to explore and develop alternatives
which maximize shareholder value. We cannot assure that shareholders or the
market may view or react adversely to this Shareholder Rights Agreement
adversely affecting shareholder value. In addition, Minnesota Statutes govern
"control share acquisitions" and require potential acquirers of at least 20% of
the Company's stock to provide notice and information to us about the proposed
acquisition of stock and limits voting rights in acquired stock unless such
voting rights are approved by an affirmative vote of shareholders and the
control share acquisition is consummated within 180 days after shareholder
approval. The effect of the statute is to limit the opportunity for a hostile
takeover of control of the Company unless a majority of shareholders consent.
There is no assurance that the control share acquisition statute will not
adversely affect shareholder value.
RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS INCLUDE POTENTIAL LIABILITY TO
CLIENTS OF DGBU FOR PRODUCTS SOLD PRIOR TO JUNE 13, 2000.
We remain liable for certain customer issues associated with the DGBU
products sold prior to the June 13, 2000 divestiture. Only a portion of such
risks are insurable. Although we maintain general liability insurance coverage,
including coverage for errors and omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against us that are uninsured, exceed available
insurance coverage or result in changes to our insurance policies, including
premium increases or the imposition of a large deductible or co-insurance
requirements, could adversely affect our business, results of operations and
financial condition.
OUR FAILURE TO MEET CLIENT EXPECTATIONS.
Many of our service and consulting engagements involve the development,
implementation and maintenance of applications that are critical to the
operations of our clients' businesses. Our failure or inability to meet a
client's expectations in the performance of our services could injure our
business reputation or result in a claim for substantial damages against us,
regardless of our responsibility for such failure. In addition, both RSPNetwork,
Inc. and B2BXchange, Inc. provide data services that may include confidential or
proprietary client information. Although we have implemented policies to prevent
such client information from being disclosed to unauthorized parties, lost, or
used inappropriately, any such unauthorized disclosure, loss or use could result
in a claim for substantial damages. We have attempted to limit contractually our
damages arising from negligent acts, errors, mistakes or omissions in rendering
professional services; however, there can be no assurance that any contractual
protections will be enforceable in all instances or would otherwise protect us
from liability for damages. Although we maintain general liability insurance
coverage, including coverage for errors and omissions, there can be no assurance
that such coverage will continue to be available on reasonable terms or will be
available in sufficient amounts to cover one or more large claims, or that the
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against us that are uninsured, exceed
available insurance coverage or result in changes to our insurance policies,
including premium increases or the imposition of a large
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deductible or co-insurance requirements, could adversely affect our business,
results of operations and financial condition.
THE MARKET FOR OUR SOLUTIONS IS AT AN EARLY STAGE. WE NEED A CRITICAL MASS OF
LARGE SUPPLIER ORGANIZATIONS AND LARGE NUMBERS OF BUYERS TO IMPLEMENT OUR
SOLUTIONS.
The market for Internet-based operating resource applications and
services is at an early stage of development. Our success depends on a
significant number of large supplier organizations and large numbers of buyers
implementing our VerticalXchange Platform and using RSPNetwork professional
services and value-added hosting. The implementation of our products by
organizations is complex and time consuming. In many cases, these organizations
must change established business practices and conduct business in new ways. Our
ability to attract additional customers for our products and services will
depend on using our existing customers as reference accounts. Unless a critical
mass of suppliers and buyers join our VerticalXchange Platform, our solutions
may not achieve widespread market acceptance and our business would be seriously
harmed.
IMPLEMENTATION OF OUR PRODUCTS AND SERVICES BY LARGE CUSTOMERS OF RSPNETWORK MAY
BE COMPLEX, TIME CONSUMING AND ORGANIZATIONALLY DIFFICULT TO IMPLEMENT. WE
FREQUENTLY EXPERIENCE LONG SALES AND IMPLEMENTATION CYCLES.
RSPNetwork provides enterprise-wide solutions that may be deployed with
many users within an organization. Its implementation by large organizations is
complex, time consuming. In many cases, our customers must change established
business practices and conduct business in new ways. In addition, they must
generally consider a wide range of other issues before committing to purchase
our product, including product benefits, ease of installation, ability to work
with existing computer systems, ability to support a larger user base,
functionality and reliability. Furthermore, because we are one of the first
companies to offer an Internet-based operating resource management system, many
customers will be addressing these issues for the first time in the context of
managing and procuring operating resources. As a result, we must educate
potential customers on the use and benefits of our products and services. In
addition, we believe that the purchase of our products is often discretionary
and generally involves a significant commitment of capital and other valuable
resources by a customer. It frequently takes several months to finalize a sale
and requires approval at a number of management levels within the customer
organization. The implementation and deployment of our products requires a
significant commitment of resources by our customers and third-party and/or our
professional services organizations. Because we target SME customers, our sales
cycles are expected to range from three to twelve months or even longer.
THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY IS VERY COMPETITIVE, AND
WE FACE INTENSE COMPETITION FROM MANY PARTICIPANTS IN THIS INDUSTRY. IF WE ARE
UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL BE SERIOUSLY HARMED.
The market for our solution is intensely competitive, evolving and
subject to rapid technological change. The intensity of competition has
increased and is expected to further increase in the future. This increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any one of which could seriously harm our business.
Competitors vary in size and in the scope and breadth of the products and
services offered. We also encounter competition with respect to different
aspects of our solution from Captura Software, Clarus, Commerce One, Concur
Technologies, Extensity, GE Information Services, Intellysis, Netscape
Communications, a subsidiary of America Online, and TRADEX Technologies. We also
encounter competition from several major enterprise software developers, such as
Oracle, PeopleSoft and SAP. In addition, because there are relatively low
barriers to entry in the operating resource management software market, we
expect additional competition from other established and emerging companies, as
the operational resource management software market continues to develop and
expand. For example, third parties that currently help implement Ariba ORMS
could begin to market products and services that compete with our own. We could
also face competition from new companies who introduce an Internet-based
operating resource management solution.
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Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than us, significantly greater name recognition and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and incentives not
matched by us. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations. We may not be
able to compete successfully against our current and/or future competitors.
WE DEPEND ON THE INTRODUCTION OF NEW VERSIONS OF OUR VERTICALXCHANGE PLATFORM
AND ON ENHANCING THE FUNCTIONALITY AND SERVICES OFFERED.
If we are unable to develop new software products or enhancements to
our existing products on a timely and cost-effective basis, or if new products
or enhancements do not achieve market acceptance, our business would be
seriously harmed. The life cycles of our products are difficult to predict
because the market for our products is new and emerging, and is characterized by
rapid technological change, changing customer needs and evolving industry
standards. The introduction of products employing new technologies and emerging
industry standards could render our existing products or services obsolete and
unmarketable.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance.
In developing new products and services, we may:
o Fail to develop and market products that respond to technological
changes or evolving industry standards in a timely or
cost-effective manner;
o Encounter products, capabilities or technologies developed by
others that render our products and services obsolete or
noncompetitive or that shorten the life cycles of our existing
products and services;
o Experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new
products and services; or
o Fail to develop new products and services that adequately meet
the requirements of the marketplace or achieve market acceptance.
IF WE FAIL TO RELEASE OUR PRODUCTS IN A TIMELY MANNER, OR IF OUR PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We may fail to introduce or deliver new potential offerings on a timely
basis or at all. If new releases or potential new products are delayed or do not
achieve market acceptance, we could experience a delay or loss of revenues and
customer dissatisfaction.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE
AND IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. If we are unable to manage our growth and expansion, our business
will be seriously harmed. In addition, we have recently hired a significant
number of employees and plan to further increase our total headcount. We also
plan to expand the geographic scope of our customer base and operations. This
expansion has resulted and will continue to result in substantial demands on our
management resources. Our ability to compete effectively and to manage future
expansion of our operations, if any, will require us to continue to improve our
financial and management controls, reporting systems and procedures on a timely
basis, and expand, train and manage our employee work force. We have implemented
new systems to
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manage our financial and human resources infrastructure. We may find that this
system, our personnel, procedures and controls may be inadequate to support our
future operations.
IF WE EXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR BUSINESS WILL
BE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
To be successful, we believe we must expand our international
operations and hire additional international personnel. Therefore, we expect to
commit significant resources to expand our international sales and marketing
activities. If successful, we will be subject to a number of risks associated
with international business activities. These risks generally include:
o Currency exchange rate fluctuations;
o Seasonal fluctuations in purchasing patterns;
o Unexpected changes in regulatory requirements;
o Tariffs, export controls and other trade barriers;
o Longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
o Difficulties in managing and staffing international operations;
o Potentially adverse tax consequences, including restrictions on
the repatriation of earnings;
o The burdens of complying with a wide variety of foreign laws;
o The risks related to the recent global economic turbulence and
adverse economic circumstances in Asia; and
o Political instability.
IN THE FUTURE WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO REMAIN
COMPETITIVE IN THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY. THIS
CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We expect that the net proceeds from our sale of the Digital Graphics
Business Unit (DGBU) will be sufficient to meet the working capital and capital
expenditure needs required for our current business plan for the fiscal 2001
year and into the following year. At some point, we may need to raise additional
funds and we cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all. If we cannot raise funds on acceptable
terms, if and when needed, we may not be able to develop or enhance our products
and services, take advantage of future opportunities, grow our business or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business.
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ELECTRONIC
COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS
ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our VerticalXchange Platform depends on the increased acceptance and
use of the Internet as a medium of commerce. Rapid growth in the use of the
Internet is a recent phenomenon. As a result, acceptance and use may not
continue to develop at historical rates and a sufficiently broad base of
business customers may not adopt or continue to use the Internet as a medium of
commerce. 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 services and products.
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Our business would be seriously harmed if:
o Use of the Internet and other online services does not continue
to increase or increases more slowly than expected;
o The technology underlying the Internet and other online services
does not effectively support any expansion that may occur; or
o The Internet and other online services do not create a viable
commercial marketplace, inhibiting the development of electronic
commerce and reducing the need for our products and services.
WE DEPEND ON THE ACCEPTANCE OF THE INTERNET AS A COMMERCIAL MARKETPLACE AND THIS
ACCEPTANCE MAY NOT OCCUR ON A TIMELY BASIS.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons. These include:
o Potentially inadequate development of the necessary communication
and computer network technology, particularly if rapid growth of
the Internet continues;
o Delayed development of enabling technologies and performance
improvements;
o Delays in the development or adoption of new standards and
protocols; and
o Increased governmental regulation.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other web sites to protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the web for commerce and communications.
Anyone who circumvents our security measures could misappropriate proprietary
information or cause interruptions in our services or operations. The Internet
is a public network, and data is sent over this network from many sources. In
the past, computer viruses, software programs that disable or impair computers,
have been distributed and have rapidly spread over the Internet. Computer
viruses could be introduced into our systems or those of our customers or
suppliers, which could disrupt our VerticalXchange Platform or make it
inaccessible to customers or suppliers. We may be required to expend significant
capital and other resources to protect against the threat of security breaches
or to alleviate problems caused by breaches. To the extent that our activities
may involve the storage and transmission of proprietary information, such as
credit card numbers, security breaches, could expose us to a risk of loss or
litigation and possible liability. Our security measures may be inadequate to
prevent security breaches, and our business would be seriously harmed if we do
not prevent them.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES OR ON PRODUCTS AND
SERVICES PURCHASED THROUGH OUR VERTICALXCHANGE PLATFORM.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in electronic commerce to liability, which could
limit the growth of electronic commerce generally. Legislation could dampen the
growth in Internet usage and decrease its acceptance as a communications and
commercial medium. If enacted, these laws, rules or regulations could limit the
market for our products and services.
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We do not collect sales or other similar taxes in respect of goods and
services purchased through our VerticalXchange Platform. However, one or more
states may seek to impose sales tax collection obligations on out-of-state
companies like us that engage in or facilitate electronic commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services over the Internet. These
proposals, if adopted, could substantially impair the growth of electronic
commerce and could adversely affect our opportunity to derive financial benefit
from such activities. Moreover, a successful assertion by one or more states or
any foreign country that we should collect sales or other taxes on the exchange
of goods and services through our VerticalXchange Platform could seriously harm
our business.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. This
legislation could ultimately be enacted into law or this legislation could
contain a limited time period in which this tax moratorium will apply. In the
event that the tax moratorium is imposed for a limited time period, legislation
could be renewed at the end of this period. Failure to enact or renew this
legislation could allow various states to impose taxes on electronic commerce,
and the imposition of these taxes could seriously harm our business.
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