As filed with the Securities and Exchange Commission on
March , 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ENTERWORKS, INC.
(Exact name of registrant as specified in its
charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization) |
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7372
(Primary Standard Industrial
Classification Code Number) |
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54-1785860
(I.R.S. Employer
Identification No.) |
19886 Ashburn Road
Ashburn, VA 20147
(703) 724-3800
(Address, including zip code and telephone
number, including
area code, of registrant’s principal
executive offices)
John B. Wood
Chairman and Chief Executive Officer
Enterworks, Inc.
19886 Ashburn Road
Ashburn, VA 20147
(703) 724-3800
(Name, address, including zip code and
telephone number,
including area code, of agent for service)
Copies to:
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Walter G. Lohr, Jr.
Hogan & Hartson L.L.P.
111 S. Calvert Street, Suite 1600
Baltimore, MD 21202
(410) 659-2700
Fax: (410) 539-6981 |
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John B. Watkins
Wilmer, Cutler & Pickering
2445 M Street, NW
Washington, D.C. 20037
(202) 663-6000
Fax: (202) 663-6363 |
Approximate date of commencement of proposed sale to the
public: as soon as practicable after this Registration
Statement becomes effective.
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,
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. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Amount of |
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Aggregate Offering Price(1) |
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Registration Fee |
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Shares of Common Stock, par value $0.01 |
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$70,000,000 |
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$18,480 |
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Estimated solely for the purpose of calculating
the registration fee in accordance with Rule 457(o) under
the Securities Act. |
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act, or until the registration statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
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The information in this preliminary
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 is effective. This prospectus
is not an offer to sell these securities, and it is not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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Subject to completion
,
2000
New Enterworks Logo
________________________________________________________________________________
Shares
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This is the initial public offering of Enterworks, Inc. We are
offering
shares
of our common stock. We have applied to have our common stock
approved for quotation on the Nasdaq National Market under the
symbol “EWKS.” |
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Investing in our common stock involves risks. See “Risk
Factors” beginning on page 4. |
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense. |
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Underwriting |
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Price to |
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Discounts and |
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Proceeds to |
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Public |
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Commissions |
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Enterworks |
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Per share |
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Total |
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We have granted the underwriters the right to purchase up to
additional
shares to cover any over-allotments. |
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Deutsche Banc Alex. Brown |
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J.P.
Morgan & Co. |
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Wit SoundView |
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The date of this prospectus is
,
2000. |
TABLE OF CONTENTS
DESCRIPTION OF GRAPHICS FOR FRONT-INSIDE COVER
DESCRIPTION OF GRAPHICS FOR BACK-INSIDE COVER
[GRAPHICS]
PROSPECTUS SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus. This summary may not contain all
the information that you should consider before investing in our
common stock. You should carefully read the entire prospectus,
including the “Risk Factors” and the financial
statements, before making an investment decision.
We develop, market and support a software framework that
integrates content and processes for companies seeking to
participate in e-business. We target operators and users of
e-marketplaces and portals. E-marketplaces and portals are
Web-based destinations where employees, customers, partners and
suppliers can interact to obtain information about products and
services, and conduct business more efficiently. Our products
enable customers to build or join e-marketplaces and portals
rapidly, add new content and e-business participants easily, and
automate the end-to-end processes required for e-business
interaction.
Forrester Research estimates the annual value of
business-to-business products and services that will be sold over
the Internet in the United States will exceed $2.7 trillion by
2004, and that 53% of that value will be processed through
e-marketplaces. In addition, industry studies indicate that many
companies are implementing their own enterprise information
portals. However, companies building or participating in
e-marketplaces and portals face several business and technical
challenges. The speed of change in today’s business
environment requires e-business systems to be flexible and
scalable. Business processes must integrate enterprise employees,
customers, partners and suppliers. In addition, content from
multiple disparate systems must be integrated and presented to
users in a single view.
Our products are designed to meet the business and technical
challenges faced by operators and users of e-marketplaces and
portals by delivering integrated, real-time content and
automating business processes that bring together employees,
customers, partners and suppliers. Our products offer numerous
competitive advantages over traditional solutions by combining
both content and process integration, and by guiding people
through e-business interactions.
The Enterworks product suite currently consists of two
components. The first component, Enterworks Content
Integrator, delivers a real-time, personalized catalog of
content from multiple sources, including databases, applications
and HTML- and XML-based sources. Enterworks Content Integrator
enables operators and users of e-marketplaces and portals to:
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integrate new content from customers, partners and suppliers
quickly and easily; |
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display a unified view of content in real time; and |
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deliver integrated content to an e-business application. |
The second component of the Enterworks product suite,
Enterworks Process Integrator, captures and automates a
company’s business practices and expertise. Enterworks
Process Integrator enables operators and users of e-marketplaces
and portals to:
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integrate applications and processes; |
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automate and track information flow to coordinate e-business
interactions within and between companies; and |
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resolve problems that require user interaction and guidance
through complex processes. |
We deliver our products through our direct sales force and
strategic partners, which include traditional system integrators,
e-business professional services companies, and other software
vendors and technology partners. Our current customers include
financial, manufacturing, government, healthcare and
telecommunications enterprises, as well as professional services
providers. As of December 31, 1999, we had licensed our
products to more than 50 companies, including The Boeing Company,
CareFirst Blue Cross Blue Shield, Cast Alloys, Inc., Jefferies
& Company, Inc., NonStopNet, Inc., Tivoli Systems, Inc. and
the US Army.
1
The Offering
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Common Stock offered by Enterworks |
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shares |
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Common Stock to be outstanding after this offering |
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shares |
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Use of Proceeds |
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General corporate purposes, including working capital. See
“Use of Proceeds.” |
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Proposed Nasdaq National Market Symbol |
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EWKS |
The number of shares of our common stock that will be outstanding
after this offering is based on 49,323,975 shares outstanding as
of December 31, 1999, assuming the conversion of all of our
convertible preferred stock outstanding on that date into
21,739,127 shares of common stock. It excludes as of
December 31, 1999:
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10,169,798 shares issuable upon the exercise of outstanding stock
options at a weighted-average exercise price of $0.73 per share;
and 3,453,285 shares issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $1.06 per share; |
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2,570,902 shares of common stock reserved for issuance under our
1996 Stock Option Plan; |
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5,000,000 shares of common stock reserved for issuance under our
2000 Stock Incentive Plan; and |
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1,000,000 shares of common stock reserved for issuance under our
2000 Employee Stock Purchase Plan. |
Summary Financial Data
(in thousands, except per share data)
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Year Ended December 31, |
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1995 |
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1996 |
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1997 |
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1998 |
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1999 |
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Statement of Operations Data: |
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Revenues: |
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Licenses |
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$ |
767 |
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$ |
971 |
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1,446 |
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$ |
3,481 |
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7,457 |
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Services and support |
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773 |
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1,238 |
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1,956 |
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3,593 |
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4,718 |
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Total revenues |
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1,540 |
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$ |
2,209 |
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$ |
3,402 |
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$ |
7,074 |
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$ |
12,175 |
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Gross profit (loss) |
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1,027 |
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955 |
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(132 |
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1,544 |
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4,635 |
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Operating loss |
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(503 |
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(3,672 |
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(5,903 |
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(11,534 |
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(16,961 |
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Net loss |
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(503 |
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(2,618 |
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(4,444 |
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(8,730 |
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(14,018 |
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Basic and diluted net loss per common share (1) |
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(0.16 |
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(0.16 |
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(0.32 |
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(0.52 |
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Weighted average number of common shares (1) |
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16,180 |
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27,086 |
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27,169 |
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27,046 |
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During 1995, we operated as a division of Telos
Corporation and had no shares of common stock issued or
outstanding. Accordingly, net loss per share and weighted average
share information is inapplicable during 1995. |
2
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As of December 31, 1999 |
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Pro Forma |
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Actual |
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Pro Forma |
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As Adjusted |
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(in thousands) |
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Balance Sheet Data: |
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Cash and cash equivalents |
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18,685 |
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18,685 |
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Working capital |
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16,860 |
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16,860 |
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Total assets |
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28,220 |
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28,220 |
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Total long-term liabilities |
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Mandatorily redeemable preferred stock |
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22,773 |
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Total stockholders’ (deficit) equity |
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(3,526 |
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19,247 |
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The above table sets forth a summary of our balance sheet as of
December 31, 1999:
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on an actual basis; |
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on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of our convertible preferred stock into
21,739,127 shares of common stock; and |
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on a pro forma, as adjusted, basis to give effect to the
automatic conversion of all outstanding shares of our convertible
preferred stock into 21,739,127 shares of common stock and our
receipt of the estimated net proceeds from the sale of
shares
of common stock in this offering at an assumed offering price of
$ per share (after deducting
estimated underwriting discounts and commissions and estimated
offering expenses). |
Enterworks is a Delaware corporation. Our principal office is
located at 19886 Ashburn Road, Ashburn, Virginia 20147. Our main
telephone number is (703) 724-3800. The address of our Web
site is www.enterworks.com. Information contained on our
Web site is not a part of this prospectus.
The “e.” logo, “Enterworks” and “Virtual
DB” are our registered trademarks. “Enterworks Content
Integrator” and “Enterworks Process Integrator”
are also our trademarks. All other product, service and company
names are trademarks or registered trademarks of other parties.
Unless otherwise indicated, this prospectus assumes:
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the automatic conversion of our outstanding convertible
preferred stock into common stock upon closing of this offering;
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the filing of our amended and restated certificate of
incorporation, establishing a staggered board of directors and
adopting certain anti-takeover provisions; and |
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the underwriters’ over-allotment option will not be
exercised. |
3
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 whether to buy our common
stock. If any of the following risks actually occur, our
business, results of operations and financial condition could
suffer significantly. In any such case, the market price of our
common stock could decline, and you may lose all or part of the
money you paid to buy our common stock.
Risks Related to Our Business
We have a limited operating history, and as a result, you may
have difficulty evaluating our business and operating results.
We began operating as a corporation in 1996. An investor in our
common stock must consider the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving
markets such as the market for e-business content and process
integration, including:
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our dependence on our Enterworks Content Integrator and
Enterworks Process Integrator software, from which we derive all
of our revenues and which have limited market acceptance to date; |
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our need to introduce new software products and services to
respond to technological and competitive developments and
customer needs; |
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our ability to manage our anticipated growth; |
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our need to expand our distribution capability through our direct
sales organization and through our strategic partners; |
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our ability to respond to competitive developments; and |
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our dependence on our current executive officers and key
employees. |
If we fail to successfully address these risks, our business
could be harmed.
We have a history of losses and expect future losses. If we do
not achieve or maintain profitability in the future, our
viability will be in doubt, and our stock price may decline.
We have incurred significant losses since our inception,
including net losses of approximately $4.4 million in 1997, $8.7
million in 1998 and $14.0 million in 1999. We cannot assure you
that our revenues will grow or that we will achieve or maintain
profitability in the future. In addition, we intend to
significantly increase our sales and marketing, product
development and administrative expenses over the next
twelve months. Accordingly, we will need to significantly
increase revenues to achieve and maintain profitability. Our
ability to increase revenues and achieve profitability will be
affected by the other risks and uncertainties described in this
section and in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Our operating results fluctuate, and if we fail to meet the
expectations of securities analysts or investors, our stock price
could decline significantly.
Our revenues and operating results are difficult to predict, and
we believe that period-to-period comparisons of our operating
results will not necessarily be meaningful or indicative of
future performance. As a result, you should not rely upon them as
an indication of future performance. Our future quarterly
operating results may fluctuate and may not meet the expectations
of securities analysts or investors. If this occurs, the price
of our common stock
4
would likely decline. The factors that may cause fluctuations of
our operating results include the following:
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the size, timing and contractual terms of sales of our products
and services due to the long and unpredictable sales cycle for
our products; |
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technical difficulties in our software that could delay the
introduction of new products or increase their costs; |
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introductions of new products or new versions of existing
products by us or our competitors; |
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changes in prices or the pricing models for our products and
services or those of our competitors; |
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our ability and the ability of our partners to implement
e-business content and process integration solutions for our
customers; |
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changes in our mix of revenues; and |
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changes in our mix of sales channels through which our products
and services are sold. |
In addition, we experience seasonality which causes us to
typically recognize a disproportionately greater amount of our
revenues for any fiscal year in our third and fourth quarters,
and a disproportionately lesser amount in our first and second
quarters, due largely to the budgeting processes of our customers
and the timing of their purchasing decisions. A substantial
portion of our operating expenses, particularly personnel and
facilities costs, is based, in part, on our expectations of
future revenues and is relatively fixed in advance of any
particular quarter. In addition, we typically enter into a
significant portion of our new license contracts in the last two
weeks of each quarter. We expect this trend to continue, and,
therefore, failure or delay in the closing of orders would
materially and adversely affect our quarterly operating results.
Variations in the time it takes us to sell our products may
cause fluctuations in our operating results.
Variations in the length of our sales cycles could cause our
revenues to fluctuate widely from period to period. Because our
operating expenses are relatively fixed over the short-term,
these fluctuations could cause our operating results to suffer in
some future periods. Our customers generally take a long time to
evaluate our products, and many individuals may be involved in
the evaluation process. Because of the number of factors
influencing the sales process, the period between our initial
contact with a new customer and the time when we recognize
revenues from that customer varies widely in length. Our sales
cycles typically range from three to six months, but for larger
opportunities with new customers, these cycles can be longer.
We depend on sales of our Enterworks Content Integrator and
Enterworks Process Integrator software, and our business will be
materially and adversely affected if the market for these
products does not continue to grow.
Substantially all of our license revenues and services and
support revenues have arisen from, or are related directly to,
our Enterworks Content Integrator and Enterworks Process
Integrator software. It is difficult to predict future revenues
from either of these software products, especially because our
Enterworks Process Integrator is in an early stage of
commercialization. We expect to continue to be dependent upon
these two software products in the future, and any factor
adversely affecting either product or the market for e-business
content and process integration software, in general, would
materially and adversely affect our ability to generate revenues.
In addition, we plan to combine and market these two
5
products as a single product suite which the market may not
accept. Furthermore, the market for our two software products, as
well as our product suite, may not continue to grow or may grow
at a slower rate than we expect. If this market fails to grow or
grows more slowly than we expect, or if the market fails to
accept our products, our business would suffer.
We rely on our strategic partners to implement and promote our
software products, and if these relationships fail, our business
could be harmed.
We have entered into relationships under our E-Alliance Program
with a number of strategic partners, including traditional system
integrators, e-business professional services companies, and
other software vendors and technology partners. We have derived,
and anticipate that we will continue to derive, a significant
portion of our revenues from customers that purchase products or
services from our partners. Our future growth will be limited if
we fail to work effectively with our partners or fail to grow our
base of these types of partners.
Our partners generally are not restricted from working with, or
promoting the products of, competing software companies.
Accordingly, our success will depend on our partners’
willingness and ability to devote sufficient resources and
efforts to marketing our software products rather than the
products of others. If these relationships fail, we will have to
devote substantially more resources to the marketing,
distribution, sales, implementation and support of our products
than we would otherwise. If our efforts are not successful, the
loss of these partners could harm our business.
We are dependent on third-party software incorporated in our
products, and impaired relations with these third parties, errors
in third-party software or inability to enhance the software
over time could harm our business.
We incorporate third-party software into our products. We may
incorporate additional third-party software into our products as
we expand our product line and broaden the content and services
accessible through our products. 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 could be adversely
affected in the event of any errors in this software.
Furthermore, it may be difficult for us to replace any
third-party software if a vendor seeks to terminate our license
to the software. In addition, some third-party software is
licensed to us on a fixed-price basis, and our profit may be
reduced if we discount our products that incorporate third-party,
fixed-price software.
A substantial block of our voting stock is owned by Telos
Corporation and is pledged to a bank. A default by Telos could
result in the stock being repurchased by us or some of our
stockholders or being sold to third parties who could influence
decisions that could adversely affect our stock price.
After the sale of the common stock offered by this prospectus,
Telos Corporation, our former parent company, will beneficially
own approximately % of our
outstanding voting securities. All our stock that Telos owns is
pledged to Bank of America, N.A. to secure borrowings under a
senior revolving credit facility. If Bank of America were to
declare a default under the credit facility, it has agreed to
offer the stock to us and some of our stockholders. If we or our
stockholders fail to purchase the stock, the bank could sell the
shares to a third party who could influence actions that could
adversely affect our stock price. For additional information
about Telos, see “Certain Transactions.”
6
If we lose our key personnel, or fail to attract and retain
additional personnel, the success and growth of our business may
suffer.
Our success depends significantly on the continued services of
our officers, management and other key employees. None of these
persons are bound by an employment agreement. The loss of
services of any of these employees for any reason could harm our
business. We believe that our success also will depend
significantly on our ability to attract, integrate, motivate and
retain additional highly skilled technical, managerial, sales,
marketing and services personnel. Competition for skilled
personnel is intense, and there can be no assurance that we will
be successful in attracting, motivating and retaining the
personnel required to grow and operate profitably. In addition,
the cost of hiring and retaining skilled employees is high, and
this reduces our profitability. Failure to attract and retain
highly skilled personnel could materially and adversely affect
our business.
We have a limited number of customers, and the loss of a major
customer could adversely affect revenues.
We have generated a substantial portion of our annual and
quarterly revenues from a limited number of customers. In 1998,
our two largest customers accounted for 27.3% and 11.4% of our
total revenues. In 1999, two different customers accounted for
19.9% and 10.3% of total revenues. In the aggregate, our five
largest customers represented approximately 65.7% and 55.0% of
our revenues during those periods. We expect that a small number
of customers will continue to represent a substantial portion of
revenues in any given quarter in the foreseeable future. As a
result, our inability to secure major customers during a given
period or the loss of any one major customer could materially and
adversely affect our business.
In addition, we derive a substantial portion of our revenues from
customers in specific industries:
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Sales to the government and public sector accounted for 70.4% of
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Sales to the healthcare sector accounted for 10.1% of total
revenues in 1998 and 15.6% of total revenues in 1999. |
If our customers in these industries decrease their information
technology spending or we fail to penetrate other industries, our
revenues may decline.
Intense competition and consolidation in our industry could
create stronger competitors and harm our business.
The market for our products is intensely competitive,
characterized by rapid technological change and is significantly
affected by new product introductions. We face competition from
in-house software developers who may develop some or all of the
functionality that our products provide, as well as custom
solutions built by system integrators and consultants. We also
face competition from many vendors in the content and process
integration areas such as OnDisplay, Inc., Hewlett-Packard
Corporation and Vitria Technology, Inc., as well as from
smaller private companies. We believe we may also face
competition from IBM Corporation, Microsoft Corporation, Oracle
Corporation and Sun Microsystems, Inc. if those companies
enter into the e-business content or process integration markets.
Furthermore, our competitors may combine with each other or
enter into acquisitions or strategic relationships with other
competitors, which would further increase the competition in the
market. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical,
product development and marketing resources, greater brand name
7
recognition, a broader range of products to offer and a larger
installed base of customers than we have, and any of these
factors could provide competitors with a significant advantage.
We need to manage the planned growth of our organization and
potential acquisitions effectively, or we may not succeed.
We have experienced and are currently experiencing a period of
significant growth. Our revenues have increased from $2.2 million
in 1996 to $12.2 million in 1999. The number of our employees
has increased from 56 at the end of 1996 to 170 at the end of
1999. Our ability to manage our growth will depend in large part
on our ability to generally improve and expand our operational
and sales and marketing capabilities, to develop the management
skills of our managers and supervisors, many of whom have been
employed by us for a relatively short period of time, and to
train, motivate and manage both our existing employees and the
additional employees that we may hire. Additionally, we may not
anticipate adequately all of the demands that growth may impose
on our systems, procedures and structure. Any failure to
adequately anticipate and respond to these demands or manage our
growth effectively could materially and adversely affect our
future prospects.
We may acquire businesses, products and technologies or enter
into joint venture arrangements to complement or expand our
business. Negotiating these transactions and integrating an
acquired business, product or technology could divert our
management’s time and resources. Future acquisitions may
dilute your ownership interest, increase our debt and contingent
liabilities, affect our amortization of goodwill and other
intangibles, increase our research and development write-offs,
and cause us to incur other acquisition-related expenses.
Furthermore, acquired businesses may not be successfully
integrated with our operations, and we may not receive the
intended benefits of the acquisition.
We expect to expand our international sales and marketing
efforts. We have limited experience in international operations,
and expanding our operations will subject us to risks including
exposure to foreign economies, political instability,
fluctuations in currency exchange rates, potentially adverse tax
consequences and reduced protection for our intellectual property
rights.
Our products must integrate with applications made by third
parties, and if we lose access to the programming interfaces for
these applications, or if we are unable to modify our products or
develop new products in response to changes in these
applications, our business could suffer.
Our software uses components called “adapters” to
communicate with our customers’ existing software
applications. Our ability to develop these adapters is largely
dependent on our ability to gain access to the application
programming interfaces, or APIs, for the applications, and we may
not have access to necessary APIs in the future. APIs are
written and controlled by an application provider. Accordingly,
if an application provider becomes a competitor by entering the
market for e-business content and process integration, it could
restrict our access to its APIs for competitive reasons. Our
business could suffer if we are unable to gain access to these
APIs. Furthermore, we may need to modify our software products or
develop new adapters in the future as new applications or newer
versions of existing applications are introduced. If we fail to
continue to develop adapters or respond to new applications or
newer versions of existing applications, our business could
suffer.
Software defects could lead to loss of revenues or delay the
market acceptance of our products.
Our content and process integration software is complex and may
contain undetected errors or failures when new products are first
introduced or as new versions are released.
8
This may result in loss of, or delay in, market acceptance of our
products. In the past, we have discovered software errors in our
new releases and new products after their introduction. In the
event that we experience significant software errors in future
releases, we could experience delays in product releases,
customer dissatisfaction and potentially lost revenues during the
period required to correct these errors. In the future, we may
discover errors or limitations in new releases or new products
after the commencement of commercial shipments. Any of these
errors or defects could materially harm our business.
We will continue to depend upon Telos for a portion of our
administrative and support services.
Telos will continue to provide us with a portion of the
administrative and support services on a contract basis that we
need to operate our business. These include some of our human
resources, payroll and management information systems support
services. Therefore, we will depend on Telos’ resources,
systems and personnel for some of the administrative and support
services that are used in the day-to-day operation of our
business. We pay Telos a monthly management fee for these
services. Telos has agreed to provide these services through at
least June 30, 2000, and we have an option to renew these
services through December 31, 2000. Over the next three to
nine months, we plan to transition these services from Telos to
our own systems or to the systems of other third-party service
providers. We may not be able to accomplish this task within the
period provided for in the renewals and may not be able to
negotiate further renewals with Telos. If we cannot, our ability
to operate our business may be adversely affected. Also, we may
have to pay more to obtain or maintain these systems than we
currently pay to Telos. If so, our profitability may be reduced.
Two members of our board of directors may have conflicts of
interest because of their relationship with Telos.
Mr. Wood, our Chairman and our Chief Executive Officer, also
serves as a director, Chief Executive Officer and President of
Telos. Mr. Aldrich, another of our directors, is the Chief
Operating Officer of Telos. Messrs. Wood and Aldrich will
have obligations to us and to Telos. This may result in conflicts
of interest regarding a variety of matters that can affect our
business, such as business arrangements between the two
companies, as well as acquisitions, financings, hiring of
personnel and other corporate opportunities that may be suitable
for both companies.
We may be subject to future product liability claims, and our
company’s and products’ reputations may suffer.
Many of our installations involve projects that are critical to
the operations of our customers’ businesses and provide
benefits that may be difficult to quantify. Any failure in a
customer’s system could result in a claim for substantial
damages against us, regardless of our responsibility for the
failure. Although our license agreements with our customers
typically contain provisions designed to limit contractually our
liability for damages arising from negligent acts, errors,
mistakes or omissions, it is possible that these provisions will
not be enforceable in some instances or would otherwise not
protect us from liability for damages. Although we maintain
general liability insurance coverage, this coverage may not
continue to be available on reasonable terms, or at all, or may
be insufficient to cover one or more large claims.
We have entered into and plan to continue to enter into
agreements with strategic partners whereby we license our
software products for integration with our partners’
software. If a partner’s software fails to meet its
customers’ expectations or causes failures in its
customers’ systems, the reputation of our company and
products could be materially and
9
adversely affected even if our software products perform in
accordance with their functional specifications.
We need to expand our sales and customer support channels, and
if we fail to do so, our growth could be limited.
We need to expand significantly our sales and customer service
and support operations in order to generate increased revenues.
New sales personnel will require training and may take a long
time to achieve full productivity. There is strong competition
for personnel, and we may not be able to attract and retain
sufficient new sales personnel to expand our business. In
addition, we believe that, as the number of our installations
increases, we will require a number of highly trained customer
service and support personnel. We may not be able to increase the
size of our customer service and support organization to provide
the high level of support required by our customers.
If we fail to develop new products and services in the face of
our industry’s rapidly evolving technology, our future
results may be materially and adversely affected.
The market for e-business content and process integration
software is subject to rapid technological change, changing
customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services
obsolete. Our growth and future operating results will depend,
in part, upon our ability to enhance existing applications and
develop and introduce new applications or components that:
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meet or exceed technological advances in the marketplace; |
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meet changing customer requirements; |
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comply with changing industry standards; |
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achieve market acceptance; |
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integrate successfully with third-party software; and |
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respond to competitive products. |
Our product development and testing efforts have required, and
are expected to continue to require, substantial investment. We
may not possess sufficient resources to continue to make the
necessary investments in technology. In addition, we may not
successfully identify new software opportunities or develop and
bring new software to market in a timely and efficient manner. If
we are unable, for technological or other reasons, to develop
and introduce new and enhanced software in a timely manner, we
may lose existing customers and fail to attract new customers,
resulting in a decline in revenues.
Some industries have adopted industry-specific technologies,
and we may need to expend significant resources to enhance our
products for specific industries.
We believe our content and process integration software is
broadly applicable to many industries; however, in order to
succeed in some industries, we will need to accommodate existing
proprietary technologies that are specific to these industries.
For example, many companies in the healthcare and financial
services industries have adopted industry-specific protocols for
the exchange of information. To sell our products successfully to
companies in these industries, we may need to expend resources
to enhance our products to adapt to these industry-specific
technologies, which could be costly and require the diversion of
engineering resources.
10
The limited ability of legal protections to safeguard our
intellectual property rights could impair our ability to compete
effectively.
Our success and ability to compete are substantially dependent on
our internally developed technologies and trademarks, which we
protect through a combination of confidentiality procedures,
contractual provisions, patent, copyright, trademark and trade
secret laws. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is
difficult and, although we are unable to determine the extent to
which piracy of our software products exists, we expect software
piracy to be a problem. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same
extent as the laws of the United States. Furthermore, our
competitors may independently develop technology similar to ours.
Our products may infringe the intellectual property rights of
others, which may cause us to incur unexpected costs or prevent
us from selling our products.
The number of intellectual property claims in our industry may
increase as the number of competing products grows and the
functionality of products in different industry segments
overlaps. Although we are not aware that any of our products
infringe upon the proprietary rights of third parties, there can
be no assurance that third parties will not claim infringement by
us with respect to current or future products. Any of these
claims, with or without merit, could be time-consuming to
address, result in costly litigation, cause product shipment
delays or require us to enter into royalty or license agreements.
These royalty or license agreements might not be available on
terms acceptable to us or at all, which could materially and
adversely affect our business.
Risks Related to Our Industry
The market for e-business content and process integration
software is in an early stage of development, and our software
products may not achieve market acceptance.
The market for content and process integration software is
relatively new and rapidly evolving. We do not know if our target
markets will widely adopt and deploy e-business integration
products such as ours. In addition, our products are complex and
generally involve significant capital expenditures by our
customers. We do not have a long history of selling our products
and will have to devote substantial resources to inform
prospective customers about the benefits of our products. Our
efforts to inform potential customers may not result in our
products achieving market acceptance. In addition, many of these
prospective customers have made significant investments in
internally-developed or other custom systems and may incur
significant costs in switching to third-party products such as
ours. If the market for our products fails to grow or grows more
slowly than we anticipate, our business would suffer.
Lack of growth or decline in Internet usage or e-business
could be detrimental to our future operating results.
Our products enhance the ability of our customers to transact
business and conduct operations over the Internet. Therefore, our
future sales and profits are substantially dependent upon the
Internet as a viable commercial marketplace. The Internet may not
succeed in becoming a viable marketplace for a number of
reasons, including:
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potentially inadequate development of network infrastructure or
delayed development of enabling technologies and performance
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delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet
activity; |
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security risks and concerns; |
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increased taxation and governmental regulation; or |
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changes in, or insufficient availability of, communications
services to support the Internet, resulting in slower Internet
user response times. |
The occurrence of any of these factors could require us to modify
our technology. Any such modification could involve the
expenditure of significant amounts of resources by us. In the
event that the Internet does not become a viable commercial
marketplace, our business, financial condition and results of
operations could be materially and adversely affected.
Security risks and concerns may deter the use of the Internet
for conducting e-business.
Concerns about the security of confidential information act as a
barrier to acceptance of e-business and Internet communications.
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. If any well-publicized
compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet 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 and 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 software solutions or make
them 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 customers use our
products in connection with 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 could be harmed if we
do not prevent them.
New laws or regulations affecting the Internet, e-business or
commerce in general could reduce our revenues and adversely
affect our growth.
Congress and other domestic and foreign governmental authorities
have adopted and are considering legislation affecting the use of
the Internet, including laws relating to the use of the Internet
for commerce and distribution. The adoption or interpretation of
laws regulating the Internet, or of existing laws governing such
things as consumer protection, libel, property rights and
personal privacy, could hamper the growth of the Internet and its
use as a communications and commercial medium. If this occurs,
companies may decide not to use our products or services, and our
business and operating results could suffer.
Potential Year 2000 problems with our internal systems or the
software that we sell could cause delay or loss of revenue,
diversion of resources or increased costs.
Many companies’ computer systems, software products and
control devices needed to be upgraded or replaced in order to
operate properly in the Year 2000 and beyond because of an
inability to distinguish 21st century dates from 20th century
dates.
Our software did not experience any date-related problems on
January 1, 2000. However, our software may contain
undetected errors or defects associated with Year 2000 date
functions that have not yet surfaced. If any such errors or
defects do exist, we may incur
12
material costs to resolve them. Our internal systems use
third-party hardware and software. Although we have not
experienced any date-related problems with third-party software,
we cannot assure you that such problems may not surface in the
future. In addition, although we believe that the costs of
ensuring that these systems do not experience any date-related
problems will not be material, we cannot assure you of this.
If these systems do experience date-related problems, we could
experience delay or loss of revenues, diversion of resources or
increased costs, and our financial condition could be harmed.
Risks Related to This Offering
Our executive officers and directors and their affiliates,
including Telos, will own a large percentage of our voting stock
and will have a substantial ability to influence decisions that
could adversely affect our stock price.
Following the completion of this offering, our executive
officers, directors and their affiliates will own approximately
% of the outstanding shares of
common stock. As a result, these stockholders will be able to
influence substantially all matters requiring stockholder
approval, including our management and affairs. Matters that
require stockholder approval include:
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election of directors; |
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mergers or consolidations; and |
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sales of all or substantially all of our assets. |
This concentration of ownership may delay, deter or prevent acts
that would result in a change of our control, which could reduce
the market price of our common stock.
Our need for additional financing is uncertain, as is our
ability to raise further financing if required.
We currently anticipate that our available cash resources,
combined with the net proceeds from this offering, will be
sufficient to meet our anticipated working capital and capital
expenditure requirements for at least twelve 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:
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fund more rapid expansion; |
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fund additional marketing expenditures; |
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develop new or enhance existing products and services; |
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enhance our operating infrastructure; |
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hire additional personnel; |
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respond to competitive pressures; or |
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acquire complementary businesses or necessary technologies. |
If we raise additional funds through the issuance of equity or
convertible debt securities, our stockholders’ percentage
ownership 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
13
unanticipated opportunities, develop or enhance our products and
services or otherwise respond to competitive pressures would be
significantly limited.
Investors in this offering will incur immediate and
substantial dilution in the book value of their shares.
The offering price will be substantially higher than the book
value of our common stock. At the assumed offering price of
$ per share, the book value of the
common stock after the offering will be
$ per share. This represents an
immediate and substantial dilution per share of the common stock.
The dilution per share represents the difference between the
amount per share paid by the purchasers of shares of common stock
in this offering and the net tangible book value per share of
common stock immediately after the completion of this offering.
In addition, to the extent outstanding options or warrants are
exercised, there will be further dilution to new investors.
Our stock price after this offering may be volatile.
Prior to this offering, our common stock has not been sold in a
public market. You will pay a price that we negotiated with the
representatives of the underwriters based on a number of factors,
which may be different from a price established in a competitive
market. After this offering, an active trading market in our
stock might not develop. If an active trading market does
develop, it may not continue. Also, if an active trading market
does develop, the trading price of our common stock may fluctuate
widely as a result of a number of factors, many of which are
outside our control. In addition, the stock market has
experienced extreme price and volume fluctuations that have
affected the market prices of many technology companies and
e-commerce companies, which have often been unrelated to the
operating performance of these companies. Our stock price could
fluctuate as a result of these market fluctuations.
Our charter and bylaws and Delaware law contain provisions
that could discourage a takeover even if beneficial to
stockholders.
Our charter and our bylaws, in conjunction with Delaware law,
contain provisions that could make it more difficult for a third
party to obtain control of us even if doing so would be
beneficial to stockholders. For example, our charter provides for
a classified board of directors and allows the board of
directors to expand its size and fill any vacancies without
stockholder approval. In addition, upon closing of this offering,
our charter will restrict the ability of stockholders to take
written actions without holding a meeting and require a
two-thirds vote of stockholders to remove a director from office.
Furthermore, our board has the authority to issue preferred
stock and to designate the voting rights, dividend rate and
privileges of the preferred stock all of which may be greater
than your rights as a common stockholder.
We will retain broad discretion in using the net proceeds from
this offering and may spend a substantial portion in ways with
which you do not agree.
We will retain a significant amount of discretion over the
application of the net proceeds from this offering, as well as
over the timing of our expenditures. Because of the number and
variability of factors that will determine our use of the net
proceeds from this offering, we may apply the net proceeds from
this offering in ways with which you disagree.
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 or the perception that these
sales may occur. These sales also could make it more difficult
for us to raise funds through equity offerings in the future at a
time and at a
14
price that we think is appropriate. The lock-up period relating
to this offering covers shares of common stock held by
management, our directors and some of our significant
stockholders and expires on
2000.
The holders of a significant amount of our common stock, as well
as the holders of outstanding warrants are entitled to
registration rights with respect to their common stock or the
common stock underlying their convertible securities. If these
holders, by exercising their registration rights, cause a large
number of securities to be registered and sold in the public
market, these sales could have an adverse effect on the market
price for our common stock. If we were to include, in a
registration statement initiated by us, shares held by these
holders pursuant to the exercise of their registration rights,
these sales may have an adverse effect on our ability to raise
needed capital.
Upon completion of this offering,
shares
of our common stock will be outstanding and will be tradable as
follows:
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these shares will be “restricted securities.”
Following the expiration of the lock-up period related to this
offering, holders of restricted securities may generally sell
their shares in the public market without registration in
accordance with the holding period, volume and other restrictions
of Rule 144 or under any other applicable exemption under
the Securities Act. We describe Rule 144 in the “Shares
Available for Future Sale–Rule 144” section of
this prospectus. |
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Except for any shares purchased by our affiliates, the
shares
of our common stock sold in this offering will be freely
tradable without further restrictions or registration under the
Securities Act. |
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Shares of our common stock reserved for issuance under our stock
option plans will be freely tradable after option exercise after
we register these shares under the Securities Act. We expect to
register them after this offering. We describe these plans in the
paragraph “Employee Benefit Plans” in the
“Management” section of this prospectus. |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
We make many statements in this prospectus under the captions
“Prospectus Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business” and elsewhere that are forward-looking and
are not based on historical facts. These statements relate to our
future plans, objectives, expectations and intentions. We may
identify these statements by the use of words such as
“believe,” “expect,” “will,”
“anticipate,” “intend” and “plan”
and similar expressions. These forward-looking statements involve
a number of 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 we
discuss in “Risk Factors” and elsewhere in this
prospectus. These forward-looking statements speak only as of the
date of this prospectus, and we caution you not to rely on these
statements without also considering the risks and uncertainties
associated with these statements and our business that are
addressed in this prospectus.
This prospectus contains estimates of market growth related to
the Internet and e-business. These estimates have been included
in studies published by market research firms. These estimates
have been produced by industry analysts based on trends to date,
their knowledge of technologies and markets and customer
research, but these are forecasts only and are subject to
inherent uncertainty.
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USE OF PROCEEDS
The net proceeds from the sale of
shares
of common stock offered by us will be approximately
$ million, or approximately
$ million
if the underwriters’ over-allotment option is exercised in
full. This estimate is based on an assumed offering price of
$ per share, after deducting
estimated underwriting discounts and commissions and the
estimated offering expenses.
The principal purposes of this offering are to increase our
working capital, create a public market for our common stock,
facilitate our future access to the public capital markets and
increase our visibility in our markets. We intend to use the net
proceeds of this offering primarily for working capital and other
general corporate purposes. We may also use a portion of the net
proceeds to acquire additional businesses, products and
technologies or to establish joint ventures that we believe will
complement our current or future business. However, we have no
specific plans, agreements or commitments to do so and are not
currently engaged in any negotiations for any acquisitions or
joint ventures. The amounts that we actually expend for working
capital purposes will vary significantly depending on a number of
factors, including future revenue growth, if any, and the amount
of cash we generate from operations. As a result, we will retain
broad discretion in the allocation of the net proceeds of this
offering. Until we use the net proceeds of this offering, we will
invest them in short-term investment-grade, interest-bearing
instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common or
preferred stock. We do not intend to pay cash dividends on our
common or preferred stock for the foreseeable future. This is
because we need to retain our cash for working capital and to
finance our planned growth. However, our board of directors is
free to change our dividend policy in the future, based upon
factors such as our results of operations, financial condition,
cash flow, cash needs and future prospects.
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CAPITALIZATION
The following table shows our capitalization as of
December 31, 1999:
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on an actual basis; |
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on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of our convertible preferred stock into
21,739,127 shares of common stock; and |
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on a pro forma, as adjusted, basis to give effect to the
automatic conversion of all outstanding shares of our convertible
preferred stock into 21,739,127 shares of common stock and our
receipt of the estimated net proceeds from the sale of
shares
of common stock in this offering at an assumed offering price of
$ per share (after deducting
estimated underwriting discounts and commissions and estimated
offering expenses). |
You should read this table together with our financial statements
and their related notes, which we have included elsewhere in
this prospectus.
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|
|
|
|
|
|
|
|
As of December 31, 1999 |
|
|
|
|
|
|
|
Pro |
|
Pro Forma |
|
|
Actual |
|
Forma |
|
As Adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
Mandatorily redeemable preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.01 par value;
21,739,127 shares authorized, issued and outstanding, actual;
none outstanding, pro forma and pro forma as adjusted |
|
$ |
22,773 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
Stockholders’ (deficit) equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 75,000,000, shares authorized,
actual; 200,000,000 shares authorized, pro forma and pro forma as
adjusted; 27,584,848 shares issued and outstanding, actual;
49,323,975 shares issued and outstanding, pro forma;
shares issued and outstanding, pro forma as adjusted |
|
|
276 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
Capital in excess of par |
|
|
33,514 |
|
|
|
56,070 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
(37,316 |
) |
|
|
(37,316 |
) |
|
|
(37,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ (deficit) equity |
|
|
(3,526 |
) |
|
|
19,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
19,247 |
|
|
$ |
19,247 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This table does not include the following as of December 31,
1999:
|
|
|
| |
• |
10,169,798 shares issuable upon the exercise of outstanding stock
options at a weighted-average exercise price of $0.73 per share; |
| |
| |
• |
3,453,285 shares issuable upon the exercise of outstanding
warrants at a weighted-average exercise price of $1.06 per share; |
| |
| |
• |
2,570,902 shares of common stock reserved for issuance under our
1996 Stock Option Plan; |
| |
| |
• |
5,000,000 shares of common stock reserved for issuance under our
2000 Stock Incentive Plan; and |
| |
| |
• |
1,000,000 shares of common stock reserved for issuance under our
2000 Employee Stock Purchase Plan. |
Please read the capitalization table together with the sections
of this prospectus entitled “Selected Financial Data,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and
“Management — Employee Benefit Plans” and
with the financial statements and their related notes included
elsewhere in this prospectus.
17
DILUTION
Our pro forma net tangible book value as of December 31,
1999 was approximately $19.2 million, or $0.39 per share of
common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets reduced by the
amount of our total liabilities, divided by the number of shares
of common stock outstanding as of December 31, 1999, after
giving effect to the automatic conversion of all outstanding
shares of our convertible preferred stock into 21,739,127 shares
of common stock.
After giving effect to the sale of common stock offered hereby,
(based upon an assumed offering price of
$ per share and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses), our pro forma net tangible book value as of
December 31, 1999, would have been approximately
$ million, or
$ per share of common stock. This
represents an immediate increase in pro forma net tangible book
value of
$ per
share to existing stockholders and an immediate dilution of
$ per share to new investors. The
following table illustrates this per share dilution:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering price per share |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of
December 31, 1999 |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
Increase per share attributable to new investors |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after the offering |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible book value dilution per share to new investors |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes on a pro forma, as adjusted, basis
after giving effect to the offering, as of December 31,
1999, the differences between the existing stockholders and new
investors with respect to the number of shares of common stock
purchased from us, the total consideration paid to us and the
average price per share paid:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Total Consideration |
|
|
|
|
|
|
|
|
Average Price |
|
|
Number |
|
Percent |
|
Amount |
|
Percent |
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders |
|
|
49,323,975 |
|
|
|
|
% |
|
$ |
51,915,307 |
|
|
|
|
% |
|
$ |
1.05 |
|
|
|
|
|
|
|
New investors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100.0 |
% |
|
$ |
|
|
|
|
100.0 |
% |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above discussion and tables are based upon the number of
shares actually issued and outstanding as of December 31,
1999 and assume no exercise of stock options or warrants
outstanding as of December 31, 1999. As of that date, there
were:
|
|
|
| |
• |
10,169,798 shares issuable upon the exercise of outstanding stock
options at a weighted-average exercise price of $0.73 per share; |
| |
| |
• |
3,453,285 shares issuable upon the exercise of outstanding
warrants at a weighted-average exercise price of $1.06 per share;
and |
| |
| |
• |
2,570,902 shares of common stock reserved for issuance under our
1996 Stock Option Plan. |
To the extent these stock options and warrants are exercised,
there will be further dilution to new investors.
18
SELECTED FINANCIAL DATA
You should read our selected financial data together with our
financial statements and their related notes and with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which is included
elsewhere in this prospectus. The statement of operations data
for each of the three years in the period ended December 31,
1999 and the balance sheet data as of December 31, 1998 and
1999 have been derived from our audited financial statements
included elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 1995 and
1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 have been derived from our audited financial
statements not included in this prospectus. The historical
results presented below are not necessarily indicative of future
results.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1995 |
|
1996 |
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
$ |
767 |
|
|
$ |
971 |
|
|
$ |
1,446 |
|
|
$ |
3,481 |
|
|
$ |
7,457 |
|
|
|
|
|
|
|
Services and support |
|
|
773 |
|
|
|
1,238 |
|
|
|
1,956 |
|
|
|
3,593 |
|
|
|
4,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,540 |
|
|
|
2,209 |
|
|
|
3,402 |
|
|
|
7,074 |
|
|
|
12,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
359 |
|
|
|
455 |
|
|
|
1,451 |
|
|
|
2,607 |
|
|
|
2,870 |
|
|
|
|
|
|
|
Services and support |
|
|
154 |
|
|
|
799 |
|
|
|
2,083 |
|
|
|
2,923 |
|
|
|
4,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
513 |
|
|
|
1,254 |
|
|
|
3,534 |
|
|
|
5,530 |
|
|
|
7,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
1,027 |
|
|
|
955 |
|
|
|
(132 |
) |
|
|
1,544 |
|
|
|
4,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
707 |
|
|
|
2,467 |
|
|
|
3,728 |
|
|
|
4,904 |
|
|
|
10,507 |
|
|
|
|
|
|
|
Research and development |
|
|
5 |
|
|
|
1,270 |
|
|
|
696 |
|
|
|
4,399 |
|
|
|
7,205 |
|
|
|
|
|
|
|
General and administrative |
|
|
818 |
|
|
|
890 |
|
|
|
898 |
|
|
|
2,032 |
|
|
|
3,884 |
|
|
|
|
|
|
|
Write-off of software development costs |
|
|
— |
|
|
|
— |
|
|
|
449 |
|
|
|
1,743 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,530 |
|
|
|
4,627 |
|
|
|
5,771 |
|
|
|
13,078 |
|
|
|
21,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(503 |
) |
|
|
(3,672 |
) |
|
|
(5,903 |
) |
|
|
(11,534 |
) |
|
|
(16,961 |
) |
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
|
660 |
|
|
|
1,449 |
|
|
|
2,142 |
|
|
|
3,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
503 |
) |
|
|
(4,332 |
) |
|
|
(7,352 |
) |
|
|
(13,676 |
) |
|
|
(20,535 |
) |
|
|
|
|
|
|
Income tax benefit |
|
|
— |
|
|
|
(1,714 |
) |
|
|
(2,908 |
) |
|
|
(4,946 |
) |
|
|
(6,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(503 |
) |
|
$ |
(2,618 |
) |
|
$ |
(4,444 |
) |
|
$ |
(8,730 |
) |
|
$ |
(14,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share(1) |
|
|
— |
|
|
$ |
(0.16 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares(1) |
|
|
— |
|
|
|
16,180 |
|
|
|
27,086 |
|
|
|
27,169 |
|
|
|
27,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
During 1995, we operated as a division of Telos
and had no shares of common stock issued or outstanding.
Accordingly, net loss per share and weighted average share
information is inapplicable during 1995. |
19
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
1995 |
|
1996 |
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18,685 |
|
|
|
|
|
|
|
Working (deficit) capital |
|
|
(20 |
) |
|
|
(208 |
) |
|
|
723 |
|
|
|
1,180 |
|
|
|
16,860 |
|
|
|
|
|
|
|
Total assets |
|
|
1,533 |
|
|
|
3,284 |
|
|
|
6,578 |
|
|
|
7,309 |
|
|
|
28,220 |
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
3,732 |
|
|
|
6,167 |
|
|
|
13,335 |
|
|
|
21,665 |
|
|
|
— |
|
|
|
|
|
|
|
Mandatorily redeemable preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,773 |
|
|
|
|
|
|
|
Total stockholders’ deficit |
|
|
(2,474 |
) |
|
|
(3,900 |
) |
|
|
(8,325 |
) |
|
|
(17,051 |
) |
|
|
(3,526 |
) |
20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition and
results of operations for each of the past three years. You
should read this discussion together with our financial
statements and their related notes, which we have included
elsewhere in this prospectus. We make some forward-looking
statements about our future performance. These forward-looking
statements include numerous risks and uncertainties, as described
in the “Risk Factors” section of this prospectus. Our
actual results could differ materially from those discussed in
these forward-looking statements.
Overview
We began operating in 1996 as a controlled subsidiary of Telos.
Prior to 1996, we were a division of Telos. We licensed our first
data integration product in January 1995 and our first
process integration product in March 1999. We licensed our
first network firewall product in February 1996, and we
ceased offering it in December 1997 in order to concentrate
on our other products. We originally marketed our products
primarily to government agencies and contractors. However, in
1999, we expanded our marketing efforts to focus on commercial
accounts and sales through indirect channels. Our fiscal year end
is December 31. References to the years 1997, 1998 or 1999
mean the fiscal year ended December 31 unless otherwise
indicated.
We generate revenues principally from licensing our software
products and from providing related consulting, training and
support services. Historically, we have recorded a significant
portion of our revenues from a small number of large customers,
and we expect this trend to continue for the foreseeable future.
In 1998, our two largest customers accounted for 27.3% and 11.4%
of our total revenues. In 1999, two different customers accounted
for 19.9% and 10.3% of total revenues. In the aggregate, our
five largest customers represented approximately 65.7% and 55.0%
of our revenues during those periods.
Customers typically pay an up-front, one-time fee for a perpetual
license of our software or pay over a period of time based on
the number of interactions. We price our products based on either
the number of users accessing our software or the number of
interactions per year with each product. Our license agreements
generally provide for full payment within 30 days of product
delivery, although in some cases we will negotiate longer payment
terms.
License revenues are recognized when an agreement is signed,
delivery of the product has occurred, no significant obligations
remain, the fee is fixed or determinable and collection of the
resulting receivable is probable and, if required by the contract
terms, acceptance criteria are met. The sales cycle for our
products is typically three to six months from initial contact to
delivery and revenue recognition. Delivery lead times for our
products are very short, and consequently, substantially all of
our license revenues in each quarter may result from orders
received in that quarter. Furthermore, we have experienced
significant seasonality and variability in the size and number of
orders. We expect the variability in the size and number of
orders to continue for the foreseeable future. However, we expect
seasonality to decline as our commercial and indirect revenues
increase and as revenues under our recently-introduced
interaction-based pricing model increase.
Services and support revenues are principally derived from
consulting services associated with the implementation and
integration of our software products, training of customers’
employees, and ongoing customer and partner support. We
typically deliver consulting services on a time and materials
basis and are generally reimbursed for out-of-pocket expenses
incurred by our personnel. Implementation and training services
are generally completed within three to six months of the initial
license sale.
21
Services revenues are recognized as the services are performed.
Support revenues, which are invoiced in advance of performance,
are recognized ratably over the term of the support agreement,
which is generally twelve months. Most support agreements are
renewable at the discretion of the customer. Pursuant to these
agreements, we provide product enhancements and technical support
services to customers for an annual fee, which is generally 18%
of the license fee.
Cost of license revenues includes costs associated with royalties
for third-party embedded software, distribution of software and
related costs, as well as the amortization of capitalized
software development costs. The cost of license revenues as a
percentage of license revenues for Enterworks Process Integrator
is less than for Enterworks Content Integrator, and as such, we
expect that the gross margin related to license revenues will
improve, as the percentage of sales from Enterworks Process
Integrator increases. In addition, we expect that our gross
margin related to license revenues will improve as amortization
of capitalized software development costs decreases and as
royalties for third-party embedded software decrease.
Cost of services and support revenues primarily includes salaries
and related expenses for our service organization, costs of
third parties contracted to provide services and related indirect
costs, and, to a lesser extent, amortization of capitalized
software development costs associated with support. We expect
that the cost of services and support revenues will increase, in
absolute dollars, in parallel with increased services and support
revenues. We expect that the cost of services and support
revenues will decrease, as a percentage of total revenues, as we
increase our future support renewals and engage in specialized
services activities with higher average bill rates.
Sales and marketing expenses include personnel-related costs, as
well as advertising and promotional costs. We expect these costs
will increase, in absolute dollars and as a percentage of
revenues, as we increase our sales and marketing efforts.
Research and development expenses primarily include
personnel-related costs associated with the development of our
software products. We expense software development costs as
incurred until technological feasibility of the software is
established, after which we capitalize any additional costs until
general release of the related software product. We amortize
capitalized software development costs over the estimated product
life, which is generally three years or less. We periodically
evaluate the net realizable value of capitalized software
development costs based on the estimated future gross revenues
from a product, net of estimated costs of completing and
disposing of the product. When net amounts capitalized exceed net
realizable value, we expense the excess amount. We expect that
research and development costs will increase, in absolute
dollars, as we continue to add personnel necessary to enhance
current products and develop future products. However, we expect
that these costs will decrease, as a percentage of revenues, as
revenues increase.
General and administrative expenses consist primarily of
compensation and related expenses for our executive, finance and
administrative personnel. We expect that general and
administrative expenses will continue to increase, in absolute
dollars, as we expand our operations and decrease, as a
percentage of revenues, as revenues increase.
Interest expense primarily includes interest related to our
payable to Telos, as well as interest on our subordinated debt.
We expect that interest expense will decrease, in absolute
dollars, and as a percentage of revenues because the
interest-bearing portion of our payable to Telos has been
forgiven and because our subordinated debt has been repaid or
converted into shares of our common stock.
Through December 30, 1999, we reported no separate tax
liability due to our relationship as a consolidated subsidiary of
Telos. The income tax benefits reflected in the accompanying
22
statements of operations data relate to compensation from Telos
for Telos’ utilization of net operating losses generated by
us through the December 30, 1999 deconsolidation. Upon our
deconsolidation from Telos, our net operating losses will benefit
us, as and if utilized to offset future taxable income,
independent of Telos. Our ability to utilize net operating losses
will be dependent on future taxable income. Additionally, our
utilization of our net operating losses may be limited due to
certain substantial changes in our ownership, including those
resulting from this offering. See “Certain
Transactions.”
Results of Operations
The following table sets forth the statement of operations data
as a percentage of our total revenues for the periods presented.
The data has been derived from, and should be read in conjunction
with, our audited financial statements and their related notes
included in this prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
42.5 |
% |
|
|
49.2 |
% |
|
|
61.2 |
% |
|
|
|
|
|
|
Services and support |
|
|
57.5 |
|
|
|
50.8 |
|
|
|
38.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
42.7 |
|
|
|
36.9 |
|
|
|
23.6 |
|
|
|
|
|
|
|
Services and support |
|
|
61.2 |
|
|
|
41.3 |
|
|
|
38.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
103.9 |
|
|
|
78.2 |
|
|
|
61.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit |
|
|
(3.9 |
) |
|
|
21.8 |
|
|
|
38.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
109.6 |
|
|
|
69.3 |
|
|
|
86.3 |
|
|
|
|
|
|
|
Research and development |
|
|
20.4 |
|
|
|
62.2 |
|
|
|
59.2 |
|
|
|
|
|
|
|
General and administrative |
|
|
26.4 |
|
|
|
28.7 |
|
|
|
31.9 |
|
|
|
|
|
|
|
Write-off of software development costs |
|
|
13.2 |
|
|
|
24.6 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
169.6 |
|
|
|
184.8 |
|
|
|
177.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(173.5 |
) |
|
|
(163.0 |
) |
|
|
(139.3 |
) |
|
|
|
|
|
|
Interest expense |
|
|
42.6 |
|
|
|
30.3 |
|
|
|
29.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(216.1 |
) |
|
|
(193.3 |
) |
|
|
(168.7 |
) |
|
|
|
|
|
|
Income tax benefit |
|
|
(85.5 |
) |
|
|
(69.9 |
) |
|
|
(53.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(130.6 |
)% |
|
|
(123.4 |
)% |
|
|
(115.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 Compared to 1998
Revenues
License Revenues. Revenues from licenses of our products
increased 114.2% to $7.5 million in 1999 from $3.5 million in
1998. The increase was primarily due to an overall increase, as
compared to 1998, in sales of Enterworks Content Integrator and
also due to sales of Enterworks Process Integrator, which we
first sold in 1999. As a percentage of total revenues, software
license revenues represented 61.2% in 1999 and 49.2% in 1998.
Services and Support Revenues. Revenues from services and
support increased 31.3% to $4.7 million in 1999 from $3.6 million
in 1998. This growth resulted primarily from services generated
by new contracts, the extension of existing contracts, and to a
lesser extent, from new and renewal support arrangements. As a
percentage of total revenues, services and support revenues
represented 38.8% in 1999 and 50.8% in 1998. This decrease
reflects the increased performance of services and support
activities by our partners.
23
Cost of Revenues
Cost of License Revenues. Cost of license revenues
increased 10.1% to $2.9 million in 1999 from $2.6 million in
1998. The increase in cost of license revenues primarily reflects
the increase in third-party sub-license fees associated with the
increase in new licenses, partially offset by a decrease of
$182,000 in the amortization of software development costs. As a
percentage of license revenues, these costs decreased to 38.5% in
1999 from 74.9% in 1998. Excluding the effects of amortization
of software development costs, the cost of license revenues as a
percentage of license revenues decreased to 19.8% in 1999 from
29.6% in 1998 which reflected more favorable third-party
sub-license terms and the change in product mix in 1999. Gross
profit from license revenues increased to 61.5% in 1999 from
25.1% in 1998.
Cost of Services and Support Revenues. Cost of services
and support revenues increased 59.8% to $4.7 million in 1999 from
$2.9 million in 1998. The increase in cost of services and
support revenues primarily reflects an increase in personnel
costs. As a percentage of services and support revenues, these
costs increased to 99.0% in 1999 from 81.4% in 1998. This
increase was primarily due to increased personnel costs during
1999 required to support anticipated increased revenues, as well
as to train staff to respond to expected order increases. Gross
profit from services and support revenues decreased to 1.0% in
1999 from 18.6% in 1998.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses
increased 114.3% to $10.5 million in 1999 from $4.9 million in
1998. The increase was primarily due to increased compensation
costs related to increased direct and indirect sales
representatives, increased product marketing staff and, to a
lesser extent, increased commissions to sales representatives.
There were also increases in promotional activities and
advertising campaigns related to targeted marketing efforts. As a
percentage of total revenues, these costs increased to 86.3% in
1999 from 69.3% in 1998.
Research and Development Expenses. Research and
development expenses increased 63.8% to $7.2 million in 1999 from
$4.4 million in 1998. This increase reflects increases in
staffing throughout 1999 associated with the research,
development and introduction of Enterworks Process Integrator and
in support of new releases of Enterworks Content Integrator.
Total expenditures for research and development, which include
capitalized software development costs, were $8.0 million in
1999, a 24.3% increase over 1998. This increase was due to the
personnel growth noted above. As a percentage of total revenues,
total expenditures decreased to 65.7% in 1999 from 91.0% in 1998,
principally due to the increases in total revenues.
General and Administrative Expenses. General and
administrative expenses increased 91.1% to $3.9 million in 1999
from $2.0 million in 1998. The growth in general and
administrative expenses was primarily a result of expansion in
staffing to support our revenue growth. During 1999, we began to
assume more general and administrative activities as we continued
our separation from Telos. As a percentage of total revenues,
these costs increased to 31.9% in 1999 from 28.7% in 1998,
principally because of a transition period during which we paid
Telos for activities which we were also beginning to perform
ourselves.
Write-off of Software Development Costs. The net
realizable value of capitalized software development costs is
periodically evaluated based on the estimated future gross
revenues from a product, net of the estimated costs of completing
and disposing of the product. When net amounts capitalized
exceed net realizable value, the excess amount is expensed.
During 1999, no write-offs were necessary and during 1998, we
wrote off $1.7 million in connection with net realizable value
adjustments. The 1998 adjustment related to the core architecture
of a product which was redesigned.
24
Interest Expense
Interest expense increased 66.9% to $3.6 million in 1999 from
$2.1 million in 1998. The increase was primarily associated with
increased borrowings from Telos, as well as an increase in
accretion related to the repayment and conversion of subordinated
notes payable.
Income Tax Benefit
The income tax benefit increased 31.8% to $6.5 million in 1999
from $4.9 million in 1998. The increase was primarily due to
higher compensation from Telos for Telos’ utilization of net
operating losses generated by us in accordance with the tax
allocation agreement between the two companies, which was
terminated effective December 30, 1999. Utilization of any
remaining net operating losses or future net operating losses
generated by us will benefit Enterworks, as and if utilized,
independent of Telos.
1998 Compared to 1997
Revenues
License Revenues. Revenues from licenses of our products
increased 140.7% to $3.5 million in 1998 from $1.4 million in
1997. The increase was primarily due to an overall increase in
Enterworks Content Integrator license fees. As a percentage of
total revenues, software license revenues represented 49.2% in
1998 and 42.5% in 1997.
Services and Support Revenues. Revenues from services and
support increased 83.7% to $3.6 million in 1998 from $2.0 million
in 1997. This growth resulted primarily from services generated
by new contracts, the extension of existing contracts, and to a
lesser extent, from new and renewal support arrangements. As a
percentage of total revenues, services and support revenues
represented 50.8% in 1998 and 57.5% in 1997.
Cost of Revenues
Cost of License Revenues. Cost of license revenues
increased 79.7% to $2.6 million in 1998 from $1.5 million in
1997. The increase in cost of license revenues primarily reflects
the increase in amortization of software development costs and
the increase of third-party sub-license fees associated with the
increase in new licenses. As a percentage of license revenues,
these costs decreased to 74.9% in 1998 from 100.3% in 1997.
Excluding the effects of amortization of software development
costs, the cost of license revenues as a percentage of license
revenues decreased to 29.6% in 1998 from 55.9% in 1997,
reflecting increased revenues and more favorable third-party
sub-license terms. Gross profit from license revenues increased
to 25.1% in 1998 from a gross deficit of 0.3% in 1997.
Cost of Services and Support Revenues. Cost of services
and support revenues increased 40.3% to $2.9 million in 1998 from
$2.1 million in 1997. The increase in cost of services and
support revenues primarily reflects the increase in personnel
costs related to the additional services and support revenues. As
a percentage of services and support revenues, these costs
decreased to 81.4% in 1998 from 106.5% in 1997, reflecting more
efficient implementations of our products. Gross profit from
services and support revenues increased to 18.6% in 1998 from a
gross deficit of 6.5% in 1997.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses
increased 31.5% to $4.9 million in 1998 from $3.7 million in
1997. The increase was primarily due to increased commissions to
sales representatives as a result of increased license revenues
and, to a lesser extent, increased promotional activities
relating to the announcement of new product
25
enhancements. As a percentage of total revenues, sales and
marketing expenses decreased to 69.3% in 1998 from 109.6% in
1997, principally due to the increases in total revenues.
Research and Development Expenses. Research and
development expenses increased 532.0% to $4.4 million in 1998
from $696,000 in 1997. This increase reflects increases in
staffing throughout 1998 associated with the research and
development efforts related to Enterworks Process Integrator and
in support of new releases of Enterworks Content Integrator.
Total expenditures for research and development, which include
capitalized software development costs, were $6.4 million in
1998, a 70.4% increase over 1997. This increase was due to the
personnel growth noted above. As a percentage of total revenues,
these total expenditures expenses decreased to 91.0% in 1998 from
111.1% in 1997.
General and Administrative Expenses. General and
administrative expenses increased 126.3% to $2.0 million in 1998
from $898,000 in 1997. The growth in general and administrative
expenses was primarily a result of expansion in staffing to
support our revenue growth. As a percentage of total revenues,
general and administrative expenses increased to 28.7% in 1998
from 26.4% in 1997.
Write-off of Software Development Costs. During 1998 and
1997, we wrote off $1.7 million and $449,000, respectively, in
connection with net realizable value adjustments. The 1997
adjustment related to the abandonment of our firewall product.
Interest Expense
Interest expense increased 47.8% to $2.1 million in 1998 from
$1.4 million in 1997. The increase was primarily associated with
increased borrowings from Telos. As a percentage of total
revenues, interest expense decreased to 30.3% in 1998 from 42.6%
in 1997, primarily due to increases in revenues.
Income Tax Benefit
The income tax benefit increased 70.1% to $4.9 million in 1998
from $2.9 million in 1997. The increase was primarily due to
higher compensation from Telos for Telos’ utilization of net
operating losses generated by us, in accordance with the tax
allocation agreement between the two companies, which was
terminated effective December 30, 1999.
26
Quarterly Results of Operations
The following table sets forth unaudited quarterly financial data
for the eight quarters ended December 31, 1999, and
includes such data as a percentage of our total revenues for the
periods presented. The unaudited quarterly financial data has
been prepared on a basis consistent with the audited financial
statements and includes all adjustments, consisting only of
normal recurring adjustments, that we consider necessary to
present fairly this information, which should be read in
conjunction with our financial statements and their related notes
included in this prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
|
1998 |
|
1998 |
|
1998 |
|
1998 |
|
1999 |
|
1999 |
|
1999 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
$ |
489 |
|
|
$ |
726 |
|
|
$ |
173 |
|
|
$ |
2,093 |
|
|
$ |
835 |
|
|
$ |
980 |
|
|
$ |
2,166 |
|
|
$ |
3,476 |
|
|
|
|
|
|
|
Services and support |
|
|
812 |
|
|
|
807 |
|
|
|
1,136 |
|
|
|
838 |
|
|
|
1,314 |
|
|
|
926 |
|
|
|
1,381 |
|
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,301 |
|
|
|
1,533 |
|
|
|
1,309 |
|
|
|
2,931 |
|
|
|
2,149 |
|
|
|
1,906 |
|
|
|
3,547 |
|
|
|
4,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
377 |
|
|
|
533 |
|
|
|
624 |
|
|
|
1,073 |
|
|
|
404 |
|
|
|
643 |
|
|
|
741 |
|
|
|
1,082 |
|
|
|
|
|
|
|
Services and support |
|
|
583 |
|
|
|
728 |
|
|
|
826 |
|
|
|
786 |
|
|
|
972 |
|
|
|
1,171 |
|
|
|
1,180 |
|
|
|
1,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
960 |
|
|
|
1,261 |
|
|
|
1,450 |
|
|
|
1,859 |
|
|
|
1,376 |
|
|
|
1,814 |
|
|
|
1,921 |
|
|
|
2,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
341 |
|
|
|
272 |
|
|
|
(141 |
) |
|
|
1,072 |
|
|
|
773 |
|
|
|
92 |
|
|
|
1,626 |
|
|
|
2,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
1,112 |
|
|
|
1,164 |
|
|
|
1,131 |
|
|
|
1,497 |
|
|
|
2,495 |
|
|
|
2,046 |
|
|
|
2,620 |
|
|
|
3,346 |
|
|
|
|
|
|
|
Research and development |
|
|
712 |
|
|
|
938 |
|
|
|
1,534 |
|
|
|
1,215 |
|
|
|
1,046 |
|
|
|
1,915 |
|
|
|
1,963 |
|
|
|
2,281 |
|
|
|
|
|
|
|
General and administrative |
|
|
303 |
|
|
|
405 |
|
|
|
678 |
|
|
|
646 |
|
|
|
897 |
|
|
|
783 |
|
|
|
1,025 |
|
|
|
1,179 |
|
|
|
|
|
|
|
Write-off of software development costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,743 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,127 |
|
|
|
2,507 |
|
|
|
3,343 |
|
|
|
5,101 |
|
|
|
4,438 |
|
|
|
4,744 |
|
|
|
5,608 |
|
|
|
6,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(1,786 |
) |
|
$ |
(2,235 |
) |
|
$ |
(3,484 |
) |
|
$ |
(4,029 |
) |
|
$ |
(3,665 |
) |
|
$ |
(4,652 |
) |
|
$ |
(3,982 |
) |
|
$ |
(4,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Total Revenues |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
37.6 |
% |
|
|
47.4 |
% |
|
|
13.2 |
% |
|
|
71.4 |
% |
|
|
38.9 |
% |
|
|
51.4 |
% |
|
|
61.1 |
% |
|
|
76.0 |
% |
|
|
|
|
|
|
Services and support |
|
|
62.4 |
|
|
|
52.6 |
|
|
|
86.8 |
|
|
|
28.6 |
|
|
|
61.1 |
|
|
|
48.6 |
|
|
|
38.9 |
|
|
|
24.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
29.0 |
|
|
|
34.8 |
|
|
|
47.7 |
|
|
|
36.6 |
|
|
|
18.8 |
|
|
|
33.8 |
|
|
|
20.9 |
|
|
|
23.7 |
|
|
|
|
|
|
|
Services and support |
|
|
44.8 |
|
|
|
47.5 |
|
|
|
63.1 |
|
|
|
26.8 |
|
|
|
45.2 |
|
|
|
61.4 |
|
|
|
33.3 |
|
|
|
29.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
73.8 |
|
|
|
82.3 |
|
|
|
110.8 |
|
|
|
63.4 |
|
|
|
64.0 |
|
|
|
95.2 |
|
|
|
54.2 |
|
|
|
53.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
26.2 |
|
|
|
17.7 |
|
|
|
(10.8 |
) |
|
|
36.6 |
|
|
|
36.0 |
|
|
|
4.8 |
|
|
|
45.8 |
|
|
|
46.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
85.5 |
|
|
|
75.9 |
|
|
|
86.4 |
|
|
|
51.1 |
|
|
|
116.1 |
|
|
|
107.3 |
|
|
|
73.9 |
|
|
|
73.1 |
|
|
|
|
|
|
|
Research and development |
|
|
54.7 |
|
|
|
61.2 |
|
|
|
117.2 |
|
|
|
41.5 |
|
|
|
48.7 |
|
|
|
100.5 |
|
|
|
55.3 |
|
|
|
49.9 |
|
|
|
|
|
|
|
General and administrative |
|
|
23.3 |
|
|
|
26.4 |
|
|
|
51.8 |
|
|
|
22.0 |
|
|
|
41.7 |
|
|
|
41.1 |
|
|
|
28.9 |
|
|
|
25.8 |
|
|
|
|
|
|
|
Write-off of software development costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
59.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
163.5 |
|
|
|
163.5 |
|
|
|
255.4 |
|
|
|
174.1 |
|
|
|
206.5 |
|
|
|
248.9 |
|
|
|
158.1 |
|
|
|
148.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(137.3 |
)% |
|
|
(145.8 |
)% |
|
|
(266.2 |
)% |
|
|
(137.5 |
)% |
|
|
(170.5 |
)% |
|
|
(244.1 |
)% |
|
|
(112.3 |
)% |
|
|
(101.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our quarterly operating results have varied in the past and may
vary significantly in the future depending on many factors
including, among others: the size, timing and recognition of
revenue from significant orders; the timing of new product
releases and product enhance-
27
ments and market acceptance of those releases; increases in
operating expenses required for product development and
marketing; customer budget constraints; our success in expanding
our sales and marketing programs; and general economic
conditions. Furthermore, we believe that the purchase of our
products is relatively discretionary and generally involves a
significant commitment of capital. As a result, purchases of our
products may be deferred or canceled in the event of a downturn
in any potential customer’s business or the economy in
general.
On an annual basis, we have generally realized lower revenues in
our first and second quarters than in our third and fourth
quarters. We believe that these fluctuations are caused primarily
by customer budgeting and purchasing patterns, particularly in
the case of our government customers.
A substantial portion of our operating expense level,
particularly personnel and facilities costs, are based, in part,
on our expectations as to future revenues and are relatively
fixed in advance of any particular quarter. In addition, we
typically enter into a significant portion of our new license
contracts in the last two weeks of a quarter. Consequently, if
revenues are below expectations, our quarterly operating results
and financial condition could be adversely affected. As a result
of the foregoing factors, we believe that our quarterly revenues,
expenses and operating results are likely to vary significantly
in the future, that period-to-period comparisons of our operating
results may not be meaningful and that, in any event, such
comparisons should not be relied upon as indicators of future
performance.
Liquidity and Capital Resources
From our inception through December 30, 1999, we financed
our operations and met our capital expenditure requirements
primarily through funds borrowed from Telos. On December 30,
1999, we completed the sale of our Series A convertible
preferred stock, which totaled $23.0 million in net proceeds, as
well as several concurrent transactions which are described in
Note 7 to the financial statements. As a result of these
transactions, Telos’ ownership percentage in us decreased
from 99.7% to 34.8%. Accordingly, we were deconsolidated from
Telos and ceased to be funded by Telos after December 30,
1999.
Our operating activities have used cash in each of the last three
fiscal years. During 1997, 1998 and 1999, cash used in operating
activities of $2.6 million, $6.1 million and $8.4 million,
respectively, resulted principally from net losses of $4.4
million, $8.7 million and $14.0 million, respectively.
Cash used in investing activities was $3.6 million, $2.6 million
and $1.6 million in 1997, 1998 and 1999, respectively. The cash
used in investing activities was principally used for our
investment in our software products, and for the purchase of
computers and other office equipment and fixtures.
Cash provided by financing activities was $6.1 million, $8.8
million and $28.7 million in 1997, 1998 and 1999, respectively.
The cash provided by financing activities was principally
provided by the borrowings from Telos in 1997 and 1998, and by
the net proceeds of the offering of Series A convertible
preferred stock and borrowings from Telos in 1999.
We anticipate that our liquidity needs for at least the next
twelve months will be met by our existing capital resources and
the net proceeds from this offering. After this time, we cannot
assure you that cash generated from operations will be sufficient
to satisfy our liquidity requirements, and we may need to raise
additional capital by selling additional equity or debt
securities or by obtaining a credit facility.
28
Year 2000 Issues
To date we have experienced no significant adverse effects
related to the Year 2000 computer issue. We had no notable
problems with equipment or our internal information technology
systems which may have been affected by faulty embedded chips or
other Year 2000 problems. We are not aware of Year 2000 problems
with our software. In addition, we have not been made aware of,
nor have we experienced, Year 2000 problems with any third-party
software. We have not incurred any material costs directly
associated with Year 2000 compliance efforts, except for
compensation costs for certain employees who have dedicated time
to our assessment of Year 2000 compliance and associated
remedies. We do not expect to incur additional material costs
associated with Year 2000 compliance; however, in the event that
we have not identified and corrected any significant Year 2000
compliance issues, these unresolved issues could harm our
business.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk. We develop products in the United States and
market our products in North America and, to a lesser extent, the
rest of the world. As a result, our financial results could be
affected by factors such as changes in foreign currency rates or
weak economic conditions in foreign markets. Because all of our
revenues are currently denominated in US dollars, a strengthening
of the dollar could make our products less competitive in
foreign markets.
Interest Rate Risk. We have an investment portfolio of
money market funds and fixed income certificates of deposit. The
fixed income certificates of deposit, like all fixed income
securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this
exposure by investing primarily in short-term securities. In
view of the nature and mix of our total portfolio, a 10% movement
in market interest rates would not have a significant impact on
the total value of our portfolio as of December 31, 1999.
New Accounting Pronouncements
In 1999, we adopted Statement of Position
(SOP) No. 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,”
which provides guidance on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1
was effective for fiscal years beginning after December 15,
1998. The adoption of SOP 98-1 did not have a material
impact on our results of operations.
In June 1998, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS 133,
as amended by SFAS 137, “Accounting for Derivative
Instruments and Hedging Activities — Deferral of the
Effective Date of FASB Statement No. 133, an amendment of
FASB Statement No. 133,” is effective for all quarters
of the year ending December 31, 2001. We currently do not
engage or plan to engage in the use of derivative instruments,
and do not expect SFAS 133 to have a material impact on our
results of operations.
29
BUSINESS
Overview
We develop, market and support a software framework that
integrates content and processes for companies seeking to
participate in e-business. We target operators and users of
e-marketplaces and portals. E-marketplaces and portals are
Web-based destinations where employees, customers, partners and
suppliers can interact to obtain information about products and
services, and conduct business more efficiently. Our products
enable customers to build or join e-marketplaces and portals
rapidly, add new content and e-business participants easily, and
automate the end-to-end processes required for e-business
interaction. In addition, our products complement and leverage
companies’ significant investments in technology
infrastructure, such as packaged or custom-built applications,
information databases and integration systems.
The Enterworks product suite currently consists of two
components. The first component, Enterworks Content
Integrator, delivers a real-time, personalized catalog of
content from multiple sources, including databases, applications
and HTML- and XML-based sources. Enterworks Content Integrator
enables operators and users of e-marketplaces and portals to:
|
|
|
| |
• |
integrate new content from customers, partners and suppliers
quickly and easily; |
| |
| |
• |
display a unified view of content in real time; and |
| |
| |
• |
deliver integrated content to an e-business application. |
The second component of the Enterworks product suite,
Enterworks Process Integrator, captures and automates a
company’s business practices and expertise. Enterworks
Process Integrator enables operators and users of e-marketplaces
and portals to:
|
|
|
| |
• |
integrate applications and processes; |
| |
| |
• |
automate and track information flow to coordinate e-business
interactions within and between companies; and |
| |
| |
• |
resolve problems that require user interaction and guidance
through complex processes. |
We deliver our products through our direct sales force and
strategic partners, which include traditional system integrators,
e-business professional services companies, and other software
vendors and technology partners. Our current customers include
financial, manufacturing, government, healthcare and
telecommunications enterprises, as well as professional services
providers. As of December 31, 1999, we had licensed our
products to more than 50 companies, including The Boeing Company,
CareFirst Blue Cross Blue Shield, Cast Alloys, Inc., Jefferies
& Company, Inc., NonStopNet, Inc., Tivoli Systems, Inc. and
the US Army.
Industry Background
Forrester Research estimates the annual value of
business-to-business products and services that will be sold in
the United States over the Internet will exceed $2.7 trillion by
2004, and that 53% of that value will be processed through
e-marketplaces. In addition, industry studies indicate that many
companies are implementing their own enterprise information
portals. Companies in virtually every industry are developing the
capabilities to take advantage of this growing Internet economy,
in many cases by augmenting or abandoning their traditional
business models.
Companies may choose to create or participate in
e-marketplaces — content-rich, Web-based destinations
that bring together many buyers, sellers and business prospects
who seek aggregated information about products and services. For
example, companies that have
30
significant trading power with their suppliers, such as a large
aircraft manufacturer, might open an Internet-based bidding
marketplace for efficient, online purchase of components from its
hundreds or thousands of suppliers.
Some companies are establishing their own e-business information
portals — Web sites which act as single points of
online access for enterprise customers, partners, suppliers and
employees to find information, interact, obtain services and
execute transactions. For example, a financial services company
might offer to its customers a central access point to have
personalized, real-time views of market data, check account
balances, and then purchase securities or pay their bills online
without leaving the Web site, even though much of the information
resides elsewhere. Employees might access the same site for
personalized views of their 401(k) account balances and to update
their healthcare benefits records.
Challenges faced by companies deploying and participating in
e-marketplaces and portals
Companies face many business challenges in deploying or
participating in e-marketplaces and portals, including:
|
|
|
| |
• |
Time-to-scale. The global accessibility and reach of the
Internet provides significant opportunities for new online
entrants to rapidly displace slower competitors. This increases
the importance of time-to-market for companies seeking to deploy
or participate in e-marketplaces or portals. The success of an
e-marketplace will depend largely on the early capture of a large
number of buyers and sellers to create market liquidity and to
attract further participants to the site. In many segments of the
Internet economy, only a single e-marketplace or a few portals
will dominate a market. |
| |
| |
• |
Leveraging core business processes and systems. Companies
have invested significant resources in developing business
practices that provide them with competitive advantages. These
companies want to incorporate these business practices into
e-marketplaces, portals and other online extensions of their
operations. For example, a distributor may benefit from its
optimized logistics process and operating infrastructure.
Similarly, a supplier might compete based on a process optimized
for just-in-time production, or a media company may compete based
on the depth and breadth of its digitized content. |
| |
| |
• |
Constant change. E-marketplace and portal operators and
participants work in an environment characterized by frequent
disruptions and change. E-marketplaces involve complex business
interactions ranging from hundreds to thousands of customers,
partners, suppliers and employees. E-marketplace and portal
participants are under constant pressure to adapt to dramatic
growth, new business practices, intense competition and
increasing complexity. Any change, such as the addition or loss
of participants, should be accomplished in real-time without
disrupting the information flow. |
| |
| |
• |
Customer satisfaction. While e-marketplace and portal
operators and participants seek to achieve high degrees of
automation and economies of scale, they often fail to provide the
level of customer attention and service that customers often
expect will accompany any business-to-business and
business-to-consumer interaction. For example, a recent Jupiter
Communications study found that 42% of top-ranked Web sites
either took longer than five days to reply to customer email
inquiries, never replied or were not accessible by email. Many
e-commerce sites do not integrate human interaction, such as
customer service, into their overall e-business processes. |
31
Companies need strong technological capabilities to address these
significant business challenges which accompany the new models
of e-business. Specifically, they need to address the following
technical challenges:
|
|
|
| |
• |
Connecting disparate systems. Business processes now span
the extended enterprise of employees, customers, partners and
suppliers, each of which rely on a broad range of incompatible
applications and communications systems. META Group, Inc.
estimates that the average company maintains 49 distinct
enterprise applications and spends approximately 35% of its total
IT budget on integration-related efforts, including internal
development and consulting services as well as purchases of
packaged solutions. Many of these applications were implemented
in standalone fashion to address strategic business functions,
including enterprise resource planning, supply chain management,
customer relationship management, sales force automation,
business decision support and e-commerce. These packaged
applications typically were not designed to work with each other,
much less with systems residing outside the enterprise. Yet
e-marketplaces and information portals must be able to instantly
access information from, and convey information to, these
disparate systems. |
| |
| |
• |
Aggregating content at the point of interaction. The
emerging models of e-marketplaces and information portals depend
significantly on the aggregation and organization of up-to-date
information, including structured data such as price lists or
employee records, or unstructured data such as product
specifications or diagrams. Companies must access, aggregate,
catalog and deliver in real-time, large volumes of information
that reside in multiple and often incompatible data repositories.
These challenges are compounded by the scale of many
e-marketplaces or portals, which may contain product information
from hundreds or thousands of suppliers, and by the security
concerns of companies which are exposing some of their most
valuable information over the Internet. |
| |
| |
• |
Automating and monitoring business processes. A business
process initiated at an e-marketplace or a portal will often
require tracking and coordinating many sub-processes which may
occur at different companies. For example, the process of taking
and fulfilling an order at an e-marketplace might require
checking inventory at the supplier, checking credit through a
bank, creating an invoice, notifying a warehouse, delivering
through a third-party logistics company and ultimately debiting
the customer’s internal accounts receivable system. This
process requires connectivity between applications and systems,
and a sophisticated monitoring capability so that all
participants can have complete visibility into the overall
process, as well as the ability to integrate human interactions
when necessary, such as handling exceptions that might cause
transactions to fail. |
Attempts to solve these complex technical challenges have
generally involved the approaches described below:
|
|
|
| |
• |
in-house IT organizations using a collection of technologies and
significant custom development to enable their companies to
integrate with e-marketplaces or to create portals; or |
| |
| |
• |
enterprise application integration (EAI) products that offer
packaged solutions for establishing discrete connectivity
between disparate applications within and between companies. |
Each of these approaches has achieved a level of success in
creating point-to-point connections between applications.
However, we believe that, even in combination, these
32
solutions fail to meet the business challenges facing companies
that want to participate in e-marketplaces or portals because
they are:
|
|
|
| |
• |
complex, cumbersome and time-consuming to implement, requiring
significant amounts of custom coding to effectively deploy and
extensive resources to manage; |
| |
| |
• |
inflexible and difficult to scale, requiring considerable effort
to add or modify participant information, content sources and
business processes; |
| |
| |
• |
unable to integrate people with technology, focusing instead on
routing electronic messages from one machine to another; and |
| |
| |
• |
lacking sufficient security to control the interactions between
participants. |
The Enterworks Solution
Our product suite creates integrated, real-time catalogs of
e-business content and automates e-business processes. Our
products were developed to address the requirements of
e-marketplaces and portals in an easy-to-use and highly
manageable framework.
We believe that our products provide the following strategic
business benefits to e-marketplace participants and portal users:
|
|
|
| |
• |
Faster time-to-market. Our products help enterprises
launch e-marketplaces and portals quickly, and scale them faster,
by integrating content sources wherever and in whatever form
they currently exist. For example, a financial services firm that
wants to offer its customers new services, such as consolidated
account information through a portal, can use our products to
catalog and deliver this information to the portal with minimal
custom coding. By accommodating and integrating disparate
business processes, our products increase the value and
efficiency of e-marketplaces and portals for users, buyers and
sellers. |
| |
| |
• |
Increased customer satisfaction. We increase customer
satisfaction by aggregating and delivering personalized content
for greater value and higher levels of service. Customer
relationships become stronger because the right information is
available. Our business process management solutions increase
customer satisfaction by handling problems faster and more
effectively. With our products, the process for handling
exceptions and responding to customer inquiries can be tailored
to an individual customer’s needs, automated and made part
of the customer experience. |
| |
| |
• |
Improved supply chain interactions. By integrating
marketplace participants’ disparate business processes, our
products allow buyers and sellers to gain the efficiencies of
e-marketplaces without losing the advantages of using their
individual business policies and best practices. For example, a
manufacturing organization that wants to more efficiently manage
inventory levels across multiple plant facilities and between its
suppliers and partners, can use our products to catalog,
aggregate and deliver single views of inventory levels, even
though each plant and most suppliers may be using different
inventory management systems. |
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Greater leverage of existing infrastructure investments.
Our products allow enterprises to integrate and extend the many
architectures and systems in which they have made significant
investments, from legacy mainframe to newer client/server
systems. Our products quickly adapt the functionality of these
systems to e-marketplaces and portals and maximize the
investments companies have already made. |
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Reduced operational costs. Our products help our customers
reduce their operating costs. By automating business processes,
including exception handling, our products enable our customers
to improve the efficiency of their operations, lessening their
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for personnel and custom coding. Our products also help our
customers reduce their costs by providing them with organized and
real-time business information. This information allows our
customers to make informed decisions regarding their operations.
For example, a healthcare organization that wants to manage its
service delivery costs more effectively needs to understand the
components of its costs on a patient by patient basis.
Unfortunately, this information is often difficult to access
because it is contained in many legacy and homegrown systems.
Using our products, the organization can catalog, aggregate and
view the information, individually by patient. |
Our content and process integration solutions are differentiated
through the following design points and technical features:
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Ease of use and speed of implementation. Our products
deliver content to, and provide process management through,
whatever user interface is most familiar to e-marketplace
participants and portal users. Our products offer their own user
interfaces as well, combining the simplicity of a browser-based
environment with a user interface typical of common operating
systems. Our products support rapid implementation by allowing
our customers not only to create customized, integrated views of
content, but to test and refine those views in real time before
rolling them out to e-marketplace participants and portal users. |
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Flexibility and adaptability to change. Our products store
the content and process models as a collection of objects making
them readily available to be reused or modified. As the set of
e-marketplace participants and portal users grows, it remains
easy to manage and deliver personalized views of information and
business processes. All of our tools support re-use of content
and process models. |
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Integration of people. By delivering content specific to
an individual’s requirements and seamlessly integrating
people into business processes, our products offer a distinct
advantage over products that offer little more than message
delivery between applications. |
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Proven security. Our products enable secure operation
among organizations using the Internet. Our products use digital
certificates for authentication and privacy, are compatible with
standard certificate management solutions and support encrypted
links through Secure Sockets Layer, or SSL, an industry-standard
encryption language. |
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Greater scalability. Our software is designed to operate
in a distributed environment and take full advantage of the
Internet. Our products can be segmented and hosted on multiple
platforms within an enterprise and on platforms at customer and
partner sites. |
The Enterworks Strategy
Our objective is to become the leading provider of integration
software for powering e-business. To achieve this objective, we
are pursuing the following strategic initiatives:
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Increasing awareness of Enterworks and our e-marketplace and
portal solutions. To strengthen our market position, we are
continuing to increase the visibility of Enterworks and our
Enterworks Content Integrator and Enterworks Process Integrator
products among potential customers, partners and industry
leaders. To achieve increased awareness, we are emphasizing key
elements of our products through multiple branding programs,
including participation in industry conferences and other events.
In addition, we are placing bylined articles and pursuing key
editorial opportunities in influential publications, and
increasing our advertising in selected trade and business
publications. |
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Expanding our sales efforts. We are aggressively targeting
our marketing and sales promotion programs at e-marketplace and
portal builders, operators and participants. We are increasing
our sales lead generation programs directed at high level
business |
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and technical executives in multiple key industries. In 1999, we
more than doubled the size of our direct sales force and we plan
to significantly increase this number over the next twelve
months. We are recruiting sales representatives experienced in
selling into certain vertical markets, including healthcare,
manufacturing and the public sector. We are also increasing our
staff of sales engineers, and we are expanding our telesales
organization to supplement the efforts of our direct sales
representatives. |
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Broadening our installed base. We intend to broaden our
installed user base because we believe that as more users
interact with our products, the value our products provide our
customers will increase. Additionally, as more customers purchase
our products, our ability to customize content and business
processes becomes more visible to both our existing and potential
customers. To broaden our installed base we have designed
scalable products and several product pricing and packaging
alternatives that meet the needs of organizations of various
sizes and stages of development. |
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Building and leveraging partnerships. We are expanding our
existing relationships and creating new partnerships under our
E-Alliance Program with traditional system integrators,
e-business professional services companies, and other software
vendors and technology partners. We have developed several
partners in each of these categories. See “E-Alliance
Program.” In early 1999, we established a separate team of
experienced partnership development professionals which we expect
to significantly increase in the next twelve months. Our
partnerships enable us to access prospective customers that we
might not otherwise reach and scale our business more quickly and
at lower marketing cost. |
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Enhancing technology leadership. We are investing
significant resources in our R&D organization to strengthen
the core functionality of our products and add industry-specific
extensions. We may also consider acquiring key technologies that
significantly differentiate us in the segments in which we
compete. To ensure that we meet the needs of our customers we
believe we must rapidly add new technologies to our products. We
plan to demonstrate continued technical leadership through new
technology that we will build or acquire. |
Products and Services
The Enterworks product suite currently consists of Enterworks
Content Integrator and Enterworks Process Integrator. Enterworks
Content Integrator, formerly marketed as Virtual DB, is an
electronic catalog that integrates and delivers dynamic,
real-time content from virtually any source (databases,
applications, Web sources, XML sources and others, whether
internal or external to the organization) to e-marketplaces and
portals. Enterworks Process Integrator, formerly marketed as
Enterworks Process Manager, provides a single point of
interaction for business processes that may span multiple
organizations. For example, an order fulfillment process that
includes an e-marketplace, a customer and several suppliers can
be coordinated and tracked within Enterworks Process Integrator.
Both products share a consistent and easy-to-use, browser-based,
graphical user interface. The products also share a common
underlying technology architecture and have interfaces between
them which allow them to work together and share information.
While our products are complementary, they can be purchased
separately so that businesses can select the individual products
they need to meet their immediate business objectives and then
add additional Enterworks products as their requirements evolve.
In addition, our applications are universally accessible,
allowing participants to access content through their preferred
reporting tool, or participate in a complex business process
through their browser.
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Enterworks Content Integrator
Enterworks Content Integrator integrates content from virtually
any electronic source. E-marketplace participants can view a
real-time catalog of content, compare supplier offerings and
query order status. Portal users can quickly retrieve, analyze
and distribute critical customer profiles, competitive
intelligence and legacy data.
[ENTERWORKS CONTENT INTEGRATOR GRAPHIC]
Enterworks Content Integrator delivers to e-marketplaces and
information portals a customized catalog of information that is
seamlessly integrated from multiple content sources in real time.
Enterworks Content Integrator comprises the following components:
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Content Engine requests and receives information from the
Access Server and Modules. The Content Engine accesses disparate
content sources and integrates the information into a single
logical database underlying an electronic catalog. The Content
Engine handles all security, application of data transformations
and business rules. The Content Engine optimizes each request for
information that it receives from a user by breaking it down
into the specific requests understood by the Access Server. |
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Access Server and Modules receive and translate content
requests. The Access Server receives requests for content from
the Content Engine and passes them to the correct Access Module.
Access Modules translate the requests into a language that each
content source understands and returns the result of the request
back to the Access Server. The Access Server also manages the
combination of content coming from various sources, and uses it
to generate the single representation of the underlying content
sources which we call the MetaCatalog. |
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Content Modeling Tool allows businesses to define
customized views of the integrated information in the
MetaCatalog. The Modeling Tool is also used to define real-time
content transformations to reconcile differences between systems,
such as conversion of foreign currencies into US dollars. The
Modeling Tool supports drag-and-drop re-use of objects and
transformations within the MetaCatalog. |
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Content Administrator provides efficient management and
configuration of the system-level functions of the product. It
also provides the ability to define users and roles, the ability
of each user to obtain different views of information and a
familiar folder-based system for organizing work. Through the
Content Administrator, customers can determine access rights and
assign those rights to users, roles and other system objects. |
Enterworks Process Integrator
Developed completely in Java and using standard browsers as the
interface, Enterworks Process Integrator automates the flow of
tasks and information in business processes, within an
enterprise, through portals, across an e-marketplace or between
the e-marketplace and any number of buyers and suppliers.
Examples include order processing, supply chain coordination and
problem resolution. Enterworks Process Integrator integrates both
applications and people, using the best practices and domain
expertise of an enterprise. It coordinates activities by
distributing and updating personal task lists to each person in
the process. Additionally, guidance in the form of “personal
wizards” helps keep people and their assignments on track,
in the right order and with the right information.
An Enterworks Process Integrator environment consists of server
and client components that include graphical tools for building
and managing process flows. These process flows may be easily
designed to intelligently route specific information to different
people. The
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people, or process flow participants, may work from any location
as long as there is a connection to the Internet and access to a
browser.
[ENTERWORKS PROCESS INTEGRATOR GRAPHIC]
Enterworks Process Integrator integrates the people,
applications and processes
required for end-to-end e-business interactions.
Enterworks Process Integrator comprises the following components:
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Process Engine stores all specific data pertaining to
activities, participants or agents, work items and other system
information. The Process Engine also manages all aspects of the
execution of a given process and maintains information regarding
the status of each process currently being executed. |
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Business Integration Components (BIC) Server creates work
items, receives and modifies work items, returns work items to
the process flow and interfaces with external systems used
primarily to integrate external third-party applications in a
process flow. The BICs run under the control of the BIC Server
which informs the Engine that a BIC is available for use. |
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FlowBuilder provides an easy-to-use process modeling tool
that allows a user to visually define a process flow. Users can
drag-and-drop icons that represent elements of a process flow,
set element properties and create links between elements to
define workflows. |
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TaskManager provides a browser-based task list for each
person involved in a business process. In the TaskManager, users
access tasks that have been assigned to them and generate new
work items to be dropped into existing process flows. |
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Process Administrator provides a drag-and-drop tool that
manages the participants, roles, actor groups, work items and
BICs within a business process. Using the Process Administrator,
managers can check the status of work items in process and the
status of workers involved with that task. |
Services
As of December 31, 1999, our Services group, which includes
consulting, education, customer support and distribution,
comprised 37 individuals with a broad range of experience and a
diverse set of complementary skills. We seek to help our
customers implement our products quickly and to support them as
their use of our products increases.
Customer support. Our Customer Support group focuses on
delivering accurate and timely information to our customers. We
provide an array of support programs, which include 24x7 support,
dedicated customer/partner staff, real-time status updating of
case information and monthly onsite visits to discuss outstanding
issues. We also enable our customers to send us questions and
review the status of their support cases over the Internet. We
offer direct 24-hour access to our knowledge base, which allows
customers to save time by learning from our experiences.
Training services. A full-time, dedicated training staff
provides customer education at our Ashburn, Virginia and
Pasadena, California facilities, as well as at customer
locations. Our curriculum includes introductory courses up
through advanced learning for sophisticated developers. We offer
many forms of training, including in-house lectures, on-site
training and customized workshops tailored to address unique
requirements.
Consulting services. Our Enterworks Services group
organization comprises individuals with extensive knowledge in
content and process integration. The group typically implements
pilots and full production programs on a time and materials
basis.
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Customers
As of December 31, 1999, we had licensed our products to
more than 50 companies. Our current customers include
financial, manufacturing, government, healthcare and
telecommunications enterprises, as well as professional services
providers. The following is a partial list of customers that have
licensed our software and that we believe are representative of
our overall customer base:
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Aventis Pharmaceuticals (formerly Hoechst Marion Roussel, Inc.) |
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The Boeing Company |
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CareFirst Blue Cross Blue Shield |
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Cast Alloys, Inc. |
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Inacom, Inc. |
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Intermec, Inc. |
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Jefferies & Company, Inc. |
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Metamediaries, Inc. |
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NonStopNet, Inc. |
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Northrop Grumman Corporations |
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OAO Technology Solutions, Inc |
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Paradigm Genetics, Inc. |
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Raytheon Systems Company |
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SecureTrade, Inc. |
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Tivoli Systems, Inc. |
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US Department of Defense |
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US Department of Veterans Affairs |
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Viador, Inc. |
Case Studies
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The Boeing Company. As the manufacturer of the next
generation of Navy fighter jets, Boeing tracks thousands of parts
supplied by hundreds of subcontracting manufacturers. However,
its schematics, order information, parts lists and inventory
lists formerly were all tracked by different programs in
different locations. In addition, the complexity of these systems
required specialists for even basic queries about parts. Boeing
initially implemented Enterworks Content Integrator to provide a
single view of parts information through a portal accessed by
Boeing personnel, contractors, partners and the US Navy. Boeing
later used Enterworks Content Integrator to create its own
e-marketplace where more than 500 of its suppliers access in real
time the specifications they need to prepare and submit bids.
Enterworks Content Integrator allowed Boeing to eliminate several
weeks of labor-intensive preparation previously required every
time specifications had to be created or changed. |
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Cast Alloys, Inc. Cast Alloys is the world’s largest
producer of premium stainless steel and titanium golf club heads,
and the main supplier of such heads for Calloway, Taylor Made
and Titleist. The company needed stronger management of its
production processes to successfully expand into manufacturing of
other precision metal products. Cast Alloys chose Enterworks
Process Integrator to automate and manage the interaction between
receiving, warehousing and the manufacturing areas to ensure
product quality, delivery and quick problem resolution. Cast
Alloys also plans to implement Enterworks Content Integrator to
provide a single Web-enabled portal that managers can consult
when they need to validate the quality and timeliness of their
production processes. |
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Jefferies & Company, Inc. This full-service investment
firm had client information spread across multiple incompatible
systems, preventing the firm from creating the single customer
view it needed for effective marketing. Using our products,
Jefferies now can access, aggregate and deliver information from
its disparate systems through a portal for account executives and
managers. These business users can review customer records and
do accurate, timely planning and analysis with the standard Web
browser on their desktop or laptop computers. With Enterworks
Content Integrator |
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technology as the key component of its information-reporting
environment, Jefferies recently won an Application Development
Trends Innovation Award. |
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NonStopNet, Inc. NonStopNet creates network
infrastructures as an outsourcing service for a number of
clients. It looked to us for additional services that would
differentiate its network offerings and bring greater value to
its clients. NonStopNet chose us to power its eBusiness
Intelligence Service, a new offering it will make available to
its customers in early 2000. In the initial launch of this
service, Enterworks Content Integrator will be used to aggregate
Web traffic and usage statistics for a key NonStopNet customer
who has become a leader in online learning. NonStopNet’s
customer will use Enterworks Content Integrator to craft
highly-targeted marketing programs and increase its royalty-based
revenue stream. |
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US Army. The US Army tracks billions of dollars worth of
inventory, needing to know at any given time where assets are
located to determine battle readiness. But the complexity and age
of its systems often required time-consuming efforts involving
phone calls and paper-based systems which frequently resulted in
misplaced status requests. Using Enterworks Content Integrator,
the Army accesses decades-old, COBOL-based applications and
delivers unified content though a portal. The Army has reduced
from days and weeks to just minutes the time it takes to track a
requisition for materiel worldwide, saving millions of dollars in
storage costs and lost inventory. |
Sales and Marketing
We target e-marketplace and portal operators, as well as the
large number of traditional businesses that are seeking to deploy
or participate in e-marketplaces and portals. Within these
enterprises we target CEOs, CIOs, CFOs and senior level managers
tasked with the company’s or organization’s overarching
e-business strategy. We also target high-level marketing and
customer relationship executives.
We deliver our products though our direct sales force and
E-Alliance partners, which include traditional system
integrators, e-business professional services companies and other
software vendors and technology providers. As of
December 31, 1999, we had 52 people in our sales and
marketing organization, of whom 41 were in direct and channel
sales organizations and 11 were in marketing. We currently have
sales representatives in Ashburn, Virginia; Chicago, Illinois;
San Francisco, California; Phoenix, Arizona; Atlanta, Georgia;
and Raleigh, North Carolina. Our direct sales representatives are
supported by a field-based staff of sales engineers. We intend
to increase the size of our direct sales force in the next twelve
months and establish additional domestic sales offices.
We build market awareness of Enterworks and our products through
a variety of marketing programs, including regular briefings with
industry analysts, public relations activities, direct mail and
e-mail campaigns, Web seminars, executive breakfasts, trade show
exhibitions, speaking engagements and Web site marketing. We
supplement direct marketing efforts with advertising in
technology, industry-specific and business publications. In
addition, we pursue joint marketing and selling efforts with our
strategic partners.
E-Alliance Program
We have established marketing and technology alliances under our
E-Alliance Program with a number of strategic partners, including
traditional system integrators, e-business professional services
companies and other software vendors and technology providers.
These partnerships enable us to access customers we might not
otherwise reach and to scale our business with lower marketing
costs. In addition, these relationships help our products
proliferate by embedding and integrating our software into the
products and services of our partners.
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Our E-Alliance Program provides sales and marketing assistance to
our partners, including lead sharing, awareness building and
joint promotional campaigns. Our partners also receive
complimentary or discounted training as part of their support
agreements.
Our program focuses on these types of strategic partners:
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Traditional System Integrators, E-business Professional
Services Companies and VARs. We partner with traditional
system integrators, e-business professional services companies
and value-added resellers (VARs) who combine their products and
services with our solutions to provide a comprehensive approach
to addressing customer needs. Our solutions are particularly
attractive to these partners because of the implementation speed,
flexibility, scalability and reusability of our software. Our
current integration partners include BTG, Inc., Edgemark Systems,
Inc., Litton/PRC Inc., OAO Technology Solutions, Inc.,
Razorfish, Inc., Science Applications International Corporation
(SAIC) and Telos. |
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Technology Partners. We partner with other software
vendors whose software is complementary to our products. Portal
vendors who develop products for presenting information through
Web sites provide an ideal front-end to our products. Our
relationships range from original equipment manufacturers (OEMs)
to joint marketing and selling arrangements. Our technology
partners include Active Software Inc., Business Objects, Inc.,
Hewlett-Packard Corporation, Inprise, Inc., Sun Microsystems,
Inc., Sybase, Inc. and Viador, Inc. |
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OEM and ISV Partners. We form alliances with companies
that embed our technology in their products to enhance the
functionality and value of their products. Our partners include
Aegis Analytical Corporation and Tivoli Systems, Inc. |
Technology
Our products are built with a distributed architecture based on
Internet standards. This architecture allows content integration
across packaged applications, legacy systems and databases. It
also allows integration of business processes across
applications, and integration of those processes with people
involved in the process flow. Graphical tools minimize the need
for expensive custom programming and allow rapid incremental
change and reuse. Our products support both intranet-and
Internet-based e-business solutions because they were designed
based on Internet standards for networking and security and use
Java as the implementation language.
[TECHNOLOGY DIAGRAM GRAPHIC]
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The Enterworks product suite uses a distributed architecture
based on Internet standards to integrate multiple content sources
and processes. |
Standards. Our products are Internet-enabled, employing
HTTP, CORBA and IIOP communication facilities, and XML and HTML
formats. They utilize SSL and X.509 to provide secure user
management. All of our products have been developed in Java to
support inherent portability across platforms. By strictly
adhering to current and emerging Internet standards, we enable
our products to meet the requirements of Internet
business-to-business interactions. Furthermore, our products have
an open architecture that is easy to integrate with our
customers’ infrastructures.
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Scalability. Our products can be scaled because of their
distributed frameworks. For example, the informational models
provided by our Enterworks Content Integrator product can be
partitioned and replicated across multiple servers. Enterworks
Content Integrator servers can also be distributed in a
hierarchical model to allow successive levels of content
integration and local control and management. Enterworks Process
Integrator provides distributed sub-flows and allows electronic
processes to be hosted within individual organizations. This
enables a network of suppliers and vendors to host their own
informational models and processes and integrate those processes
into a single distributed system.
Flexibility. Our products are easily adapted to the
environments of our customers and their partners. Enterworks
Content Integrator can access more than 70 content sources
and legacy systems. In addition, we provide a content access
module development kit which can be used to integrate other
content sources into our Enterworks Content Integrator
architecture. Enterworks Process Integrator BICs provide a unique
mechanism to allow external systems to easily initiate a process
within the Enterworks Process Integrator framework and to pass
content into a process. BICs can also be used to pass content to
external systems and initiate actions within those systems.
Security. Our products use standards-based security
technology that permits the integration of processes and sharing
of content between suppliers and customers. These security
features include:
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Encryption. We use SSL, the Internet standard for
e-business encryption, based on public key technology. |
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Digital certificates. We base our authentication and
authorization models for both server-to-server and
client-to-server security on X.509 standard digital certificates.
These certificates contain all the information required to
verify that the public key being used for authentication belongs
to a properly authorized party. Digital certificates, when
coupled with a certificate authority framework, provide a
framework for defining and verifying identity. Our products are
designed to integrate with industry-standard certificate
management frameworks such as Netscape’s Certificate Server. |
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Authorization. Our products restrict access to both data
and functional interfaces so that users can only access
information and perform functions for which they have been
specifically authorized. |
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Roles-based security management. We allow security
profiles to be defined as roles, such as a manager or part
supplier. We then allow specific users or entities to be mapped
into those roles. Once mapped to a role, all users in that role
have the same access privileges, allowing more cost-effective
management of complex security within an e-business environment. |
Research and Development
We invest significant time and resources in our product
development. We have recruited software developers and managers
with experience in e-business content and process integration. As
of December 31, 1999, we employed 62 people in research and
development.
We have two server development groups focused on the technical
evolution of our Enterworks Content Integrator and Enterworks
Process Integrator products. In addition, the User Interface
Engineering group builds the client tools for both products,
allowing maximized reuse of code for the two product lines and
ensuring a consistent look and feel across our product lines. Our
Quality Assurance and Release Engineering group designs and
develops test environments and code to identify problems and
report software performance and quality metrics to our
engineering and product marketing managers. They also manage
release cycles
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and builds of the products. A separate documentation group
provides technical documentation for the products targeted at the
user, system administrator and developer.
We intend to release major new versions of our products
approximately every six months and upgrades approximately every
three months. Major releases usually include significant new
features and increased performance; upgrades introduce specific
tactical features as part of an existing release. We are
currently developing new releases in both components of our
product suite. We anticipate that these new releases will provide
increased scalability, advanced functionality and additional
features designed for specific industry segments.
We plan to continue investing significant resources in research
and development, because our future success will depend in part
on our ability to anticipate changes in technology, keep pace
with evolving customer needs, enhance our current products and
develop and deliver new products.
Competition
We face competition from in-house development staffs and other
consultants. We also face competition from many vendors in the
content and process integration areas such as OnDisplay, Inc.,
Hewlett-Packard Corporation and Vitria Technology, Inc., as well
as from smaller private companies. We believe we may also face
competition from IBM Corporation, Microsoft Corporation, Oracle
Corporation and Sun Microsystems, Inc. if those companies enter
into the e-business content or process integration markets.
The primary competitive factors affecting us include:
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scope of other solutions; |
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degree to which competing solutions interface with each other,
and with existing customer applications; |
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number of customers and strategic partners; |
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product features and quality; |
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time to implementation; and |
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customer service and support. |
We believe our solutions compete favorably in all of these
aspects. The market in which we compete, however, is new and
undergoing rapid growth and change. Many of our current and
potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger
installed base of customers than we have. In addition, many of
our competitors have well-established relationships with our
current and potential customers and have extensive knowledge of
our industry. Consequently, our competitors may be able to
respond more quickly to customer needs or offer competitive
solutions on more favorable terms. Many current and potential
competitors have established or may establish tactical or
strategic relationships with each other or with third parties to
increase their ability to address customer needs. As a result,
new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. In addition, we expect
industry consolidations to increase competition. We may not be
able to maintain our competitive position against current and
potential competitors.
Intellectual Property
Our success depends on our ability to develop and protect our
proprietary technology and intellectual property rights. We rely
on a combination of contractual provisions, confidentiality
procedures, trade secrets, and patent, copyright and trademark
laws to protect our rights with
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respect to intellectual property. Generally, we require employees
to sign employee agreements, through which they assign to us
ownership of intellectual property developed while employed by
us.
We have an active patent program and encourage our entire staff
to be aware of intellectual property issues. We have been granted
one patent for technology within Enterworks Content Integrator
and have two patents pending on our Enterworks Process Integrator
technology. It is possible that no patent will be issued from
our patent applications or that the patents that we have applied
for, if issued, or any other patents we might obtain in the
future, may be successfully challenged. It is also possible that
we may not develop proprietary products or technologies that are
patentable, that any patent issued to us may not provide us with
any competitive advantages or that the patents of others will
materially and adversely affect our business, operating results
and financial condition.
Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain
and use information that we regard as proprietary. In addition,
other parties may breach confidentiality agreements or other
protective contracts we have entered into, and we may not be able
to enforce our rights in the event of these breaches.
Furthermore, we expect that we will increase our international
operations in the future, and the laws of many foreign countries
do not protect our intellectual property rights to the same
extent as the laws of the United States.
The software industry is characterized by the existence of a
large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other
intellectual property rights. Although we attempt to avoid
infringing known proprietary rights of third parties in our
product development efforts, we expect that we may be subject to
legal proceedings and claims for alleged infringement by us or
our licensees of third-party proprietary rights, such as patents,
trademarks or copyrights, from time to time in the ordinary
course of business. Any claims relating to the infringement of
third-party proprietary rights, even if not meritorious, could
result in costly litigation, divert management’s attention
and resources, or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties
making these claims may be able to obtain an injunction, which
could prevent us from selling our products in the United States
or abroad. Any of these results could harm our business. We may
increasingly be subject to infringement claims as the number of
products and competitors in our industry grows and
functionalities of products overlap. Furthermore, former
employers of our current and future employees may assert that our
employees have improperly disclosed confidential or proprietary
information to us.
In addition, we license technology that is incorporated into our
products from third parties, and any significant interruption in
the supply or support of any licensed software could adversely
affect sales, unless and until we can replace the functionality
provided by this licensed software. For more information
regarding our dependence on third-party technology, see
“Risk Factors — We are dependent on third-party
software incorporated in our products, and impaired relations
with these third parties, errors in third-party software or
inability to enhance the software over time could harm our
business.”
Employees
As of December 31, 1999, we had a total of 170 employees, of
whom 62 were in research and development, 52 were in sales and
marketing, 37 were in professional services and 19 were in
corporate and business services functions. We believe that our
future success will depend in part on our continued ability to
attract and retain qualified personnel. Competition for these
personnel is intense and there can be no assurance that we will
be successful in
43
attracting or retaining these personnel in the future. None of
our employees is subject to a collective bargaining agreement. We
consider our relations with our employees to be good.
Facilities
We operate out of two primary locations, our 22,000 square foot
headquarters in Ashburn, Virginia (20 miles west of Washington,
D.C.) and a 6,600 square foot product development, support and
services center in Pasadena, California. We also maintain sales
offices in: Ashburn, Virginia; Chicago, Illinois; San Francisco,
California; Phoenix, Arizona; and Raleigh, North Carolina. We
lease this real estate directly or sublease it from Telos under
leases that expire between 2000 and 2002. See “Certain
Transactions.”
Legal Proceedings
We are not currently subject to any material legal proceedings;
however, we are from time to time a party to litigation arising
in the ordinary course of business.
44
MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following table shows the name, age and position of each of
our executive officers, directors and other key employees as of
the date of this prospectus.
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
|
|
|
|
|
|
Executive Officers and Directors |
|
|
|
|
|
|
|
|
|
|
|
|
John B. Wood |
|
|
36 |
|
|
Chief Executive Officer and Chairman of the Board of Directors |
|
|
|
|
|
|
Robert W. Lewis |
|
|
38 |
|
|
President, Chief Operating Officer and Director |
|
|
|
|
|
|
Daniel P. McGrath |
|
|
34 |
|
|
Vice President, Treasurer and Chief Financial Officer |
|
|
|
|
|
|
Dee Ann Revere |
|
|
42 |
|
|
Vice President, General Counsel and Secretary |
|
|
|
|
|
|
David S. Aldrich |
|
|
40 |
|
|
Director |
|
|
|
|
|
|
Patrick J. McNeela |
|
|
50 |
|
|
Director |
| |
|
Other Key Employees |
|
|
|
|
|
|
|
|
|
|
|
|
Alan J. Bollinger |
|
|
42 |
|
|
Chief Technology Officer |
|
|
|
|
|
|
Jonathan D. Church |
|
|
40 |
|
|
Vice President, Professional Services |
|
|
|
|
|
|
Warren H. Jones |
|
|
46 |
|
|
Vice President, Corporate Communications |
|
|
|
|
|
|
Carolyn J. Parent |
|
|
33 |
|
|
Vice President, Commercial Sales |
|
|
|
|
|
|
Stephen G. Rice |
|
|
42 |
|
|
Vice President, Product Development |
|
|
|
|
|
|
John F. Salimbene |
|
|
42 |
|
|
Vice President, Marketing |
|
|
|
|
|
|
John T. Trauth |
|
|
38 |
|
|
Vice President, Federal Sales |
|
|
|
|
|
|
William E. Welch |
|
|
32 |
|
|
Vice President, E-Alliances |
John B. Wood has served as the Chairman of Enterworks
since January 1996 and as Chief Executive Officer of Enterworks
since January 1997. He has also served as a director and as
President and Chief Executive Officer of Telos since
February 1994, after joining Telos as Executive Vice
President in February 1992. Prior to joining Telos,
Mr. Wood founded a boutique investment banking firm.
Mr. Wood has a BA in Finance and Computer Science from
Georgetown University.
Robert W. Lewis has served as the President and Chief
Operating Officer of Enterworks since January 1996 and as a
director since January 2000. Prior to joining Enterworks, he was
an employee of Telos for 11 years. At Telos, Mr. Lewis
served in product development, operational and marketing roles.
His most recent position was Director of Business Development.
Mr. Lewis has a BBA in Information Technology from James
Madison University and an MBA in Management and Marketing from
George Mason University.
Daniel P. McGrath has served as Vice President, Treasurer
and Chief Financial Officer of Enterworks since August 1999.
Previously, he was Vice President of Finance and Accounting for
Telos which he joined in May 1998. Prior to joining Telos,
Mr. McGrath served with Price Waterhouse LLP’s
Technology Industry Group since 1987, most recently as a Senior
Manager. He is a Certified Public Accountant and holds a BBA with
a concentration in Accounting from the University of Notre Dame.
Dee Ann Revere has served as Vice President, General
Counsel of Enterworks since April 1999 and Secretary since
October 1999. Ms. Revere joined Enterworks in
January 1996 as Assistant General Counsel. Previously, she
was Assistant General Counsel to Telos since May 1995. Prior
to joining Telos, Ms. Revere was a trial lawyer with the
law firm of Hazel &
45
Thomas, P.C. for six years. Ms. Revere holds a BA from Knox
College and a JD from the George Mason University School of Law.
David S. Aldrich has served as a director of Enterworks
since January 2000. He is Vice President and Chief Operating
Officer of Telos, which he joined in 1996 as Vice President of
Corporate Development and Strategy. He became Chief Operating
Officer in January of 1999. Prior to joining Telos, Mr. Aldrich
was a partner in the Financial Advisory Service Group of Coopers
& Lybrand which he joined in 1991. He holds an AB in
Economics from Princeton University and an MBA from New York
University.
Patrick J. McNeela has served as a director of Enterworks
since January 2000. He is Vice President, Private Equity Group,
of General Electric Asset Management. Mr. McNeela has been
affiliated with the General Electric Company for more than
18 years. He received a BA in Economics from Old Dominion
University and an MBA from the Darden School at the University of
Virginia.
Alan J. Bollinger has served as Vice President, Chief
Technology Officer since December 1999. Previously he was
technical director and manager at Oracle Corporation from 1997 to
1999. Mr. Bollinger was with the Digital Equipment
Corporation from 1986 to 1997, where he performed a wide variety
of technical support roles. Mr. Bollinger holds a BS in
Computer Science from the University of Maryland and an MS in
Computer Science from Johns Hopkins University.
Jonathan D. Church joined Enterworks in August 1998
as Vice President, Professional Services. Prior to joining
Enterworks, Mr. Church was the Senior Director of Service
Operations at Software AG of North America where he worked for
17 years. At Software AG of North America, Mr. Church
held various positions including General Manager of the
company’s Insight Consulting, Inc. subsidiary, which focused
on process improvement and integration services. He studied
Computer Science at the University of Denver.
Warren H. Jones has been Vice President, Corporate
Communications since August 1998 after joining Enterworks in
February 1997 as Director of Corporate Communications.
Mr. Jones worked previously for Relay Technology from 1994
to 1997. Mr. Jones holds a BS in Public Communications from
Syracuse University and a JD degree from the University of
Richmond School of Law.
Carolyn J. Parent joined Enterworks in December 1997
as sales representative and has served as Vice President,
Commercial Sales, since October 1998. Prior to joining
Enterworks, Ms. Parent was with Computer Associates
International, Inc. from 1993 to 1997, where she was Divisional
Vice President of Sales for an eight-state region. From 1988 to
1993 she held sales and branch management positions with Versyss
Inc. (formerly known as Contel), which provides healthcare
software solutions to physicians in hospital markets.
Ms. Parent holds a BA from Villanova University.
Stephen G. Rice has been Vice President, Product
Development since April 1999. He joined Enterworks in July 1998
as a Product Development Manager. From 1993 to 1998,
Mr. Rice was Development Manager of Trusted Information
Systems. Mr. Rice holds a degree in Economics from the
University of Maryland.
John F. Salimbene joined Enterworks as Vice President,
Marketing, in January 2000. Mr. Salimbene came to
Enterworks from MemorizeUSA, a startup company in the smart card
software market where he served as President and Chief Operating
Officer from May 1999. Mr. Salimbene was Vice President
of Marketing and Sales for InLine Software Corporation, a Java
Development company, from 1998 to 1999. He was Director of
Marketing for Group 1 Software from 1996 to 1998 and served as
Vice President of Sales and Marketing for OTG Software from 1995
to 1996. Prior to Oracle, he managed online communications and
46
information services for ITT Dialcom/ British Telecom.
Mr. Salimbene holds a BS in Management from Arizona State
University.
John T. Trauth joined Enterworks in April 1997 as a
sales representative, and has served as Vice President, Federal
Sales since October 1998. Mr. Trauth has also held
sales management positions with a variety of hardware, software,
and solutions companies. Prior to joining Enterworks,
Mr. Trauth was district sales manager with the Advanced
Programs Division of Oracle Corporation from June 1996 to
April 1997, federal sales manager for Tektronix Inc. from
May 1995 to June 1996 and director of federal sales for
QMS Inc. from December 1994 to May 1995.
Mr. Trauth holds a BS in Finance and Business Economics from
Miami University, Ohio.
William E. Welch joined Enterworks in December 1998
as Director of Civilian and Public Sector Sales and was promoted
to Vice President, E-Alliances in January 2000. Prior to
joining Enterworks, he served from 1997 to 1998 as regional
manager for NetDynamics, an applications server company. From
1992 to 1997, Mr. Welch held various director level
positions at Oracle Corporation. Mr. Welch holds a BS in
Finance and Political Science from LaSalle University.
Board Structure
Our board of directors currently consists of five members. Prior
to the closing of this offering, the holders of our Series A
convertible preferred stock were entitled to elect one director,
and Telos was entitled to elect one director. The Series A
convertible preferred stockholders elected Mr. McNeela, and
Telos elected Mr. Aldrich. The holders of the convertible
preferred stock and common stock, voting together as a single
class, are entitled to elect the remaining directors. Upon the
closing of this offering, these board representation rights
terminate, and no stockholders will have special rights to elect
directors.
Our charter and bylaws provide that our board of directors is
divided into three classes as nearly equal in size as possible
with staggered three-year terms. The term of our Class I
directors will expire at the annual meeting (or special meeting
held in lieu of an annual meeting) of stockholders to be held in
2001; the term of office of our Class II directors will
expire at the annual meeting (or special meeting held in lieu of
an annual meeting) of stockholders held in 2002; and the term of
our Class III directors will expire at the annual meeting
(or special meeting held in lieu of an annual meeting) of
stockholders held in 2003. At each annual meeting of
stockholders, beginning with the 2001 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.
Mr. McNeela has been designated as a Class I director.
There is one Class I director vacancy. The board intends to
fill that vacancy by March 31, 2000 with an independent
director who also shall serve on the audit and compensation
committees, but it has not identified a candidate at this time.
Mr. Lewis has been designated as a Class II director,
and Messrs. Wood and Aldrich have been designated as
Class III directors. 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 us.
Board Committees
Our board of directors has a compensation committee, an audit
committee and an executive committee.
Compensation committee. The current members of our
compensation committee are Messrs. Aldrich and McNeela.
Mr. Aldrich is an affiliate of Telos. The compensation
committee reviews and makes recommendations to the board of
directors concerning salaries and
47
incentive compensation for our officers and employees. The
compensation committee also administers our stock option plans.
Audit committee. The current members of our audit
committee are Messrs. Aldrich and McNeela. Our audit committee
reviews and monitors our financial statements and accounting
practices, makes recommendations to our board of directors
regarding the selection of independent auditors and reviews the
results and scope of the audit and other services provided by our
independent auditors.
Executive committee. The current members of our executive
committee are Messrs. Wood and Lewis. The executive
committee makes decisions and recommendations to the board of
directors on operational business matters and exercises the
powers of the board of directors between meetings.
Compensation Committee Interlocks and Insider Participation
Mr. Wood serves as a director of Telos and he has served as
a member of its non-executive compensation committee. None of the
members of our compensation committee has at any time since our
formation been an officer or employee of Enterworks. No executive
officer of Enterworks, other than Mr. Wood, serves, or in
the past has served, as a member of the board of directors or
compensation committee of any entity that has one or more
executive officers serving on our board of directors or
compensation committee.
Director Compensation
Our directors do not receive cash compensation for their services
as directors but are reimbursed for their reasonable and
necessary expenses in attending board and committee meetings.
Each non-employee director who is or becomes a member of our
board of directors will be granted an option to purchase shares
of our common stock under the 2000 Stock Incentive Plan.
Immediately following a non-employee director’s re-election
to the board, the director will automatically be granted an
additional option to purchase shares under that plan if the
director has served continuously as a member of our board of
directors since the date of the director’s initial grant.
Each option will have an exercise price equal to the fair market
value of our common stock on the date of grant and will have a
ten-year term. Each of these options will vest ratably over a
three-year period.
48
Executive Compensation
The following table sets forth compensation awarded to, earned by
or paid to our Chief Executive Officer and our three other
executive officer. These individuals are referred to as the named
executive officers in this prospectus.
Summary Compensation Table
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term and |
|
|
|
|
Annual Compensation |
|
Other Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
All Other |
|
Underlying |
| Name and Principal Position |
|
Year |
|
Salary |
|
Bonus |
|
Compensation(1) |
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
John B. Wood (2) |
|
|
1999 |
|
|
$ |
348,574 |
|
|
$ |
— |
|
|
$ |
5,000 |
|
|
|
2,000,000 |
|
|
Chief Executive Officer and |
|
|
1998 |
|
|
|
334,198 |
|
|
|
— |
|
|
|
13,500 |
|
|
|
— |
|
|
Chairman of the Board |
|
|
1997 |
|
|
|
299,998 |
|
|
|
382,000 |
|
|
|
36,750 |
|
|
|
— |
|
|
of Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert W. Lewis |
|
|
1999 |
|
|
$ |
128,446 |
|
|
$ |
44,000 |
|
|
$ |
11,000 |
|
|
|
301,000 |
|
|
President |
|
|
1998 |
|
|
|
114,138 |
|
|
|
46,000 |
|
|
|
9,439 |
|
|
|
— |
|
|
|
|
1997 |
|
|
|
103,084 |
|
|
|
9,100 |
|
|
|
6,455 |
|
|
|
— |
|
|
|
|
|
|
|
Daniel P. McGrath (3) |
|
|
1999 |
|
|
$ |
114,600 |
|
|
$ |
— |
|
|
$ |
3,247 |
|
|
|
225,833 |
|
|
Vice President, Chief |
|
|
1998 |
|
|
|
61,316 |
|
|
|
— |
|
|
|
1,783 |
|
|
|
10,000 |
|
|
Financial Officer and |
|
|
1997 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Treasurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dee Ann Revere (4) |
|
|
1999 |
|
|
$ |
106,832 |
|
|
$ |
— |
|
|
$ |
2,500 |
|
|
|
136,333 |
|
|
Vice President, General |
|
|
1998 |
|
|
|
86,419 |
|
|
|
20,000 |
|
|
|
2,500 |
|
|
|
— |
|
|
Counsel and Secretary |
|
|
1997 |
|
|
|
76,579 |
|
|
|
37,500 |
|
|
|
2,375 |
|
|
|
— |
|
|
|
| (1) |
Includes 401(k) Shared Savings Plan contributions
and car allowances paid by Enterworks. |
| |
| (2) |
Represents Mr. Wood’s total compensation
during 1997, 1998 and 1999, all of which was paid by Telos. A
portion of this amount was allocated to Enterworks through
general corporate overhead allocations based on agreements
between the companies. |
| |
| (3) |
During 1998 and through August 1999,
Mr. McGrath’s compensation was paid by Telos, which he
joined in May 1998. |
| |
| (4) |
During 1997, 1998 and through March 1999,
Ms. Revere’s compensation was paid by Telos. |
Option Grants During 1999
The following table provides information about stock option
grants to the named executive officers who received options
during fiscal year 1999.
We have a right to repurchase the shares issued on exercise of
these options upon termination of the optionee’s employment.
This right will terminate upon the closing of this offering. All
options were granted at an exercise price equal to the fair
market value of our common stock, as determined by our board of
directors on the date of grant. The 5% and 10% assumed annual
rates of compounded stock price appreciation in the table below
are required by rules of the Securities and Exchange Commission
and do not represent our estimates or projections of our future
stock prices.
49
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Realizable |
|
|
Individual Grants |
|
Value at Assumed |
|
|
|
|
Annual Rates |
|
|
Number of |
|
Percent of |
|
|
|
of Stock Price |
|
|
Shares |
|
Total |
|
Exercise |
|
|
|
Appreciation for |
|
|
Underlying |
|
Options |
|
Price |
|
|
|
Option Term |
|
|
Options |
|
Granted to |
|
Per |
|
Expiration |
|
|
| Name |
|
Granted |
|
Employees |
|
Share |
|
Date |
|
5% |
|
10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John B. Wood |
|
|
2,000,000 |
|
|
|
24.8 |
% |
|
$ |
0.77 |
|
|
|
8/31/09 |
|
|
$ |
968,498 |
|
|
$ |
2,454,363 |
|
|
|
|
|
|
|
Robert W. Lewis |
|
|
301,000 |
|
|
|
3.7 |
% |
|
|
0.77 |
|
|
|
8/31/09 |
|
|
|
145,759 |
|
|
|
369,382 |
|
|
|
|
|
|
|
Daniel P. McGrath |
|
|
200,833 |
|
|
|
2.5 |
% |
|
|
0.77 |
|
|
|
8/31/09 |
|
|
|
97,253 |
|
|
|
246,459 |
|
|
|
|
25,000 |
|
|
|
0.3 |
% |
|
|
1.00 |
|
|
|
12/29/09 |
|
|
|
15,722 |
|
|
|
39,844 |
|
|
|
|
|
|
|
Dee Ann Revere |
|
|
60,000 |
|
|
|
0.7 |
% |
|
|
0.77 |
|
|
|
4/1/09 |
|
|
|
29,055 |
|
|
|
73,631 |
|
|
|
|
51,333 |
|
|
|
0.6 |
% |
|
|
0.77 |
|
|
|
8/31/09 |
|
|
|
24,858 |
|
|
|
62,995 |
|
|
|
|
25,000 |
|
|
|
0.3 |
% |
|
|
1.00 |
|
|
|
12/29/09 |
|
|
|
15,722 |
|
|
|
39,844 |
|
1999 Year-End Option Values
The following table provides information concerning the shares of
common stock represented by outstanding stock options held by
each of the named executive officers as of December 31,
1999. No named executive officers exercised stock options during
1999.
The last two columns represent the difference between the fair
market value of the shares as of December 31, 1999, and the
exercise price of the option.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
Underlying Unexercised |
|
Value of Unexercised |
|
|
Options at |
|
In-the-Money Options at |
|
|
Fiscal Year End |
|
Fiscal Year End |
|
|
|
|
|
| Name |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
|
|
|
|
|
|
|
|
|
John B. Wood |
|
|
2,060,000 |
|
|
|
— |
|
|
$ |
512,800 |
|
|
$ |
— |
|
|
|
|
|
|
|
Robert W. Lewis |
|
|
601,000 |
|
|
|
— |
|
|
|
333,230 |
|
|
|
— |
|
|
|
|
|
|
|
Daniel P. McGrath |
|
|
202,833 |
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33,000 |
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46,652 |
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1,840 |
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Dee Ann Revere |
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99,333 |
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44,500 |
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26,747 |
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5,460 |
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Employee Benefit Plans
1996 Stock Option Plan
Our 1996 Stock Option Plan, as amended, provides for the granting
of either incentive stock options or non-qualified stock options
to purchase shares of our common stock in order to provide
incentives to employees, consultants and directors. The maximum
number of shares of common stock that may be issued under the
plan is 13,000,000. The plan allows participants to purchase our
common stock at prices set by the board of directors, but in the
case of incentive stock options not less than fair market value
at the date the option is granted.
Typically, options vest at an average rate of 20% to 25% each
year. Vesting of stock options granted to founders and key
employees is based on the passage of time but accelerates upon
the occurrence of certain key events, including this offering or
a change in control. Unexercised options expire ten years after
the date of grant or in the case of some key employees and
executive officers three years after the annual meeting of
stockholders held following the closing of this offering unless
otherwise specified by the board of directors. As of
December 31, 1999, there were 10,169,798 outstanding options
to purchase common stock pursuant to the 1996 Stock Option Plan
and 2,570,902 additional shares reserved for issuance under the
plan.
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan, which is subject to stockholder
approval, provides for the granting of incentive stock options,
non-qualified stock options and restricted stock, to provide
50
incentives to employees, consultants and directors. We have
reserved a total of 5,000,000 shares of common stock for issuance
under the incentive plan. In addition, the plan provides for
annual increases in the number of shares available for issuance
under the plan on the first day of each fiscal year, beginning
with the fiscal year 2001, equal to the lesser of 4% of the
outstanding shares of common stock on the first day of the fiscal
year, 1,500,000 shares, or such other amount as may be
determined by the board of directors.
Options granted under the incentive plan are granted on such
terms and at such prices as are determined by the board of
directors, except that the per share exercise price of options
granted under the incentive plan cannot be less than the fair
market value of the common stock on the date of the grant. Each
option is exercisable after the period or periods specified in
the option agreement. Options granted to an individual who owns
10% or more of the total combined voting power of all of our
classes of stock must have an exercise price of at least 110% of
the fair market value of the common stock on the date of the
grant. The board of directors has the authority to amend or
terminate the incentive plan, provided that no such amendment or
termination may adversely affect the rights of the holder of any
outstanding option without the consent of such holder and certain
amendments are subject to stockholder approval.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan, which is subject to
stockholder approval, permits our employees to purchase shares of
our common stock. A total of 1,000,000 shares of common stock is
reserved for issuance under this plan. The purchase plan
provides for annual increases in the number of shares available
for issuance under the purchase plan on the first day of each
fiscal year, beginning with the fiscal year 2001, equal to the
lesser of 1.5% of the outstanding shares of common stock on the
first day of the fiscal year, 250,000 shares, or such lesser
amount as may be determined by the board. The board of directors
or a committee appointed by the board of directors administers
the purchase plan and has full and exclusive authority to
interpret the terms of the purchase plan and determine
eligibility. Employees are eligible to participate if they are
customarily employed by us or any participating subsidiary for 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 such employee:
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• |
immediately after grant would own stock possessing 5% or more of
the total combined voting power or value of all classes of the
capital stock of Enterworks; or |
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• |
has rights to purchase stock under all of our employee stock
purchase plans which accrue at a rate that exceeds $25,000 worth
of stock or more than 1,000 shares for each calendar year. |
401(k) Shared Savings 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)
Shared Savings plan as of the first day of each month.
Participants may make pre-tax contributions to the plan of up to
16% of their eligible pay, subject to a statutorily prescribed
annual limit. We match one-half of the pre-tax participant
contributions to the plan up to a maximum company contribution of
3% of a participant’s salary. Participants are fully vested
in their contributions and the investment earnings; however, our
matching contribution vests at a rate of 20% per year.
Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
51
Employee of the Quarter Stock Awards
Our management selects employees each quarter to receive a stock
award of shares of our common stock in appreciation for that
employee’s outstanding service and excellent job performance
during the quarter because we believe it builds morale and
improves employee retention rates. We intend to continue this
practice following the offering by granting restricted stock
under our 2000 Stock Incentive Plan.
Limitations of Liability and Indemnification Matters
Our charter 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 liability for any of the following:
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• |
any breach of their duty of loyalty to the corporation or its
stockholders; |
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; |
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unlawful payments of dividends or unlawful stock repurchases or
redemptions; or |
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any transaction from which the director derived an improper
personal benefit. |
This limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect the
availability of equitable remedies, including injunctive relief
or rescission. Our bylaws provide that we shall indemnify our
directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent
permitted by law. We believe that indemnification under 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 officer, director, employee or other
agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit
indemnification.
We have entered into agreements to indemnify our directors and
executive officers, in addition to indemnification provided for
in our charter. These agreements, among other things, indemnify
our directors and executive officers for specified expenses,
including attorneys’ fees, judgments, fines and settlement
amounts incurred by any person in any action or proceeding,
including any action by us arising out of that person’s
services as our director or executive officer, any of our
subsidiaries or any other company or enterprise to which the
person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
Presently, there is no pending litigation or proceeding involving
any of our directors, officers or employees for which
indemnification is sought, nor are we aware of any threatened
litigation that might result in claims for indemnification.
52
CERTAIN TRANSACTIONS
Telos Relationship
Prior to January 1, 1996, we operated as a division of Telos
Corporation, an information technology company located in
Ashburn, Virginia. On January 1, 1996, all of the
division’s assets and liabilities were contributed by Telos
to us in exchange for the issuance of 3,000,000 shares of our
common stock, thereby making us a wholly-owned subsidiary of
Telos. On June 14, 1996, we issued 24,000,000 additional
shares of common stock to Telos.
During 1996, we completed a private financing whereby $3,278,000
in principal amount of 8% subordinated notes were issued to
investors, including members, directors, management and
stockholders of Enterworks and Telos. In connection with the
financing, we issued warrants to purchase 2,048,725 shares of our
common stock. The warrants are vested, exercisable, have an
exercise price of $1.00 per share and expire in 2006.
As of August 31, 1999, Telos contributed 1,000,000 shares of
our common stock to us. Simultaneously with this transaction, we
issued options to purchase an aggregate of 1,000,000 shares of
our common stock to six Telos executives who had made substantial
contributions to our development. These options are vested,
exercisable, have an exercise price of $0.77 per share and expire
in August 2009.
Telos has pledged its shares of our stock to Bank of America,
N.A. as security for indebtedness. In the event that the bank
declares a default, the bank has agreed to offer to sell the
shares to us and to certain of our stockholders. In the event
that we or our stockholders do not purchase the stock, the bank
may sell the shares of our common stock to a third party to
satisfy the indebtedness.
Private Placement of Series A Convertible Preferred Stock
and Concurrent Transactions
On December 30, 1999, we issued 21,739,127 shares of our
Series A convertible preferred stock at $1.15 per share to
investors in a private placement transaction.
The following transactions with Telos and related entities were
effected simultaneously with the closing of the private
placement:
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Our payable to Telos of $31,211,000 was reduced as follows: |
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• |
We issued 4,000,000 shares of our common stock to Telos in
exchange for a reduction of $4,000,000 of our payable to Telos; |
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• |
Telos forgave $25,211,000 of our payable to Telos; and |
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• |
The remaining $2,000,000 became a short-term payable to Telos
which will be paid out of our first collections on accounts
receivable this year. |
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• |
We repurchased and retired 5,000,000 shares of our common stock
owned by Telos at a price of $1.00 per share. We increased our
convertible preferred stock offering size to raise the additional
proceeds to fund this repurchase. In consideration for the
increased offering size, Telos paid related cash fees of
$303,000. Additionally, Telos contributed 210,912 shares of our
common stock owned by Telos to our treasury to fund the issuance
of warrants to the placement agent associated with the increased
offering size. |
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• |
We issued a warrant to acquire 350,000 shares of our common stock
at an exercise price of $1.15 per share to Telos’ primary
lender, Bank of America, N.A., in consideration for the consent
of Bank of America to permit the private placement. These
warrants are exercisable and expire in December 2002. |
53
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• |
We repaid and converted $3,278,000 in principal amount of our 8%
subordinated notes by exchanging $2,706,000 in principal amount
of notes for shares of our common stock at an exchange ratio of
one share of common stock for each $1.00 in principal amount of
debt and by repaying the remaining principal amount of $572,000
in cash. The holders converting their notes forgave the accrued
but unpaid interest on the debt. |
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• |
We entered into investor rights agreements with the purchasers of
our Series A convertible preferred stock, the holders of
the shares of common stock received upon exchange of our 8%
subordinated debt and the holders of warrants issued in
connection with the private placement. See “Description of
Capital Stock — Registration Rights.” |
Business Relationships with Telos
Prior to December 30, 1999, we operated as a controlled
subsidiary of Telos. While operating as a majority-owned
subsidiary, we entered into a number of agreements with Telos, as
described below.
Business Arrangements
We have entered into agreements with Telos, whereby each company
performs services as a subcontractor to the other. Our revenues
under these subcontracting agreements were approximately $6,000,
$638,000 and $245,000 in 1997, 1998 and 1999. For those
agreements where Telos acted as a subcontractor to Enterworks, we
incurred expenses of $17,000, $35,000 and $187,000 in 1997, 1998
and 1999.
We have sold software licenses and support services to Telos as a
customer and a reseller. The prices charged to Telos represented
current market prices charged to unrelated entities. We had no
revenues from these transactions with Telos in 1997, and we had
$72,000 and $642,000 in revenues in 1998 and 1999.
Services
Prior to December 30, 1999, Telos provided certain services
to us, which included general management, cash management,
accounting and financial reporting, insurance, information
technology, administration and human resources. Costs for these
services were allocated to us based upon our usage of each
service as a percentage of Telos’ consolidated usage. Our
usage was generally determined on the basis of a specific
measurement, such as headcount, number of transactions processed,
or number of telephone, e-mail or network connections. Where no
specific measurement was available, costs were based principally
upon our total overhead costs as a percentage of the Telos
consolidated overhead costs. The costs allocated to us were
$452,000, $839,000 and $1,737,000 in 1997, 1998 and 1999. We have
agreements with Telos to continue to receive some information
technology, human resources and payroll services. We have the
right to terminate these agreements at the end of their terms. We
intend to reduce the scope of services and support from Telos as
we provide these services ourselves or obtain them from other
vendors.
Facilities
We sublease headquarters office space from Telos on a
year-to-year basis. We pay rent, utilities and other costs for
this space based upon the square footage occupied in relation to
the total square footage of the facility. Our costs were
$149,000, $159,000, and $220,000 in 1997, 1998 and 1999.
54
Financial Arrangements
Prior to our deconsolidation from Telos on December 30,
1999, our operational cash needs were funded primarily through
cash advances from Telos. This payable to Telos bore interest at
the prime rate plus 1.0%, which was 8.5% at December 31,
1999. In 1999, we paid interest to Telos of $2,498,000. As of
December 31, 1999, we had short-term non-interest bearing
accounts payable to Telos of $2.0 million, which we are
repaying out of our first collection on accounts receivable in
2000.
As a result of our being a member of Telos’ affiliated group
for tax filing purposes prior to December 30, 1999, we and
the other members of the group are jointly and severally liable
for any federal income taxes assessed against the group for
periods during which we were a member.
Retirement Plan
Prior to December 30, 1999, substantially all our full-time
employees were eligible to participate in the Telos Shared
Savings Plan. Enterworks matched one-half of participant
contributions to the plan up to a maximum of 3% of a
participant’s salary. Our contributions were $63,000,
$63,000, and $93,000 in 1997, 1998 and 1999. We have established
our own Shared Savings Plan. See “Management —
401(k) Shared Savings Plan.”
Indemnification Agreements
We have entered into indemnification agreements with our officers
and directors containing provisions which may require us to,
among other things, indemnify our officers and directors against
liabilities that may arise by reason of their status or service
as officers or directors (other than liabilities arising from
willful misconduct of a culpable nature) and to advance their
expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See
“Management — Limitation of Liability and
Indemnification Matters” for more information on our
indemnification obligations.
Future Affiliate Transactions
All future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates,
will be approved by a majority of the board of directors,
including a majority of the independent and disinterested outside
directors on the board of directors, and will be on terms
determined by them to be no less favorable to us than could be
obtained from unaffiliated third parties.
55
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND PRINCIPAL
STOCKHOLDERS
The following table contains information regarding the beneficial
ownership of our common stock as of December 31, 1999 by:
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• |
each person who we know to beneficially own more than 5% of our
common stock; |
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• |
each of our directors; |
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• |
each of the named executive officers; and |
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• |
all directors and executive officers as a group. |
This table lists ownership based on 49,323,975 shares of common
stock. These shares include 27,584,848 shares of common stock
outstanding as of December 31, 1999 and the 21,739,127
shares we will issue upon the conversion of our convertible
preferred stock at completion of this offering. The
“Percentage After Offering” column reflects the sale of
shares
of our common stock in this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. Options and
warrants to purchase shares of our common stock that are
exercisable within sixty days of the closing of this offering are
deemed to be beneficially owned by the persons holding these
options or warrants for the purpose of computing percentage
ownership of that person, but are not treated as outstanding for
the purpose of computing any other person’s ownership
percentage.
To the best of our knowledge, the persons named in this table
have sole voting and investing power with respect to all of the
shares of common stock held by them. Unless otherwise indicated
the address for each stockholder on this table is c/o Enterworks,
Inc., 19886 Ashburn Road, Ashburn, Virginia 20147.
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Shares Beneficially Owned |
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Options & Warrants to |
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Purchase Shares Included |
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Percentage |
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Percentage |
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in Beneficial Ownership |
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Before |
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After |
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| Beneficial Owner |
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Number |
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Offering |
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Offering |
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Options |
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Warrants |
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Telos Corporation(1) |
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17,153,059 |
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34.8 |
% |
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— |
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— |
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19886 Ashburn Road |
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Ashburn, VA 20147 |
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John R.C. Porter(2) |
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5,670,580 |
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11.3 |
% |
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— |
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750,000 |
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15 Berners Street |
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London SW1 9EA England |
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Chartwell Capital |
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4,347,826 |
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8.8 |
% |
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— |
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— |
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One Independent Drive, Suite 3120 |
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Jacksonville, FL 32202 |
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GE Asset Management |
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4,347,826 |
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8.8 |
% |
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— |
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— |
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3003 Summer Street |
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Stamford, CT 06905 |
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Foreign & Colonial Ventures Limited(3) |
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3,252,668 |
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6.6 |
% |
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— |
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155,043 |
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Berkeley Square House |
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Berkeley Square |
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London W1X 5PA England |
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Seligman New Technologies Fund, Inc. |
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2,747,826 |
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5.6 |
% |
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— |
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— |
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100 Park Avenue |
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New York, NY 10017 |
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56
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Shares Beneficially Owned |
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Options & Warrants to |
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Purchase Shares Included |
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Percentage |
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Percentage |
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in Beneficial Ownership |
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Before |
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After |
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| Beneficial Owner |
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Number |
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Offering |
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Offering |
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Options |
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Warrants |
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Raptor Fund |
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2,598,261 |
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5.3 |
% |
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— |
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— |
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Tudor Investments |
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c/o Michael Flaherty |
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40 Rowes Wharf, 2nd Floor |
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Boston, MA 02110 |
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Seligman Investment Opportunities |
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730,435 |
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1.5 |
% |
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— |
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— |
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(Master Fund — NTV Portfolio) |
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100 Park Avenue |
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New York, NY 10017 |
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Directors and Executive Officers: |
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John B. Wood(4) |
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2,141,250 |
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4.2 |
% |
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2,060,000 |
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31,250 |
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Robert W. Lewis |
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601,000 |
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1.2 |
% |
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601,000 |
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— |
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David S. Aldrich |
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562,500 |
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1.1 |
% |
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400,000 |
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62,500 |
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Patrick J. McNeela(5) |
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4,347,826 |
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* |
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Daniel P. McGrath |
|
|
202,833 |
|
|
|
* |
|
|
|
|
|
|
|
202,833 |
|
|
|
— |
|
|
|
|
|
|
|
Dee Ann Revere |
|
|
99,333 |
|
|
|
* |
|
|
|
|
|
|
|
99,333 |
|
|
|
— |
|
|
|
|
|
|
|
All directors and executive officers as a group (6 persons) |
|
|
7,954,742 |
|
|
|
15.1 |
% |
|
|
|
|
|
|
3,363,166 |
|
|
|
93,750 |
|
|
|
| * |
Represents less than 1% of the outstanding shares
of common stock. |
| |
| (1) |
These shares are held by Telos Corporation, a
California corporation and wholly owned subsidiary of Telos.
Messrs. Porter, Wood and Aldrich and Foreign & Colonial
Ventures Limited may be deemed to be affiliates of Telos based
solely on our review of the reports filed by Telos with the SEC.
Ownership of these 17,153,059 shares has not been attributed in
the table to each individual affiliate of Telos, in the interest
of clarity, nor have shares owned by affiliates of Telos been
attributed to Telos. |
| |
| (2) |
Does not include 17,153,059 shares held by Telos.
Mr. Porter beneficially owns 80.3% of Telos’ Class A
common stock according to Telos’ SEC reports, but he does
not exercise voting power over these shares pursuant to an
agreement between him and Telos. |
| |
| (3) |
Does not include 17,153,059 shares held by Telos.
Foreign & Colonial Ventures Limited beneficially owns 77.9%
of Telos’ Class B common stock according to Telos’ SEC
reports. Additionally, Foreign & Colonial Enterprise Trust
beneficially owns 6.7% of Telos Class A common stock. |
| |
| (4) |
Does not include 17,153,059 shares held by Telos.
Mr. Wood beneficially owns 7.5% of Telos’ Class A
common stock according to Telos’ SEC reports. |
| |
| (5) |
Includes 4,347,826 shares of common stock held by
GE Asset Management. Mr. McNeela disclaims beneficial
ownership of the shares held by GE Asset Management, except to
the extent of his proportionate pecuniary interest therein.
|
57
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the
authorized capital stock of Enterworks will consist of
200,000,000 shares of common stock, par value $0.01 per share and
50,000,000 shares of preferred stock, par value $0.01 per share.
As of December 31, 1999, and assuming the conversion of all
outstanding shares of our convertible preferred stock into
common stock upon the closing of this offering, there were
outstanding 49,323,975 shares of common stock held of record by
approximately 120 stockholders, and options to purchase
10,169,798 shares of common stock and warrants to purchase
3,453,285 shares of common stock.
Common Stockholders
Dividend rights. Holders of our common stock are entitled
to share ratably in any dividends declared by our board of
directors, subject to any priority dividend rights of any
preferred stock we have issued or may issue in the future. We do
not intend to pay cash dividends on our common stock for the
foreseeable future. This is because we need to retain our cash
for working capital and to finance our planned growth. However,
our board of directors is free to change our dividend policy in
the future, based upon factors such as our results of operations,
financial condition, cash flow, cash needs and future prospects.
Voting rights. The holders of our common stock are
entitled to one vote per share on all matters to be voted on by
stockholders. Holders of our common stock are not entitled to
accumulate their votes in the election of directors. Generally,
all matters on which stockholders will vote must be approved by a
majority of the votes entitled to be cast by all shares of
common stock present in person or represented by proxy, subject
to any voting rights granted to holders of any preferred stock.
However, our charter includes some supermajority requirements,
which we describe below in “Anti-Takeover Provisions of
Charter Documents and Delaware Law.”
No preemptive or similar rights. No shares of our common
stock are subject to redemption by us. Holders of shares of our
common stock do not have any preemptive rights to purchase
additional shares of our common stock. All of our shares of our
common stock to be outstanding after this offering will be
validly issued, fully paid and nonassessable.
Right to receive liquidation distributions. If we are
liquidated, dissolved or wound up, we must first pay all amounts
we owe our creditors and then pay the full amounts required to be
paid to holders of any shares of our preferred stock then
outstanding before we may make any payments to holders of shares
of our common stock. All holders of shares of our common stock
are entitled to share ratably in any assets available for
distribution to them, after all of our creditors have been
satisfied and we have paid the liquidation preferences of any of
our preferred stock.
Preferred Stockholders
Upon the closing of this offering, each of the 21,739,127
outstanding shares of convertible preferred stock will be
converted into shares of our common stock.
Following the offering, our board of directors will continue to
have the authority, without action by the stockholders, to
designate and issue preferred stock in one or more series and to
designate the rights, preferences and privileges of each series,
which may be greater than the rights of the common stock. It is
not possible to state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of the
common stock until the board
58
of directors determines the specific rights of the holders of
preferred stock. However, the effects might include, among other
things:
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| |
• |
restricting dividends on the common stock; |
| |
| |
• |
diluting the voting power of the common stock; |
| |
| |
• |
impairing the liquidation rights of the common stock; or |
| |
| |
• |
delaying or preventing a change in control of Enterworks without
further action by the stockholders. |
Warrants
As of December 31, 1999, we had outstanding warrants to
purchase a total of 2,048,725 shares of common stock at an
exercise price of $1.00 per share and 1,404,560 shares at an
exercise price of $1.15 per share. The warrants are exercisable
and expire on July 11, 2006 and December 31, 2002.
Registration Rights
Certain holders of our convertible preferred stock, common stock
and warrants to purchase our common stock have rights with
respect to the registration of their shares under the Securities
Act for resale to the public. These rights are subject to lock-up
arrangements with the representatives of the several
underwriters in connection with this offering.
Demand Registration Rights
The investor rights agreement among us and the Series A
convertible preferred stockholders permits the Series A
convertible preferred stockholders to require us, on two
occasions, whether or not we propose to register our common stock
for sale, to register all or part of those stockholders’
common stock so long as the securities that would be covered by
the registration statement have an aggregate gross offering
amount of at least $5 million. In addition, we have entered into
an investor rights agreement with some common stockholders of
converted subordinated notes which requires us, on one occasion,
whether or not we propose to register our common stock for sale,
to register all or part of those stockholders’ common stock
so long as the securities that would be covered by the
registration statement have an aggregate gross offering amount of
at least $5 million. We also have similar registration
obligations to our warrantholders.
If any registration involves an underwritten offering, the
converted subordinated noteholders, warrantholders and
Series A convertible preferred stockholders that wish to
participate in that offering must notify us and, in the event
that they participate, must enter into customary agreements with
us and the underwriter. The underwritten offering will be subject
to certain limitations and restrictions that may be imposed by
the underwriters, including the right of the underwriters to
exclude a portion of the securities owned by the converted
subordinated noteholders, warrantholders and Series A
convertible preferred stockholders from the offering.
The investor rights agreements as well as the warrants we have
issued, provide demand registration rights to the Series A
convertible preferred stockholders, converted subordinated
noteholders and warrantholders requiring us to register all or
part of the registrable securities on Form S-3, provided
that, among other things:
|
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| |
• |
Form S-3 is available to us; |
| |
| |
• |
the offering price of the securities to be registered, together
with securities held by other persons entitled to participate in
the registration, meets certain thresholds; and |
59
|
|
|
| |
• |
the board of directors determines that the registration would not
be seriously detrimental to us and our stockholders at that
time. |
Piggyback Registration Rights
Under the investor rights agreements and warrants, the
convertible preferred stockholders, converted subordinated
noteholders and warrantholders have the right, subject to several
exceptions and the lock-up agreements, to have their registrable
securities included in any registration statement filed by us.
Each convertible preferred stockholder, converted subordinated
noteholder and warrantholder that wishes to participate in the
offering must notify us that they want to participate and the
underwriter may limit in whole or in part the inclusion of that
holder’s registrable securities in the registration
statement, as determined by the underwriters in their sole
discretion.
We are required to pay all expenses relating to any of these
registrations other than underwriting discounts and commissions
relating to shares sold by the convertible preferred
stockholders, converted subordinated noteholders and
warrantholders. The registration rights provided in the investor
rights agreements extend for a period of three years following
our initial public offering. The registration rights provided in
the warrants extend for a period of ten years from the date the
warrant was issued.
Co-Sale and Other Rights
Telos and Mr. Wood, our Chief Executive Officer and
Chairman, have granted co-sale rights to each holder of more than
500,000 shares of the Series A convertible preferred stock
in the event that Telos or Mr. Wood intends to sell an
amount or type of equity securities held by them under certain
circumstances. Upon closing of this offering, these rights will
terminate.
Anti-Takeover Provisions of Charter Documents and Delaware Law
Some provisions of Delaware law and our charter and bylaws could
make the following more difficult:
|
|
|
| |
• |
acquisition of Enterworks by means of a tender offer; |
| |
| |
• |
acquisition of Enterworks by means of a proxy contest or
otherwise; or |
| |
| |
• |
removal of Enterworks’ incumbent officers and directors. |
These provisions, summarized below, are expected to discourage
some types of coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons
seeking to acquire control of us to first negotiate with our
board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging
proposals because negotiation of these proposals could result in
an improvement of their terms.
Election and Removal of Directors
Our board of directors is divided into three classes. The
directors in each class will serve for a three-year term, with
our stockholders electing one class each year. See
“Management-Board Structure.” This system of electing
and removing directors may tend to discourage a third party from
making a tender offer or otherwise attempting to obtain control
of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
60
Stockholder Meetings
Under our bylaws, only the board of directors, the chairman of
the board and the president may call special meetings of
stockholders.
Delaware Anti-Takeover Law
Section 203 of the Delaware General Corporation Law, an
anti-takeover law, applies to us. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a
“business combination” with an “interested
stockholder” for a period of three years following the date
the person became an interested stockholder, unless the
“business combination” or the transaction in which the
person became an interested stockholder is approved in a
prescribed manner. Generally, a “business combination”
includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder.
Generally, an “interested stockholder” is a person who,
together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder
status, did own, 15% or more of a corporation’s voting
stock. The existence of this provision may have an anti-takeover
effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that
might result in a premium over the market price for the shares of
common stock held by stockholders.
Elimination of Stockholder Action by Written
Consent
Following this offering, our charter will eliminate the right of
stockholders to act by written consent without a meeting.
No Cumulative Voting
Our charter does not provide for cumulative voting in the
election of directors.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it
possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of us.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Chase
Mellon Shareholder Services, L.L.C.
61
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common
stock. Future sales of substantial amounts of our common stock in
the public market could adversely affect prevailing market
prices. As described below, no shares currently outstanding will
be available for sale immediately after this offering because of
contractual restrictions on resale. Sales of substantial amounts
of our common stock in the public market after the restrictions
lapse could adversely affect the prevailing market price and
impair our ability to raise equity capital in the future.
Upon completion of this offering,
shares
of our common stock will be outstanding. Of these shares, the
shares
to be sold in this offering
( shares
if the underwriters’ over-allotment option is exercised in
full) will be freely tradable in the public market without
restriction under the Securities Act, unless the shares are held
by our “affiliates” as that term is defined in
Rule 144 under the Securities Act.
The remaining
shares
outstanding upon completion of this offering will be
“restricted securities” as that term is defined under
Rule 144. We issued and sold these restricted securities in
private transactions in reliance on exemptions from registration
under the Securities Act. Restricted securities may be sold in
the public market only if they are registered or if they qualify
for an exemption from registration under Rule 144 or
Rule 701 under the Securities Act, as summarized below.
Our directors, officers and substantially all of our stockholders
have entered into lock-up agreements in connection with this
offering generally providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of
180 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. Notwithstanding
possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not become eligible for resale until these
agreements expire or are waived by Deutsche Bank Securities Inc.
Taking into account the lock-up agreements, and assuming Deutsche
Bank Securities Inc. does not release stockholders from these
agreements, the following shares will be eligible for sale in the
public market at the following times:
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• |
beginning on the effective date of this prospectus, only the
shares sold in the offering will be immediately available for
sale in the public market; |
| |
| |
• |
beginning 180 days after the effective date, approximately
shares
will be eligible for sale under Rule 701, approximately
additional
shares will be eligible for sale under Rule 144(k) and
approximately
additional
shares will be eligible for sale under Rule 144; and |
| |
| |
• |
between 180 days and 365 days after the effective date,
approximately
shares
will be eligible for sale under Rule 144 at various times. |
Rule 701
Following the expiration of the lock-up period, shares issued
upon exercise of options we granted prior to the date of this
prospectus will also be available for sale in the public market
pursuant to Rule 701 under the Securities Act. Rule 701
permits resales of these shares beginning 90 days after the
date of this prospectus by persons other than affiliates.
Rule 144
Generally, after the expiration of the lock-up period,
Rule 144 provides that a person who has beneficially owned
restricted shares for at least one year is entitled to sell in
the open
62
market in brokers’ transactions within any three-month
period a number of shares that does not exceed the greater of:
|
|
|
| |
• |
one percent of the then outstanding shares of our common stock;
or |
| |
| |
• |
the average weekly trading volume in our common stock on the open
market during the four calendar weeks preceding such sale. |
Sales under Rule 144 are also subject to post-sale notice
requirements and the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who has not been our affiliate
at any time during the three months before a sale and who has
beneficially owned the shares proposed to be sold for at least
two years can sell these shares without complying with the manner
of sale, public information, volume limitation or notice
provisions of Rule 144.
Sales of substantial amounts of our common stock in the open
market, or their availability for sale, could adversely affect
the price of our common stock. Our affiliates would be subject to
the restrictions of Rule 144 described above, other than
the one-year holding period requirement.
Stock Options
We have reserved 2,570,902 and 5,000,000 shares of our common
stock for future issuance under our 1996 Stock Option Plan and
our 2000 Stock Incentive Plan. We intend to file a registration
statement on Form S-8 covering the issuance of all shares
under these plans. Accordingly, any shares issued under this plan
will be freely tradable, subject to the restrictions on resale
by affiliates under Rule 144.
Registration Rights
At any time more than six months after the closing of this
offering, the holders of
shares
of our common stock issued upon conversion of our convertible
preferred stock and subordinated notes and warrants to acquire
common stock, or their transferees, will be entitled to rights to
register their shares under the Securities Act. See
“Description of Capital Stock — Registration
Rights.” After registration, these shares could be sold
without restriction under the Securities Act.
Warrants
As of December 31, 1999, we had outstanding warrants to
purchase 3,453,285 shares of common stock. When these warrants
are exercised and the exercise price is paid in cash the shares
must be held for one year before they can be sold under
Rule 144. These warrants also contain “net exercise
provisions.” These provisions allow a holder to exercise the
warrant for a lesser number of shares of common stock in lieu of
paying cash. The shares of common stock issued in a “net
exercise” could be publicly sold under Rule 144
immediately after exercise, subject to the 180-day lock-up
period.
63
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement, the underwriters named below through their
representatives Deutsche Bank Securities Inc., J.P. Morgan
Securities Inc. and SoundView Technology Group, Inc. have
severally agreed to purchase from us the following respective
number of shares of common stock at the initial public offering
price less the underwriting discounts and commissions set forth
on the cover page of this prospectus.
| |
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| Underwriter |
|
Number of Shares |
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|
|
Deutsche Bank Securities Inc. |
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|
|
J.P. Morgan Securities Inc. |
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|
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|
|
|
|
SoundView Technology Group, Inc. |
|
|
|
|
|
|
|
|
|
|
Total |
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|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of common stock offered
hereby are subject to certain conditions precedent and that the
underwriters will purchase all shares of the common stock offered
hereby, other than those covered by the over-allotment option
described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to
the public at public offering price set forth on the cover page
of this prospectus and to dealers at a price that represents a
concession not in excess of $ per
share under the public offering price. The underwriters may
allow, and these dealers may re-allow, a concession of not more
than $ per share to other dealers. After the initial public
offering, representatives of the underwriters may change the
offering price and other selling items.
We have granted the underwriters an option, exercisable not later
than 30 days after the date of this prospectus, to purchase
up to
additional
shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriters may exercise this
option only to cover over-allotments made in connection with the
sale of the common stock offered hereby. To the extent that the
underwriters exercise this option, each of the underwriters will
become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of common
stock as the number of shares of common stock to be purchased by
it in the above table bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to
the option, to sell these additional shares of common stock to
the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters
will offer the additional shares on the same terms as those on
which these shares are being offered.
A prospectus in electronic format is being made available on an
Internet Web site maintained by Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in
this offering have agreed to make a prospectus in electronic
format available on Web sites maintained by each of these
dealers. Other than the prospectus in electronic format, the
information on Wit Capital’s Web site and any information
contained on any other Web site maintained by Wit Capital is not
part of the prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or
endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
The underwriting fee is equal to the public offering price per
share of common stock less the amount paid by the underwriters to
us per share of common stock. The underwriting fee is
% of the initial public offering
price. We have agreed to pay the underwriters the
64
following fees, assuming either no exercise or full exercise by
the underwriters of the underwriters’ over-allotment option:
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Without Exercise of |
|
With Full Exercise |
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|
Over-Allotment |
|
of Over-Allotment |
|
|
Fee Per Share |
|
Option |
|
Option |
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|
|
|
Fees paid by Enterworks |
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|
In addition, we estimate that our share of the total expenses of
this offering, excluding underwriting discounts and commissions,
will be approximately
$ .
We have agreed to indemnify the underwriters against some
specified types of liabilities, including liabilities under the
Securities Act and to contribute to payments the underwriters may
be required to make in respect of any of these liabilities.
Each of our officers and directors and substantially all of our
stockholders and holders of options and warrants to purchase our
stock, have agreed not to offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction that is
designed to, or could be expected to, result in the disposition
of any portion of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our
common stock or derivatives of our common stock owned by these
persons prior to this offering or common stock issuable upon
exercise of options or warrants held by these persons for a
period of 180 days after the effective date of the
registration statement, of which this prospectus is a part,
without the prior written consent of Deutsche Bank Securities
Inc. This consent may be given at any time without public notice.
We have entered into a similar agreement with the
representatives of the underwriters. There are no agreements
between the representatives and any of our stockholders or
affiliates releasing them from these lock-up agreements prior to
the expiration of the 180-day period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over
which they exercise discretionary authority.
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.
Specifically, the underwriters may over-allot shares of our
common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short
position results when an underwriter sells more shares of common
stock than that underwriter is committed to purchase.
Additionally, to cover these over-allotments 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.
Finally, the representatives, on behalf of the underwriters, may
also reclaim selling concessions allowed to an underwriter or
dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Any of these
activities may maintain the market price of our common stock at a
level above that which might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National
Market or otherwise. The underwriters are not required to engage
in these activities and, if commenced, may end any of these
activities at any time.
At our request, the underwriters have reserved for sale, at the
initial public offering price, up to
shares
for our vendors, employees, family members of employees,
customers and other third parties. The number of shares of our
common stock available for sale to the general public will be
reduced to the extent these reserved shares are purchased. Any
reserved shares that are not purchased by these persons will be
offered by the underwriters to the general public on the same
basis as the other shares in this offering.
Deutsche Bank Securities Inc. served as our placement agent in
connection with the private placement in December 1999 of our
Series A convertible preferred stock and was paid a cash
placement agent fee. Deutsche Bank Securities Inc. also
received a warrant for the
65
purchase of 1,054,560 shares of our common stock. In addition, in
the private placement seven individuals associated with Deutsche
Bank Securities Inc. purchased 124,139 shares of our convertible
preferred stock for an aggregate purchase price of $142,760.
These individuals purchased the convertible preferred stock on
the same terms as the other investors in the private placement.
Each share of convertible preferred stock will convert
automatically upon the closing of this offering into one share of
our common stock.
Pricing of this Offering
Prior to this offering, there has been no public market for our
common stock. Consequently, the initial public offering price for
our common stock has been determined by negotiation among us and
the representatives of the underwriters. Among the primary
factors considered in determining the public offering price were:
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• |
prevailing market conditions; |
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| |
• |
our results of operations in recent periods; |
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| |
• |
the present stage of our development; |
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| |
• |
the market capitalization and stages of development of other
companies that we and the representatives of the underwriters
believe to be comparable to our business; and |
| |
| |
• |
estimates of our business potential. |
LEGAL MATTERS
The validity of the shares of common stock we are offering will
be passed upon for us by our counsel, Hogan & Hartson L.L.P.,
Baltimore, Maryland. Some legal matters related to this offering
will be passed upon for the underwriters by their counsel,
Wilmer, Cutler & Pickering, Washington, D.C.
EXPERTS
The financial statements of Enterworks, Inc. as of
December 31, 1998 and 1999, and for the years ended
December 31, 1997, 1998 and 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
66
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the
SEC under the Securities Act covering the shares of common stock
offered by this prospectus. This prospectus does not contain all
the information we included in the registration statement and the
exhibits and schedules we attached to it. For further
information about us and the shares we offered by this
prospectus, you should review this registration statement and the
exhibits and schedules attached to it. A copy of the
registration statement, including the exhibits and schedules, may
be read and copied at the SEC’s Public Reference Room at
450 Fifth Street, NW, Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet
site at www.sec.gov, from which you can electronically
access the registration statement, including the exhibits and
schedules attached to it.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of
1934. We will fulfill these requirements by filing periodic
reports and other information with the SEC. We intend to furnish
stockholders with annual reports containing consolidated
financial statements certified by an independent public
accounting firm.
67
INDEX TO FINANCIAL STATEMENTS
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Page |
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Report of Independent Accountants |
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F-2 |
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Balance Sheets as of December 31, 1998 and 1999 |
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F-3 |
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Statements of Operations for the years ended December 31,
1997, 1998 and 1999 |
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F-4 |
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Statements of Changes in Stockholders’ Deficit for the years
ended December 31, 1997, 1998 and 1999 |
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F-5 |
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Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 |
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F-6 |
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Notes to Financial Statements |
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F-7 |
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F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Enterworks, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of changes in stockholders’
deficit and of cash flows present fairly, in all material
respects, the financial position of Enterworks, Inc. at
December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
McLean, Virginia
March 6, 2000
F-2
ENTERWORKS, INC.
BALANCE SHEETS
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Pro Forma |
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December 31, |
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Stockholders’ Equity at |
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December 31, |
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1998 |
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1999 |
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1999 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
— |
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$ |
18,684,633 |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
3,122,248 |
|
|
|
7,128,563 |
|
|
|
|
|
|
|
|
|
|
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Deferred income taxes |
|
|
722,648 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
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Other current assets |
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31,082 |
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|
20,000 |
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|
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Total current assets |
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3,875,978 |
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25,833,196 |
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Property and equipment, net |
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|
805,433 |
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|
|
983,304 |
|
|
|
|
|
|
|
|
|
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Software development costs, net |
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|
1,841,670 |
|
|
|
994,078 |
|
|
|
|
|
|
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|
|
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Deferred income taxes |
|
|
467,018 |
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|
|
— |
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|
|
|
|
|
|
|
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Prepaid licenses and other assets |
|
|
318,631 |
|
|
|
409,196 |
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|
|
|
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|
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Total assets |
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$ |
7,308,730 |
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$ |
28,219,774 |
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LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS’ (DEFICIT) EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,047,092 |
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$ |
2,904,809 |
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Accrued compensation and benefits |
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1,057,745 |
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2,454,538 |
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Payable to Telos |
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— |
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2,000,000 |
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Deferred revenues |
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499,440 |
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1,406,537 |
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|
|
|
|
|
|
|
|
|
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Interest payable on senior subordinated notes payable |
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|
73,478 |
|
|
|
— |
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|
|
|
|
|
|
|
|
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Other current liabilities |
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|
17,773 |
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|
|
206,943 |
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Total current liabilities |
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2,695,528 |
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8,972,827 |
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|
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|
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Deferred income taxes |
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|
735,563 |
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|
|
— |
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|
|
|
|
|
|
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Payable to Telos |
|
|
18,205,823 |
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|
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— |
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|
|
|
|
|
|
|
|
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Senior subordinated notes payable |
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2,723,246 |
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— |
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Total liabilities |
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24,360,160 |
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8,972,827 |
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Commitments |
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Mandatorily redeemable preferred stock: |
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Series A convertible preferred stock, $0.01 par value; 0 and
21,739,127 shares authorized, issued and outstanding, actual;
none outstanding, pro forma |
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— |
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22,773,049 |
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Stockholders’ (deficit) equity: |
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|
|
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Common stock, $0.01 par value; 50,000,000 and 75,000,000 shares
authorized, actual; 200,000,000 shares authorized, pro forma;
27,181,000 and 27,584,848 shares issued and outstanding, actual;
49,323,975, shares issued and outstanding, pro forma |
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|
271,810 |
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|
275,848 |
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$ |
493,240 |
|
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|
|
|
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Capital in excess of par |
|
|
942,746 |
|
|
|
33,513,814 |
|
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|
56,069,471 |
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|
|
|
|
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Accumulated deficit |
|
|
(18,265,986 |
) |
|
|
(37,315,764 |
) |
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|
(37,315,764 |
) |
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|
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|
|
|
|
|
|
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Total stockholders’ (deficit) equity |
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(17,051,430 |
) |
|
|
(3,526,102 |
) |
|
$ |
19,246,947 |
|
|
|
|
|
|
|
|
|
|
|
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|
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Total liabilities, mandatorily redeemable preferred stock and
stockholders’ (deficit) equity: |
|
$ |
7,308,730 |
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$ |
28,219,774 |
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The accompanying notes are an integral part of these financial
statements.
F-3
ENTERWORKS, INC.
STATEMENTS OF OPERATIONS
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Year Ended December 31, |
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1997 |
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1998 |
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1999 |
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Revenues: |
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Licenses |
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$ |
1,446,155 |
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$ |
3,481,104 |
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$ |
7,457,333 |
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|
|
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Services and support |
|
|
1,956,145 |
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|
3,592,500 |
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|
4,718,280 |
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Total revenues |
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|
3,402,300 |
|
|
|
7,073,604 |
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|
12,175,613 |
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Cost of revenues: |
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|
|
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|
|
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|
|
|
|
|
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Licenses |
|
|
1,451,223 |
|
|
|
2,606,862 |
|
|
|
2,870,146 |
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|
|
|
|
|
|
Services and support |
|
|
2,083,309 |
|
|
|
2,923,192 |
|
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|
4,670,173 |
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|
|
|
|
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|
|
|
|
|
|
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Total cost of revenues |
|
|
3,534,532 |
|
|
|
5,530,054 |
|
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|
7,540,319 |
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Gross (loss) profit |
|
|
(132,232 |
) |
|
|
1,543,550 |
|
|
|
4,635,294 |
|
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|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
3,728,312 |
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|
|
4,903,528 |
|
|
|
10,507,158 |
|
|
|
|
|
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|
Research and development |
|
|
696,010 |
|
|
|
4,398,886 |
|
|
|
7,205,457 |
|
|
|
|
|
|
|
General and administrative |
|
|
898,187 |
|
|
|
2,032,293 |
|
|
|
3,883,535 |
|
|
|
|
|
|
|
Write-off of software development costs |
|
|
448,426 |
|
|
|
1,742,947 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
5,770,935 |
|
|
|
13,077,654 |
|
|
|
21,596,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating loss |
|
|
(5,903,167 |
) |
|
|
(11,534,104 |
) |
|
|
(16,960,856 |
) |
|
Interest expense |
|
|
1,449,396 |
|
|
|
2,141,886 |
|
|
|
3,573,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(7,352,563 |
) |
|
|
(13,675,990 |
) |
|
|
(20,534,549 |
) |
|
|
|
|
|
|
Income tax benefit |
|
|
(2,908,196 |
) |
|
|
(4,946,392 |
) |
|
|
(6,516,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,444,367 |
) |
|
$ |
(8,729,598 |
) |
|
$ |
(14,017,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
27,086,463 |
|
|
|
27,169,070 |
|
|
|
27,045,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
ENTERWORKS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
| |
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
Common Stock |
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Total |
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Capital in |
|
Accumulated |
|
Stockholders’ |
|
|
Shares |
|
Amount |
|
excess of par |
|
Deficit |
|
Deficit |
|
|
|
|
|
|
|
|
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Balance, December 31, 1996 |
|
|
27,000,000 |
|
|
$ |
270,000 |
|
|
$ |
921,926 |
|
|
$ |
(5,092,021 |
) |
|
$ |
(3,900,095 |
) |
|
|
|
|
|
|
Issuance of common stock upon exercise of options |
|
|
163,000 |
|
|
|
1,630 |
|
|
|
17,930 |
|
|
|
— |
|
|
|
19,560 |
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,444,367 |
) |
|
|
(4,444,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Balance, December 31, 1997 |
|
|
27,163,000 |
|
|
|
271,630 |
|
|
|
939,856 |
|
|
|
(9,536,388 |
) |
|
|
(8,324,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options and grant of
stock awards |
|
|
64,500 |
|
|
|
645 |
|
|
|
8,005 |
|
|
|
— |
|
|
|
8,650 |
|
|
|
|
|
|
|
Repurchase and retirement of common stock |
|
|
(46,500 |
) |
|
|
(465 |
) |
|
|
(5,115 |
) |
|
|
— |
|
|
|
(5,580 |
) |
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,729,598 |
) |
|
|
(8,729,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1998 |
|
|
27,181,000 |
|
|
|
271,810 |
|
|
|
942,746 |
|
|
|
(18,265,986 |
) |
|
|
(17,051,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options and grant of
stock awards |
|
|
35,300 |
|
|
|
353 |
|
|
|
18,378 |
|
|
|
— |
|
|
|
18,731 |
|
|
|
|
|
|
|
Repurchase and retirement of common stock |
|
|
(126,500 |
) |
|
|
(1,265 |
) |
|
|
(13,915 |
) |
|
|
(82,225 |
) |
|
|
(97,405 |
) |
|
|
|
|
|
|
Issuance of common stock warrants |
|
|
— |
|
|
|
— |
|
|
|
238,775 |
|
|
|
— |
|
|
|
238,775 |
|
|
|
|
|
|
|
Non-cash stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
108,239 |
|
|
|
— |
|
|
|
108,239 |
|
|
|
|
|
|
Issuance of common stock upon conversion of senior subordinated
notes payable |
|
|
2,705,960 |
|
|
|
27,059 |
|
|
|
2,733,465 |
|
|
|
— |
|
|
|
2,760,524 |
|
|
|
|
|
|
|
Contribution and retirement of shares owned by Telos |
|
|
(1,210,912 |
) |
|
|
(12,109 |
) |
|
|
12,109 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Issuance of common stock in exchange for reduction of payable to
Telos |
|
|
4,000,000 |
|
|
|
40,000 |
|
|
|
3,960,000 |
|
|
|
— |
|
|
|
4,000,000 |
|
|
|
|
|
|
|
Contribution of payable to Telos |
|
|
— |
|
|
|
— |
|
|
|
25,210,831 |
|
|
|
— |
|
|
|
25,210,831 |
|
|
|
|
|
|
|
Repurchase and retirement of shares owned by Telos |
|
|
(5,000,000 |
) |
|
|
(50,000 |
) |
|
|
— |
|
|
|
(4,950,000 |
) |
|
|
(5,000,000 |
) |
|
|
|
|
|
|
Contribution of offering costs by Telos |
|
|
— |
|
|
|
— |
|
|
|
303,186 |
|
|
|
— |
|
|
|
303,186 |
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,017,553 |
) |
|
|
(14,017,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1999 |
|
|
27,584,848 |
|
|
$ |
275,848 |
|
|
$ |
33,513,814 |
|
|
$ |
(37,315,764 |
) |
|
$ |
(3,526,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
ENTERWORKS, INC.
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,444,367 |
) |
|
$ |
(8,729,598 |
) |
|
$ |
(14,017,553 |
) |
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
316,149 |
|
|
|
471,664 |
|
|
|
604,390 |
|
|
|
|
|
|
|
|
Amortization of software development costs |
|
|
758,861 |
|
|
|
1,859,855 |
|
|
|
1,645,550 |
|
|
|
|
|
|
|
|
Write-off of software development costs |
|
|
448,426 |
|
|
|
1,742,947 |
|
|
|
— |
|
|
|
|
|
|
|
|
Non-cash stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
108,239 |
|
|
|
|
|
|
|
|
Accretion of subordinated notes payable |
|
|
142,176 |
|
|
|
166,632 |
|
|
|
554,714 |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
719,103 |
|
|
|
(1,622,318 |
) |
|
|
454,103 |
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(1,244,926 |
) |
|
|
(1,067,052 |
) |
|
|
(4,006,315 |
) |
|
|
|
|
|
|
|
|
Other current assets |
|
|
(10,800 |
) |
|
|
(20,282 |
) |
|
|
11,082 |
|
|
|
|
|
|
|
|
|
Prepaid licenses |
|
|
279,777 |
|
|
|
(31,042 |
) |
|
|
16,327 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
(73,608 |
) |
|
|
(67,622 |
) |
|
|
(106,892 |
) |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
23,496 |
|
|
|
773,445 |
|
|
|
1,857,717 |
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits |
|
|
172,246 |
|
|
|
438,054 |
|
|
|
1,396,793 |
|
|
|
|
|
|
|
|
|
Payable to Telos |
|
|
— |
|
|
|
— |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
Deferred revenues |
|
|
12,427 |
|
|
|
282,064 |
|
|
|
907,097 |
|
|
|
|
|
|
|
|
|
Interest payable |
|
|
270,870 |
|
|
|
(312,712 |
) |
|
|
(18,914 |
) |
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
50,840 |
|
|
|
(33,067 |
) |
|
|
189,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,579,330 |
) |
|
|
(6,149,032 |
) |
|
|
(8,404,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net purchases of property and equipment |
|
|
(479,737 |
) |
|
|
(593,448 |
) |
|
|
(782,261 |
) |
|
|
|
|
|
|
Investment in software products |
|
|
(3,083,441 |
) |
|
|
(2,040,488 |
) |
|
|
(797,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,563,178 |
) |
|
|
(2,633,936 |
) |
|
|
(1,580,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of subordinated debt |
|
|
— |
|
|
|
— |
|
|
|
(572,000 |
) |
|
|
|
|
|
|
Change in net payable to Telos |
|
|
6,122,948 |
|
|
|
8,779,898 |
|
|
|
11,005,008 |
|
|
|
|
|
|
|
Contribution of offering costs by Telos |
|
|
— |
|
|
|
— |
|
|
|
303,186 |
|
|
|
|
|
|
|
Repurchase and retirement of common stock |
|
|
— |
|
|
|
(5,580 |
) |
|
|
(5,097,405 |
) |
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
19,560 |
|
|
|
8,650 |
|
|
|
18,731 |
|
|
|
|
|
|
|
Proceeds from issuance of Series A preferred stock |
|
|
— |
|
|
|
— |
|
|
|
24,999,996 |
|
|
|
|
|
|
|
Offering costs of Series A preferred stock |
|
|
— |
|
|
|
— |
|
|
|
(1,988,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
6,142,508 |
|
|
|
8,782,968 |
|
|
|
28,669,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
— |
|
|
|
— |
|
|
|
18,684,633 |
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18,684,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of senior subordinated
notes payable |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,760,524 |
|
|
|
|
|
|
|
Issuance of common stock in exchange for reduction of payable to
Telos |
|
|
— |
|
|
|
— |
|
|
|
4,000,000 |
|
|
|
|
|
|
|
Contribution of payable to Telos |
|
|
— |
|
|
|
— |
|
|
|
25,210,831 |
|
|
|
|
|
|
|
Issuance of common stock warrants |
|
|
— |
|
|
|
— |
|
|
|
238,775 |
|
|
|
|
|
|
|
Contribution and retirement of shares owned by Telos |
|
|
— |
|
|
|
— |
|
|
|
12,109 |
|
The accompanying notes are an integral part of these financial
statements.
F-6
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company
Enterworks, Inc., (“Enterworks”), a Delaware
corporation, develops, markets and supports a software framework
that integrates content and processes for companies seeking to
participate in e-business. Enterworks targets operators and users
of e-marketplaces and portals. E-marketplaces and portals are
Web-based destinations where employees, customers, partners and
suppliers can interact to obtain information about products and
services and conduct business efficiently. Enterworks’
products enable customers to build or join e-marketplaces or
portals, add new content and e-business participants and automate
the end-to-end processes required for e-business interaction. In
addition, Enterworks’ products complement and leverage
companies’ investments in technology infrastructure, such as
packaged or custom-built applications, information databases and
integration systems.
Enterworks delivers its products through a direct sales force and
strategic partners, which include traditional system
integrators, e-business professional services companies and other
software vendors and technology partners. Current customers
include financial, manufacturing, government, healthcare and
telecommunications enterprises, as well as professional services
providers.
Prior to January 1, 1996, Enterworks was a division of Telos
Corporation (“Telos”). Enterworks was organized as a
wholly owned subsidiary of Telos on January 1, 1996, and all
of the division’s assets and liabilities were transferred
at historical book value by Telos to Enterworks in exchange for
3,000,000 shares of Enterworks’ common stock. In
June 1996, Telos increased the number of shares available
for issuance to 50,000,000 and increased its holdings to
27,000,000 shares of common stock. On December 30, 1999,
through the issuance of Series A preferred stock and a
series of concurrent transactions, the Telos voting interest in
Enterworks was reduced to 34.8%, a non-controlling position, and
accordingly Enterworks was deconsolidated (see Note 7).
Note 2. Summary of Significant Accounting Policies
Revenue Recognition:
Revenue is generated from software licenses, support and
services. License revenue is recognized when an agreement is
signed, delivery of the product has occurred, no significant
obligations remain, the fee is fixed or determinable, collection
of the resulting receivable is probable and, if required by the
contract terms, acceptance criteria are met. For contracts with
multiple elements (e.g., product licenses, support, installation
and other services), revenue is allocated to each component of
the contract based on objective evidence of the element’s
fair value. Revenue from support is recognized ratably over the
term of the related agreement, generally one year. Revenue from
consulting and training services is recognized over the period
that the services are performed. Enterworks does not provide for
specific product upgrades.
Enterworks recognizes revenue in accordance with the provisions
of Statements of Position (SOP) No. 97-2 and 98-4,
“Software Revenue Recognition.” In
December 1998, the AICPA issued SOP 98-9,
“Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.”
SOP 98-9 requires revenue to be recognized using the
“residual method” if certain conditions are met. This
approach results in contract discounts being applied to the
license with no such allocation to deferred support elements.
Enterworks has adopted the provisions of SOP 98-9 for the
year ended December 31, 1999. The adoption of SOP 98-9
did not have a significant effect on Enterworks’ results of
operations.
F-7
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Deferred revenues relate primarily to support arrangements and
are recorded when customer payments are received in advance of
the performance of the related services.
Cost of Revenues:
Cost of license revenues includes costs associated with royalties
for third-party embedded software, distribution of software and
related indirect costs, as well as the amortization of
capitalized software development costs. Cost of services and
support revenues primarily includes salaries and related expenses
for the services and support organization, costs of third
parties contracted to provide services to customers, related
indirect costs and, to a lesser extent, amortization of
capitalized software development costs associated with support.
Software Development Costs:
Statement of Financial Accounting Standards No. 86,
“Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed,” requires capitalization
of certain software development costs incurred subsequent to
technological feasibility and prior to general release to
customers. Based upon Enterworks’ development process,
technological feasibility is established upon completion of a
working model, which includes activities necessary to demonstrate
design specifications and technical performance requirements.
Enterworks expenses research and development costs incurred in
connection with software development projects until technological
feasibility is established. All costs thereafter are capitalized
until general release of the related software product.
Capitalized costs are amortized over the estimated product life,
which is generally three years or less. The net realizable value
of capitalized software development costs is periodically
evaluated based on the estimated future gross revenues from a
product, net of the estimated costs of completing and disposing
of the product. When net amounts capitalized exceed net
realizable value, a loss is recognized. During 1997 and 1998,
Enterworks wrote off $448,000, and $1,743,000, respectively, in
connection with net realizable value adjustments. No net
realizable value adjustments were made during 1999 in connection
with capitalized software development costs.
Cash and Cash Equivalents:
Enterworks considers investments that are readily convertible to
known amounts of cash and with an original or remaining maturity
of three months or less to be cash equivalents. Prior to the
December 1999 deconsolidation from Telos, Enterworks’
operational cash requirements were funded by Telos.
Prepaid Licenses:
Prepaid licenses consist principally of licenses acquired for
externally developed software embedded in Enterworks’
products, and are charged to cost of sales as the licenses are
used to generate revenue, or over an estimated two year life, if
the resulting amortization is greater. Enterworks periodically
evaluates the remaining units of each software license to
determine that such licenses are stated at the lower of cost or
net realizable value.
Property and Equipment:
Property and equipment is stated at historical cost, net of
accumulated depreciation. Depreciation is computed using the
straight-line method based on the estimated useful lives
F-8
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
of the assets, which range from three to five years. Repairs and
maintenance are expensed as incurred. At the time of retirement
or other disposal of property and equipment, the cost and related
accumulated depreciation are removed from their respective
accounts and any resulting gain or loss is recorded. Long-lived
assets are reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. No such impairments have been identified to
date.
Mandatorily Redeemable Preferred Stock:
Enterworks carries its mandatorily redeemable preferred stock at
original issue price with periodic adjustments to accrete the
carrying value to its redemption value by the earliest possible
date of stockholder initiated redemption (see Note 6).
Stock-Based Compensation:
Enterworks accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25 (APB 25), “Accounting for Stock
Issued to Employees,” and related interpretations. Under
APB 25, compensation cost is measured as the excess, if
any, of the deemed fair market value of Enterworks’ common
stock at the date of grant over the exercise price of the option
granted. Compensation cost, if any, is recognized over the
vesting period. Enterworks provides additional pro forma
disclosures as required under Statement of Financial Accounting
Standards No. 123 (SFAS 123), “Accounting for
Stock-Based Compensation” (see Note 7).
Income Taxes:
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences of temporary differences and
income tax credits. Temporary differences are primarily the
result of the differences between the tax bases of assets and
liabilities and their financial reporting amounts. Deferred tax
assets and liabilities are measured by applying enacted statutory
tax rates applicable to the future years in which deferred tax
assets or liabilities are expected to be realized. As of
December 31, 1999, Enterworks has provided a full valuation
allowance against its net deferred tax assets. Management
believes it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
Prior to December 30, 1999, under its tax allocation
agreement with Telos, Enterworks computed its separate tax
liability and paid such amount, if any, to Telos. In addition,
the agreement provided that Telos compensate Enterworks for any
net operating losses or tax credits generated by Enterworks, when
such losses or credits were utilized by Telos. Through
December 30, 1999, Enterworks had no separate tax liability
due to Telos. The income tax benefits reflected in the
accompanying statements of operations relate to Telos’
utilization of net operating losses generated by Enterworks
through the December 30, 1999 deconsolidation (see
Note 11).
Comprehensive Income:
Comprehensive income includes changes in equity (net assets)
during a period from non-owner sources. Enterworks has no
comprehensive income components other than its net loss.
F-9
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Net Loss per Share:
Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted net
loss per share is computed giving effect to all potential common
shares, including options, warrants and convertible preferred
stock, except if the effect would be anti-dilutive.
Pro Forma Stockholders’ Equity (unaudited):
Upon the closing of Enterworks’ initial public offering, the
outstanding shares of Series A preferred stock will convert
into 21,739,127 shares of common stock. The pro forma effects of
these transactions are unaudited and have been reflected in the
accompanying pro forma stockholders’ equity data at
December 31, 1999.
Concentration of Credit Risk:
Enterworks maintains its cash and cash equivalents in accounts
with major financial institutions in the United States which, at
times, may exceed federally insured limits. Enterworks has not
experienced any losses on such deposits.
Accounts receivable consist principally of amounts due from
large, credit-worthy companies. Enterworks performs ongoing
credit assessments of its customers, and collateral is not
required. Enterworks records an allowance for doubtful accounts
for credit losses at the end of each period based on an analysis
of individual aged accounts receivable balances. Enterworks has
not experienced significant losses related to uncollectible
receivables.
Enterworks derives all of its license and service and support
revenues from its two products. The following table sets forth
customers comprising 10% or more of revenue for each of the
periods presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
| Customer |
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
A |
|
|
16 |
% |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
B |
|
|
15 |
% |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
C |
|
|
12 |
% |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
D |
|
|
11 |
% |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
E |
|
|
* |
|
|
|
27 |
% |
|
|
* |
|
|
|
|
|
|
|
F |
|
|
* |
|
|
|
11 |
% |
|
|
* |
|
|
|
|
|
|
|
G |
|
|
* |
|
|
|
* |
|
|
|
20 |
% |
|
|
|
|
|
|
H |
|
|
* |
|
|
|
* |
|
|
|
10 |
% |
|
|
|
| |
* |
Represents less than 10% |
As of December 31, 1998, Customer E’s receivable
balance to Enterworks represented 61% of total accounts
receivable. As of December 31, 1999, Customer H’s
receivable balance represented 21% of total accounts receivable.
No other customer represented greater than 10% of accounts
receivable as of December 31, 1998 or 1999.
Sales to the government and public sector accounted for 50.7%,
70.4%, and 42.6% of total revenues during the years ended
December 31, 1997, 1998, and 1999, respectively. Sales to
the healthcare sector accounted for 10.1% and 15.6% of total
revenues during the years ended December 31, 1998 and 1999,
respectively.
F-10
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values due to the relatively short maturity of those
instruments.
Reclassifications:
Certain prior period information has been reclassified to conform
with the current period presentation.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets, liabilities and disclosures at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates include
allowances for doubtful accounts receivable, valuation allowances
for deferred tax assets and the value of Enterworks’
capital stock. Actual results could differ from those estimates.
Recent Accounting Pronouncements:
In 1999, Enterworks adopted SOP 98-1, “Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use,” which provides guidance on accounting for
the costs of computer software developed or obtained for
internal use. SOP 98-1 was effective for fiscal years
beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on Enterworks’
results of operations.
In June 1998, the FASB issued SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities.” SFAS 133 establishes accounting and
reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133, as amended by SFAS 137,
“Accounting for Derivative Instruments and Hedging
Activities — Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement
No. 133,” is effective for all quarters of
Enterworks’ year ending December 31, 2001. Enterworks
currently does not engage or plan to engage in the use of
derivative instruments, and does not expect SFAS 133 to have
a material impact on the results of operations.
Note 3. Accounts Receivable
Accounts receivable consist of the following as of
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
1998 |
|
1999 |
|
|
|
|
|
|
Accounts receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed |
|
$ |
467,802 |
|
|
$ |
4,763,182 |
|
|
|
|
|
|
|
Unbilled |
|
|
2,684,398 |
|
|
|
2,613,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,152,200 |
|
|
|
7,376,738 |
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(29,952 |
) |
|
|
(248,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
3,122,248 |
|
|
$ |
7,128,563 |
|
|
|
|
|
|
|
|
|
|
F-11
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Enterworks recorded $9,000, $30,000 and $218,000 in bad debt
expense during the years ended December 31, 1997, 1998 and
1999, respectively.
Note 4. Property and Equipment
Property and equipment consists of the following as of
December 31:
| |
|
|
|
|
|
|
|
|
|
|
1998 |
|
1999 |
|
|
|
|
|
|
Furniture and equipment |
|
$ |
2,044,433 |
|
|
$ |
2,783,005 |
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
(1,239,000 |
) |
|
|
(1,799,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
805,433 |
|
|
$ |
983,304 |
|
|
|
|
|
|
|
|
|
|
Enterworks recorded $316,000, $472,000, and $604,000, in
depreciation expense during the years ended December 31,
1997, 1998 and 1999, respectively.
Note 5. Senior Subordinated Notes Payable
During 1996, Enterworks completed a private financing whereby
$3,278,000 of 8% subordinated notes payable were issued. Of the
senior subordinated notes payable, $2,278,000 principal amount
was payable to certain members of Telos’ board of directors,
management and certain Telos stockholders. The subordinated
notes payable had a five-year maturity and interest was paid
quarterly on January 1, April 1, July 1, and
October 1 of each year, commencing on January 1, 1998.
In connection with the financing, Enterworks issued 2,048,725
detachable warrants to purchase shares of Enterworks’ common
stock. The warrants have an exercise price of $1.00 per share,
were immediately exercisable on the date of grant and expire in
July 2006. The estimated fair value of the warrants of $922,000
was recorded to capital in excess of par. In connection with
Enterworks’ December 1999 issuance of Series A
preferred stock, $572,000 of subordinated notes payable were
repaid and $2,706,000 were converted into Enterworks’ common
stock (see Note 7).
Interest expense in the accompanying statements of operations
includes $142,000, $167,000, and $555,000 (including $359,000
related to the acceleration of accretion at the time of repayment
and conversion) during the years ended December 31, 1997, 1998
and 1999, respectively, for accretion of the difference between
the carrying value and face value of these notes payable.
Note 6. Mandatorily Redeemable Preferred Stock
Series A Preferred Stock
In December 1999, Enterworks completed a private placement of
21,739,127 shares of Series A preferred stock, at a price of
$1.15 per share. Net proceeds to Enterworks after issuance costs
were $23,012,000. Concurrent with the private placement of the
Series A preferred stock, Enterworks entered a series of
transactions pursuant to which Telos’ voting interest in
Enterworks was reduced to approximately 34.8% (see Note 7).
The Series A preferred stockholders are entitled to receive
dividends when, as and if, declared by the board of directors. No
dividends will be paid on common stock until equal dividends
have been declared and paid on the Series A preferred stock.
In the event of any liquidation, dissolution or winding up of
Enterworks, the Series A preferred stockholders will be
entitled to receive, prior and in preference to the common
stockholders, the original issuance price per share of the
Series A preferred stock, plus an
F-12
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
amount equal to a cumulative, compounded annual return of 10% of
the original issuance price of such shares (inclusive of any
dividends received by such holders). A change of control (defined
as a transaction or series of transactions in which more than
50% of the voting power of Enterworks is disposed of to a single
person or group of affiliated persons or the consolidation or
merger of Enterworks or a sale of substantially all of its
assets, but excluding certain affiliate transactions to be
defined in the definitive transaction documents) will, at the
option of the Series A preferred stockholders be deemed to
be a liquidation, dissolution or winding up for purposes of the
foregoing liquidation preference.
Holders of a majority of the outstanding shares of Series A
preferred stock may elect, at any time and from time to time on
and after December 31, 2004, to have Enterworks redeem all
the then outstanding shares of Series A preferred stock at
the greater of the original $1.15 issuance price per share or the
appraised fair market value thereof, plus any declared but
unpaid dividends. Enterworks will record periodic adjustments to
accrete the carrying value of the Series A preferred stock
to its redemption value by December 31, 2004.
Series A preferred stockholders have the right to convert at
any time the shares of Series A preferred stock into shares
of common stock of Enterworks, initially on a one-for-one basis.
The Series A preferred stock is automatically convertible
into common stock upon the earlier of (i) completion by
Enterworks of a public offering raising gross proceeds of
$30,000,000 or more and at an offering price per share greater
than or equal to 150% of the then applicable conversion price or
(ii) the written consent of the holders of at least
66 2/3% of the Series A preferred stock then
outstanding.
In the event Enterworks issues additional shares of common stock
or securities convertible into common stock, subject to certain
exclusions, for consideration less than the original issuance
price paid for the outstanding shares of Series A preferred
stock, then the Series A preferred stock conversion price
will be reduced in accordance with anti-dilution provisions. The
Series A preferred stockholders have a preemptive right to
purchase a number of securities if additional securities are
issued, sufficient to maintain percentage ownership interest on
an “as if” converted basis.
The Series A preferred stockholders have one vote for each
common-equivalent share held and vote with common stockholders
(as a single voting group) on all matters brought before the
stockholders, except (i) as otherwise required by law and
(ii) for so long as 25% of the shares of Series A
preferred stock remain outstanding, as to the election of one
representative on Enterworks’ board of directors and other
defined matters.
Before taking certain actions, Enterworks must obtain either
majority approval or approval of holders of two-thirds of the
shares of Series A preferred stock. These actions include
making loans or advances to employees and guaranteeing the
indebtedness of any other party other than in the ordinary course
of business, the sale of Enterworks’ property or business,
issuance of senior equity securities and the declaration and
payment of dividends on common stock. Series A preferred
stockholders are entitled to certain registration rights and
co-sale rights.
Note 7. Stockholders’ Equity
Common Stock:
Enterworks has 75,000,000, $0.01 par value, shares of common
stock authorized. The voting, dividend and liquidation rights of
common stockholders are subject to, and qualified by, the rights
of preferred stockholders. Common stockholders are entitled to
one vote on all
F-13
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
matters brought before the stockholders for each share of common
stock held. The common stockholders are entitled to receive
dividends when, as and if, declared by the board of directors,
and subject to preferential dividend rights of preferred
stockholders. Upon dissolution or liquidation of Enterworks,
common stockholders will be entitled to receive all assets of
Enterworks available for distribution to stockholders, subject to
preferential rights of preferred stockholders.
Preferred Stock:
Enterworks has 25,000,000, $0.01 par value, shares of preferred
stock authorized. As of December 31, 1999, 21,739,127 shares
of Series A preferred stock were issued and outstanding.
Upon automatic conversion of the Series A preferred stock
into shares of common stock, the number of authorized, issued and
outstanding shares of preferred stock shall be reduced by
21,739,127 (see Note 6).
Warrants Issued in Connection with Senior
Subordinated Notes Payable:
In connection with the 1996 issuance of subordinated notes
payable, Enterworks issued 2,048,725 detachable warrants to
purchase shares of common stock. The warrants have an exercise
price of $1.00 per share, were exercisable immediately upon grant
and expire in July 2006 (see Note 5).
Transactions Concurrent with the Private Placement
of Series A Preferred Stock:
On December 30, 1999, simultaneous with the issuance of
Series A preferred stock and a series of concurrent
transactions discussed below, the Telos voting interest in
Enterworks was reduced to approximately 34.8%.
Enterworks converted $2,706,000 principal amount of senior
subordinated notes payable into shares of Enterworks’ common
stock at an exchange ratio of one share of common stock for each
$1.00 principal amount of notes payable. The remaining principal
amount of $572,000 and accrued interest thereon of $11,000 was
repaid in accordance with the original terms of the senior
subordinated notes payable. Accrued interest of $55,000 related
to the $2,706,000 principal amount of senior subordinated notes
payable which was converted into shares of Enterworks’
common stock was forgiven. Enterworks recorded additional
interest expense of $359,000 to accrete the $2,919,000 carrying
value of the notes payable on December 30, 1999 to the face
value on conversion (see Note 5).
The payable to Telos of $31,211,000 as of December 30, 1999
was reduced as follows: Enterworks issued to Telos 4,000,000
shares of Enterworks’ common stock in exchange for a
reduction of $4,000,000 of Enterworks’ payable to Telos.
Enterworks’ payable to Telos of approximately $25,211,000
was contributed by Telos to Enterworks’ capital. The
remaining $2,000,000 short-term payable to Telos as of
December 31, 1999 will be paid out of Enterworks’ first
collections on accounts receivable in 2000.
Warrants to acquire 350,000 shares of Enterworks’ common
stock for $1.15 per share were issued to Telos’ primary
lender in connection with obtaining the necessary approvals for
the Series A preferred stock offering. The warrants are
immediately exercisable upon grant and expire in 2002. The fair
value of $60,000 associated with these warrants has been
reflected as an offering cost and offset against the proceeds
from the issuance of Series A preferred stock.
Warrants to acquire 1,054,560 shares of Enterworks’ common
stock for $1.15 per share were issued to the placement agent in
the private placement. The warrants are immediately
F-14
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
exercisable upon grant and expire in 2002. The fair value of
$179,000 associated with these warrants has been reflected as
additional underwriting commissions and offset against the
proceeds from the issuance of Series A preferred stock.
Telos converted $7,636,000 principal amount of subordinated notes
payable of Telos into shares of Enterworks’ common stock
owned by Telos at an exchange ratio of one share of
Enterworks’ common stock for each $1.00 principal amount of
notes payable. This transaction reduced Telos’ ownership
interest in Enterworks; however there was no accounting impact to
Enterworks.
To further reduce Telos’ ownership, Enterworks repurchased
and retired 5,000,000 shares of Enterworks’ common stock
owned by Telos at a price of $1.00 per share. Enterworks
increased its Series A preferred stock offering size to
raise the additional proceeds to fund this repurchase. In
consideration for the increased offering size, Telos paid related
cash fees of $303,000. Additionally, Telos contributed 210,912
shares of Enterworks’ common stock owned by Telos to the
Enterworks treasury to fund the issuance of warrants to the agent
associated with the increased offering size. These cash and
share contributions are recorded as additional paid in capital to
reflect the contribution of a principal stockholder and are
offset against the proceeds of the preferred stock offering, as
offering costs.
1996 Stock Option Plan:
Enterworks’ 1996 Stock Option Plan (the “1996
Plan”), as amended, provides for the granting of either
incentive stock options or non-qualified stock options to
purchase shares of Enterworks’ common stock in order to
provide incentives to certain employees, consultants and
directors. The maximum number of shares of common stock that may
be issued under the 1996 Plan as of December 31, 1999 is
13,000,000. The terms of option grants under the 1996 Plan are
determined by the board of directors. The exercise price of
incentive stock options is limited to a minimum of the fair
market value of Enterworks’ common stock on the date of
grant. Typically, options vest at an average rate of 20-25% each
year. Vesting of stock options granted to founders and key
employees is based on both the passage of time and the occurrence
of certain key events, including a public offering or a change
in control. Unexercised options expire on the earlier of ten
years after the date of grant or, in the case of some key
employees and executive officers, three years after the annual
meeting of stockholders held following an initial public
offering.
F-15
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
A summary of stock option activity is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Average |
|
|
Options |
|
Exercise Price |
|
|
|
|
|
|
Outstanding as of December 31, 1996 |
|
|
2,729,000 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
Granted |
|
|
998,000 |
|
|
|
0.77 |
|
|
|
|
|
|
|
Exercised |
|
|
(163,000 |
) |
|
|
0.12 |
|
|
|
|
|
|
|
Canceled |
|
|
(461,500 |
) |
|
|
0.39 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 1997 |
|
|
3,102,500 |
|
|
|
0.38 |
|
|
|
|
|
|
|
Granted |
|
|
1,814,000 |
|
|
|
0.77 |
|
|
|
|
|
|
|
Exercised |
|
|
(63,100 |
) |
|
|
0.12 |
|
|
|
|
|
|
|
Canceled |
|
|
(1,103,500 |
) |
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 1998 |
|
|
3,749,900 |
|
|
|
0.54 |
|
|
|
|
|
|
|
Granted |
|
|
8,079,857 |
|
|
|
0.81 |
|
|
|
|
|
|
|
Exercised |
|
|
(33,200 |
) |
|
|
0.52 |
|
|
|
|
|
|
|
Canceled |
|
|
(1,626,759 |
) |
|
|
0.69 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 1999 |
|
|
10,169,798 |
|
|
|
0.73 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 1997 |
|
|
738,200 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 1998 |
|
|
921,250 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 1999 |
|
|
6,416,543 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
Available for grant as of December 31, 1999 |
|
|
2,570,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1999, Enterworks issued 1,000,000 stock options to a group of
six Telos executives who acted in key Enterworks’ management
roles during the period that Enterworks was a controlled
subsidiary of Telos. These stock options have an exercise price
of $0.77 per share and are immediately exercisable on the
date of grant. As of December 31, 1999, 200,000 of these
stock options were canceled pursuant to employee terminations.
Enterworks valued these stock options using the intrinsic value
method prescribed by APB 25, which resulted in no
compensation, as the exercise price equaled the fair market value
of Enterworks’ common stock on the date of grant.
Additionally, in 1999, Enterworks issued 556,524 stock options to
non-employees for services provided. Of these stock options,
506,524 have an exercise price of $0.77 per share and 50,000
have an exercise price of $1.00 per share. All of these
stock options are immediately exercisable on the date of grant.
Enterworks valued these stock options using the fair value method
prescribed by SFAS 123 and recorded aggregate compensation
expense of $108,000 on the stock option grant dates.
F-16
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 1999:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
Weighted |
| Range of |
|
|
|
Remaining |
|
Average |
|
|
|
Average |
| Exercise |
|
Number |
|
Contractual |
|
Exercise |
|
Number |
|
Exercise |
| Prices |
|
Outstanding |
|
Life in Years |
|
Price |
|
Exercisable |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
$0.12 |
|
|
|
1,085,400 |
|
|
|
6.5 |
|
|
$ |
0.12 |
|
|
|
1,037,820 |
|
|
$ |
0.12 |
|
|
0.77 |
|
|
|
7,771,398 |
|
|
|
9.3 |
|
|
|
0.77 |
|
|
|
5,326,623 |
|
|
|
0.77 |
|
|
1.00 |
|
|
|
1,313,000 |
|
|
|
10.0 |
|
|
|
1.00 |
|
|
|
52,100 |
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,169,798 |
|
|
|
|
|
|
|
|
|
|
|
6,416,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of stock option grants was $0.22
per share in 1997, $0.19 per share in 1998, and $0.14 per share
in 1999. Had Enterworks determined compensation cost consistent
with SFAS 123 methodology, net loss and basic and diluted net
loss per common share would have been as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,494,581 |
) |
|
$ |
(8,831,695 |
) |
|
$ |
(14,516,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.17 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Significant
assumptions used in determining the fair value of each option at
the date of grant were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0.00% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
|
|
|
|
|
Expected stock price volatility |
|
|
0.00% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
|
|
|
|
|
Risk free interest rate |
|
|
6.00% |
|
|
|
5.18% |
|
|
|
5.67% |
|
|
|
|
|
|
|
Expected life of option |
|
|
5.5 years |
|
|
|
5.2 years |
|
|
|
3.2 years |
|
Because the determination of the fair value of all options
granted after Enterworks becomes a public entity will include an
expected volatility factor in addition to the factors described
in the preceding table and because additional option grants are
expected to be made each year, the above pro forma disclosures
are not representative of the pro forma effects of option grants
on reported net income (loss) for future years.
F-17
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Note 8. Earnings per Share
The following table sets forth the calculation for loss
(numerator) and shares (denominator) for earnings per
share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,444,367 |
) |
|
$ |
(8,729,598 |
) |
|
$ |
(14,017,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
27,086,463 |
|
|
|
27,169,070 |
|
|
|
27,045,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 1999, the Series A preferred stock
was convertible into 21,739,127 shares of common stock, but is
not included in the earnings per share computation because it is
anti-dilutive. As of December 31, 1997, 1998 and 1999,
options to purchase 3,102,500, 3,749,900, and 10,169,798 shares
of common stock were outstanding, respectively, but are not
included in the computation as they are anti-dilutive.
Additionally, as of December 31, 1997, 1998, and 1999,
warrants to purchase 2,048,725, 2,048,725, and 3,453,285 shares
of common stock were outstanding, respectively, but are not
included in the computation as they are anti-dilutive.
Note 9. Transactions with Former Parent Company
Cash Management and Payable to Telos Corporation:
Prior to the deconsolidation from Telos on December 30,
1999, Enterworks’ operational cash needs had been funded
primarily through advances from Telos. Enterworks has recorded
interest expense related to such advances of $977,000, $1,598,000
and $2,498,000 during the years ended December 31, 1997,
1998 and 1999, respectively. The payable to Telos bears interest
at the rate of prime (8.5% at December 31, 1999), plus 1.0%.
The weighted average interest rate on the outstanding borrowings
under this agreement was 9.44%, 9.95%, and 9.86% during the
years ended December 31, 1997, 1998 and 1999, respectively.
Revenue:
Enterworks recognized $0, $67,000, and $222,000 in license
revenues and $6,000, $643,000, and $665,000 in services and
support revenues from transactions with Telos during the years
ended December 31, 1997, 1998, and 1999, respectively.
Additionally, Enterworks incurred $17,000, $35,000 and $187,000
in sub-contract and royalty expense payable to Telos during the
years ended December 31, 1997, 1998 and 1999, respectively.
Corporate Support:
During the periods presented, Telos provided certain services to
Enterworks, which included general management, cash management,
accounting and financial reporting, legal, insurance, information
technology administration and human resources. Costs for such
services were allocated to Enterworks based upon usage of each
service as a percentage of Telos’ consolidated amounts.
Enterworks’ service usage was generally determined on the
basis of a specific parameter, such as headcount, number of
transactions processed, or number of telephone, e-mail or network
connections. Where no specific parameter, such as headcount or
connections was available, costs were based principally upon
Enterworks’ total
F-18
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
overhead costs as a percentage of the Telos consolidated amounts.
Such allocated costs totaled $452,000, $839,000 and $1,737,000
during the years ended December 31, 1997, 1998 and 1999,
respectively.
Enterworks has entered into agreements with Telos to continue to
receive such services at negotiated rates. The scope of services
and support from Telos will be reassessed, and such services and
support are expected to decrease in scope over the next six to
twelve months as Enterworks independently assumes these
responsibilities.
Facilities:
Enterworks subleases headquarters office and facility space from
Telos on a year-to-year basis. Enterworks is charged rent,
utilities and other facilities costs for this space based upon
the square footage occupied in relation to the total square
footage of the facility. Facility costs allocated to Enterworks
and included in operating expenses amounted to $149,000,
$159,000, and $220,000 during the years ended December 31,
1997, 1998 and 1999, respectively.
Retirement Plan:
Substantially all full-time employees of Enterworks were eligible
to participate in the Telos Corporation Shared Savings Plan (the
“Shared Savings Plan”) during the years presented.
Enterworks matched one-half of participant contributions to the
Shared Savings Plan up to a maximum of 3% of a participant’s
salary. Contributions made by Enterworks totaled $63,000,
$63,000, and $93,000 during the years ended December 31,
1997, 1998 and 1999, respectively. Subsequent to deconsolidation
from Telos, Enterworks employees are no longer eligible to
participate in the Shared Savings Plan. In January 2000,
Enterworks established a separate 401(k) Savings Plan for its
employees (see Note 12).
Contribution of Shares:
In August 1999, Telos contributed 1,000,000 shares of
Enterworks’ common stock owned by Telos to the Enterworks
treasury. At the same time, Enterworks increased the number of
shares available for issuance under the option plan and issued
1,000,000 stock options to a group of six Telos executives who
had performed services for Enterworks (see Note 7).
Pledge of Stock:
Telos has pledged 17,153,059 shares of Enterworks’ common
stock owned by Telos to its bank to secure borrowings under a
credit facility. In the event that the bank declares a default
under the credit facility, the bank will first offer the purchase
of the shares to Enterworks and a group of Enterworks
stockholders. If Enterworks or its stockholders fail to purchase
the shares, the bank may sell the shares to third parties.
Transactions Concurrent with the Private Placement
of Series A Preferred Stock:
Telos’ voting interest in Enterworks was reduced to
approximately 34.8% on December 30, 1999, simultaneous with
the issuance of Series A preferred stock and a series of
concurrent transactions (see Note 7).
Note 10. Commitments
Enterworks has entered into certain commitments associated with
the leasing of office space and computer equipment. Operating
lease expense totaled $84,000, $264,000 and
F-19
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
$296,000 during the years ended December 31, 1997, 1998 and
1999, respectively. Future minimum lease payments under
non-cancelable operating leases are as follows as of
December 31, 1999:
| |
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
$ |
890,000 |
|
|
|
|
|
|
|
2001 |
|
|
193,000 |
|
|
|
|
|
|
|
2002 |
|
|
194,000 |
|
|
|
|
|
|
|
Thereafter |
|
|
— |
|
|
|
|
|
|
|
Total |
|
$ |
1,277,000 |
|
|
|
|
|
|
Note 11. Income Taxes
The benefit for income taxes includes the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(3,087,836 |
) |
|
$ |
(2,829,707 |
) |
|
$ |
(5,934,335 |
) |
|
|
|
|
|
|
State |
|
|
(539,463 |
) |
|
|
(494,367 |
) |
|
|
(1,036,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
(3,627,299 |
) |
|
|
(3,324,074 |
) |
|
|
(6,971,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
612,157 |
|
|
|
(1,381,042 |
) |
|
|
386,567 |
|
|
|
|
|
|
|
State |
|
|
106,946 |
|
|
|
(241,276 |
) |
|
|
67,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
719,103 |
|
|
|
(1,622,318 |
) |
|
|
454,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit |
|
$ |
(2,908,196 |
) |
|
$ |
(4,946,392 |
) |
|
$ |
(6,516,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit for income taxes varies from the amount determined by
applying the federal income tax statutory rate to the income or
loss before income taxes. The reconciliation of these differences
is as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Computed expected income tax benefit |
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
|
|
|
|
|
|
State income taxes, net of federal income tax benefit |
|
|
(5.9 |
) |
|
|
(5.9 |
) |
|
|
(5.9 |
) |
|
|
|
|
|
|
Change in valuation allowance for deferred tax assets |
|
|
— |
|
|
|
3.6 |
|
|
|
8.0 |
|
|
|
|
|
|
|
Other |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.6 |
)% |
|
|
(36.2 |
)% |
|
|
(31.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows as of December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
1998 |
|
1999 |
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
11,963 |
|
|
$ |
99,121 |
|
|
|
|
|
|
|
Allowance for inventory obsolescence |
|
|
38,523 |
|
|
|
21,279 |
|
|
|
|
|
|
|
Accrued liabilities |
|
|
69,122 |
|
|
|
522,077 |
|
|
|
|
|
|
|
Accrued compensation |
|
|
157,458 |
|
|
|
243,404 |
|
|
|
|
|
|
|
Property and equipment |
|
|
21,435 |
|
|
|
51,109 |
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
1,382,912 |
|
|
|
1,597,407 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
1,681,413 |
|
|
|
2,534,397 |
|
|
|
|
|
|
|
|
Less valuation allowance |
|
|
(491,747 |
) |
|
|
(2,137,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
1,189,666 |
|
|
|
397,034 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs |
|
|
(735,563 |
) |
|
|
(397,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(735,563 |
) |
|
|
(397,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
454,103 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Prior to the December 30, 1999 deconsolidation of Enterworks
from Telos, and in connection with the intercompany tax
allocation agreement, Enterworks was compensated by Telos for the
benefit of Telos utilizing net operating loss carry forwards
(NOLs) generated by Enterworks. A valuation allowance was
recorded against related deferred tax assets to reflect the
estimated utilization by Telos.
Upon deconsolidation, utilization of any remaining NOLs or future
NOLs generated by Enterworks will benefit Enterworks, as and if
utilized, independent of Telos.
As of December 31, 1999, Enterworks had NOLs of
approximately $4,000,000 available to offset future regular
taxable income. These NOLs expire in 2013. The realization of the
benefits of the NOLs is dependent on sufficient taxable income
in future years. Lack of future earnings, certain substantial
changes in the ownership of Enterworks, or the application of the
alternative minimum tax rules could adversely affect
Enterworks’ ability to utilize these NOLs.
Note 12. Subsequent Events
Initial Public Offering:
On March 2, 2000, Enterworks’ board of directors
authorized Enterworks to file a registration statement with the
Securities and Exchange Commission for the purpose of an initial
public offering of Enterworks’ common stock. Upon the
completion of this offering, Enterworks’ Series A
preferred stock will be converted into common stock, and all
outstanding shares of Series A preferred stock will be
canceled and retired.
2000 Stock Incentive Plan:
On March 2, 2000, Enterworks’ board of directors
approved the 2000 Stock Incentive Plan (the “2000
Plan”). The 2000 Plan, which is subject to stockholder
approval, provides for the granting of incentive stock options,
non-qualified stock options and restricted stock. The terms of
option grants and issuance of restricted stock under the 2000
Plan will be determined by
F-21
ENTERWORKS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
the board of directors. The exercise price of incentive stock
options will be limited to a minimum of the fair market value of
Enterworks’ common stock on the date of grant. Options
granted under the 2000 Plan will vest at a minimum rate of 20%
per year and will terminate ten years from the date of grant.
A total of 5,000,000 shares of common stock are initially
reserved for issuance under the 2000 Plan. The number of shares
reserved for issuance under the 2000 Plan will be increased
annually, beginning on January 1, 2001, by the lesser of
(i) 1,500,000 shares (ii) 4% of the then outstanding
and issued shares of common stock or (iii) an amount
determined by the board of directors.
Employee Stock Purchase Plan:
On March 2, 2000, Enterworks’ board of directors
approved the 2000 Employee Stock Purchase Plan (the
“ESPP”). The ESPP, which is subject to stockholder
approval, is intended to qualify under Section 423 of the
Internal Revenue Code. The ESPP permits participants to purchase
shares of Enterworks’ common stock through payroll
deductions made during offering periods which will be determined
by the board of directors. The purchase price per share of common
stock purchased in an offering period will be the lower of 85%
of the fair market value of Enterworks’ common stock on the
first trading day of an offering period or 85% of the fair market
value of Enterworks’ common stock on the last trading day
of an offering period. Participants generally may not purchase
more than 1,000 shares of Enterworks’ common stock or shares
of Enterworks’ common stock having an aggregate fair market
value in excess of $25,000 in any calendar year.
A total of 1,000,000 shares of common stock are initially
reserved for issuance under the ESPP. The number of shares
reserved for issuance under the ESPP will be increased annually,
beginning on January 1, 2001, by the lesser of
(i) 250,000 shares (ii) 1.5% of the then outstanding
and issued shares of Enterworks’ common stock or
(iii) an amount determined by the board of directors.
401(k) Shared Savings Plan:
In January 2000, Enterworks’ board of directors approved a
401(k) Shared Savings Plan (the “401(k) Plan”).
Substantially all full-time employees of Enterworks are eligible
to participate in the 401(k) Plan. Participants may make pre-tax
contributions to the 401(k) Plan of up to 16% of their eligible
salary. Enterworks matches 50% of pre-tax participant
contributions, up to a maximum of 3% of a participant’s
salary. Participants are fully vested in their contributions and
investment earnings; however, Enterworks’ matching
contributions vest at a rate of 20% per year.
Increase in Authorized Common and Preferred Stock
In March 2000, Enterworks amended its Certificate of
Incorporation to increase the authorized number of shares of
common stock to 200,000,000 and to increase the authorized number
of shares of preferred stock to 50,000,000.
F-22
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide information
different from that contained in this prospectus. We are offering
to sell, and seeking offers to buy, shares of common stock only
in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate as of the
date of this prospectus, regardless of the time and delivery of
this prospectus or of any sale of our common stock.
TABLE OF CONTENTS
| |
|
|
|
|
|
|
Page |
|
|
|
|
Prospectus Summary |
|
|
1 |
|
|
|
|
|
|
|
Risk Factors |
|
|
4 |
|
|
|
|
|
|
|
Use of Proceeds |
|
|
16 |
|
|
|
|
|
|
|
Dividend Policy |
|
|
16 |
|
|
|
|
|
|
|
Capitalization |
|
|
17 |
|
|
|
|
|
|
|
Dilution |
|
|
18 |
|
|
|
|
|
|
|
Selected Financial Data |
|
|
19 |
|
|
|
|
|
|
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
|
|
21 |
|
|
|
|
|
|
|
Business |
|
|
30 |
|
|
|
|
|
|
|
Management |
|
|
45 |
|
|
|
|
|
|
|
Certain Transactions |
|
|
53 |
|
|
|
|
|
|
|
Security Ownership of Directors, Officers and Principal
Stockholders |
|
|
56 |
|
|
|
|
|
|
|
Description of Capital Stock |
|
|
58 |
|
|
|
|
|
|
|
Shares Eligible for Future Sale |
|
|
62 |
|
|
|
|
|
|
|
Underwriting |
|
|
64 |
|
|
|
|
|
|
|
Legal Matters |
|
|
66 |
|
|
|
|
|
|
|
Experts |
|
|
66 |
|
|
|
|
|
|
|
Additional Information |
|
|
67 |
|
|
|
|
|
|
|
Index to Consolidated Financial Statements |
|
|
F-1 |
|
Dealer prospectus delivery obligation: Until
,
2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade these shares of common stock,
whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers’
obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
Enterworks Logo
Shares
Common Stock
Deutsche Banc Alex. Brown
J.P. Morgan & Co.
Wit SoundView
Prospectus
,
2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution
The following table sets forth the various expenses payable by us
in connection with the registration of the securities offered
hereby. All of the amounts shown are estimated except the SEC
registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
| |
|
|
|
|
|
|
|
|
|
|
|
SEC registration fee |
|
|
* |
|
|
|
|
|
|
|
NASD filing fee |
|
|
* |
|
|
|
|
|
|
|
Nasdaq National Market listing fee |
|
|
* |
|
|
|
|
|
|
|
Transfer agent’s and registrar’s fees |
|
|
* |
|
|
|
|
|
|
|
Printing expenses |
|
|
* |
|
|
|
|
|
|
|
Legal fees and expenses |
|
|
* |
|
|
|
|
|
|
|
Accounting fees and expenses |
|
|
* |
|
|
|
|
|
|
|
Miscellaneous expenses |
|
|
* |
|
|
|
|
|
|
|
Total |
|
$ |
* |
|
|
|
|
|
|
|
|
| * |
To be completed by amendment. |
Item 14. Indemnification of Officers and
Directors
Under Section 145 of the General Corporate Law of the State
of Delaware, Enterworks 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”).
Enterworks’ certificate of incorporation (Exhibit 3.1
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 Enterworks 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 Enterworks,
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,
Enterworks will have entered into agreements with its directors
and certain of its executive officers that require Enterworks to
indemnify such 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 such person
is or was a director or officer of Enterworks or any of its
affiliated enterprises, provided such person acted in good faith
and in a manner such person reasonably believed to be in or not
opposed to the best interests of Enterworks and, with respect to
any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful. The indemnification agreements also
set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
II-1
Enterworks intends to obtain in conjunction with the
effectiveness of the registration statement a policy of
directors’ and officers’ liability insurance that
insures Enterworks’ directors and officers against the cost
of defense, settlement or payment of a judgment under certain
circumstances.
The underwriting agreement filed as Exhibit 1.1 to this
registration statement provides for indemnification by the
underwriters of Enterworks and its officers and directors for
certain liabilities arising under the Securities Act or
otherwise.
Item 15. Recent Sales of Unregistered
Securities
During the past three years, the registrant has issued
unregistered securities to a limited number of persons as
described below.
|
|
| |
1. In December 1999, Telos received 4,000,000 shares
of Enterworks’ common stock. |
| |
| |
2. In December 1999, Enterworks issued 2,705,960
shares of Enterworks’ common stock to the holders of
approximately $2.7 million in 8% convertible
subordinated notes issued by Enterworks in July 1996.
Accrued interest due on the notes of approximately $55,000 was
forgiven. At the same time, Enterworks repurchased the remaining
$572,000 principal amount of subordinated notes and paid accrued
interest of approximately $11,000 for a total of approximately
$583,000 in cash. The 2,048,725 warrants issued during the
July 1996 subordinated debt offering remain outstanding.
These warrants have an exercise price of $1.00 per share and
expire in July 2006. |
| |
| |
3. In December 1999, Enterworks issued a total of
21,739,127 shares of its Series A convertible preferred
stock to accredited investors in exchange for $24,999,996 in
cash. Deutsche Bank Securities Inc. acted as the placement agent
for the offering and received a cash placement fee, reimbursement
of its expenses and a three-year non-cancelable warrant to
purchase 1,054,560 shares of common stock. |
| |
| |
4. In December 1999, in connection with the offering
of our Series A convertible preferred stock, Enterworks
issued a warrant to purchase 350,000 shares of its common
stock to Bank of America, N.A. at an exercise price per share
of $1.15. The warrant expires in December 2002. |
| |
| |
5. Enterworks, from time to time, has granted options or warrants
to acquire common stock of Enterworks to employees and members
of the board of directors. The following table sets forth certain
information regarding such grants: |
| |
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Range of Exercise Prices |
|
|
|
|
|
|
1997 |
|
|
998,000 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
1998 |
|
|
1,814,000 |
|
|
|
0.77 |
|
|
|
|
|
|
|
1999 |
|
|
8,079,857 |
|
|
|
0.77-1.00 |
|
The sale and issuance of securities in the transactions described
above were exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act,
Rule 701 or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering, where
the purchasers were sophisticated investors who represented their
intention to acquire securities for investment only and not with
a view to distribution and received or had access to adequate
information about Enterworks.
Except as described above, no underwriters were employed in the
above transactions.
II-2
Item 16. Exhibits and Financial Statement
Schedules.
(A) Exhibits
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
|
1.1* |
|
|
Form of Underwriting Agreement |
|
3.1* |
|
|
Form of Amended and Restated Certificate of Incorporation of
Enterworks, Inc. |
|
3.2* |
|
|
Form of Amended and Restated Bylaws of Enterworks, Inc. |
|
4.1 |
|
|
Specimen certificate representing the Common Stock |
|
5.1* |
|
|
Opinion of Hogan & Hartson L.L.P. with respect to legality of
the common stock |
|
10.1 |
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Form of Indemnification Agreement |
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10.2 |
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1996 Stock Option Plan, as amended |
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10.3 |
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Form of 1996 Stock Option Plan Incentive Stock Option Agreement
for Key Employees |
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10.4 |
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Form of 1996 Stock Option Plan Stock Option Agreement for
Founders |
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10.5 |
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Form of 1996 Stock Option Plan Stock Option Agreement for
Associates |
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10.6 |
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Form of 2000 Stock Incentive Plan |
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10.7 |
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Form of 2000 Stock Incentive Plan Stock Option
Agreement — Incentive Stock Option |
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10.8 |
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Form of 2000 Stock Incentive Plan Stock Option
Agreement — Non-Qualified Option |
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10.9* |
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Form of Employee Stock Purchase Plan |
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10.10* |
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401(k) Shared Savings Plan |
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10.11 |
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Form of Series A Convertible Preferred Stock Purchase Agreement |
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10.12* |
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Lease, dated as of , by and between Enterworks, Inc.
and Telos Corporation. |
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10.13* |
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Lease, dated as of , by and between Enterworks, Inc.
and |
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10.14# |
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Value Added Remarketer Agreement by and between Gemstone, Inc.
and Enterworks, Inc. |
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10.15# |
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OEM Object Code License Agreement by and between RSA Data
Security, Inc. and Enterworks, Inc. |
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10.16 |
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Form of Investor Rights Agreement by and among Enterworks, Inc.
and the additional parties named therein |
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10.17* |
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Investor Rights Agreement by and among Enterworks, Inc. and the
stockholders named therein |
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10.18* |
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Warrant to purchase shares of Enterworks’ common stock
issued to Deutsche Bank Securities Inc., dated December 30,
1999. |
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10.19 |
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Warrant to purchase shares of Enterworks’ common stock to
Bank of America, N.A., dated December 30, 1999. |
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10.20 |
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Form of 1996 Warrant to purchase shares of Enterworks’
common stock issued in connection with subordinated note
placement |
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23.1 |
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Consent of PricewaterhouseCoopers LLP |
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23.2* |
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Consent of Hogan & Hartson L.L.P. (included in
Exhibit 5.1) |
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24.1 |
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Power of Attorney for John B. Wood |
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24.2 |
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Power of Attorney for David S. Aldrich |
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24.3 |
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Power of Attorney for Robert W. Lewis |
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24.4 |
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Power of Attorney for Patrick J. McNeela |
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27.1 |
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Financial Data Schedule |
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| * |
To be filed by amendment. |
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| # |
Confidential treatment has been requested for
portions of this exhibit. |
II-3
(B) Financial Statement Schedules:
All other schedules are omitted because they are not required,
are not applicable or the information is included in the
financial statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
of its Charter or Bylaws or the Delaware General Corporation Law
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 Securities 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, 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
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|
| |
(1) For purposes of determining any liability under the
Securities 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 Securities
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
Securities 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
SIGNATURES
Pursuant to the requirements of the Securities Act, Enterworks,
Inc. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
County of Loudoun, Commonwealth of Virginia, on March 6,
2000.
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Enterworks, Inc. |
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| |
By: /s/ John B. Wood |
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| |
John B. Wood |
| |
Chairman and Chief Executive Officer |
KNOW BY ALL PERSONS, that each person whose signature appears
below constitutes and appoints, Daniel P. McGrath and
Dee Ann Revere, and each of them, as his 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 of
1933, 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 or her substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
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| Signature |
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Title |
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Date |
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|
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/s/ John B. Wood
John B. Wood |
|
Chairman of the Board of Directors (Principal Executive Officer) |
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|
March 6, 2000 |
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| |
/s/ Daniel P. McGrath
Daniel P. McGrath |
|
Chief Financial Officer
(Principal Financial Officer) |
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|
March 6, 2000 |
|
| |
/s/ Robert W. Lewis
Robert W. Lewis |
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Director |
|
|
March 6, 2000 |
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| |
/s/ Patrick J. McNeela*
Patrick J. McNeela |
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Director |
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March 6, 2000 |
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| |
/s/ David S. Aldrich
David S. Aldrich |
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Director |
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|
March 6, 2000 |
|
* by power-of-attorney
II-5
