AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 2000.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KINZAN.COM
(Exact name of Registrant as specified in its charter)
CALIFORNIA 7371 33-0839983
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
incorporation or organization) Classification Code Number)
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KINZAN.COM
2111 PALOMAR AIRPORT ROAD, SUITE 250
CARLSBAD, CALIFORNIA 92009
(760) 602-2900
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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JEFFREY P. HIGGINS, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
2111 PALOMAR AIRPORT ROAD, SUITE 250
CARLSBAD, CALIFORNIA 92009
(760) 602-2900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
CRAIG W. ADAS, ESQ. GARY L. SELLERS, ESQ.
WEIL, GOTSHAL & MANGES LLP SIMPSON THACHER & BARTLETT
2882 SAND HILL ROAD, SUITE 280 425 LEXINGTON AVENUE
MENLO PARK, CALIFORNIA 94025 NEW YORK, NEW YORK 10017-3954
(650) 926-6200 (212) 455-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.
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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. / /
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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. / /
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If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
Common stock, $0.001 par value.............................. $57,500,000 $15,180.00
(1) Estimated for the sole purpose of computing the amount of the registration
fee in accordance with Rule 457(o) promulgated under the Securities Act of
1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. UNDERWRITERS MAY NOT CONFIRM SALES OF THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION. DATED APRIL 28, 2000
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by Kinzan, Inc. All
of the shares of common stock are being sold by Kinzan. The estimated initial
public offering price will be between $ and $ per share.
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There is currently no public market for the common stock. We have
applied to list the common stock on the Nasdaq National Market under the symbol
KNZN.
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PER SHARE TOTAL
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Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Kinzan, before expenses......................... $ $
We have granted the underwriters an option for a period of 30 days to
purchase up to additional shares of our common stock.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
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.
CHASE H&Q
THOMAS WEISEL PARTNERS LLC
WILLIAM BLAIR & COMPANY
, 2000
Inside Front Cover: A diagram depicting the interconnection of customers,
suppliers and manufacturers in a business relationship network appears under the
heading "Extending Relationship Networks onto the Internet." The following text
is included: "Kinzan provides a leading platform for extending and managing
business relationship networks on the Internet. It is through these relationship
networks - the complex and dynamic interaction between a central organization
and its numerous affiliated individuals or entities - that an organization
conducts its business. Our platform enables an organization to manage its
relationship network by quickly, easily and cost-effectively distributing
branded content, commerce and revenue-generating opportunities throughout the
entire network." The Kinzan logo appears at the bottom of the page.
Inside Gatefold: Text describing our offering and our customers appears under
the heading "Extending the Brand, Not Just the Reach." What we do: "Kinzan's
global platform - an integrated suite of proprietary software, scalable hardware
and sophisticated processes - facilitates the development and deployment of
hosted Internet applications. We function as the 'brand behind the brand,'
enabling our customers to extend, configure and brand our platform to meet their
diverse needs." Our customers: "Central organizations whose operations depend on
large networks of affiliates recognize the importance of extending their
relationships onto the Internet. As a result, our customers are typically
traditional offline organizations such as manufacturers of retail products,
major franchisors, Fortune 500 organizations with dealer/distributor channels,
media companies and professional associations." The following profiles of our
customers are included:
- AutoTrader.com: "AutoTrader.com, with listings of over 1.5 million
used vehicles, selected the Kinzan solution to establish its business
relationship network as an Internet portal. Now, used vehicle dealers
have access to AutoTrader.com's online database and can receive direct
sales leads." The AutoTrader.com logo is included.
- Avon: "Avon.com is bringing its U.S. representatives online this year
with Kinzan's platform. Avon.com's E-Representative strategy allows
representatives to create, edit and maintain an online presence while
ensuring that Avon maintains the integrity of its brand and consistent
marketing message. The Web sites will also create efficiencies in
administrative processes and provide convenient access to
time-sensitive information for the representatives and customers." The
Avon.com logo is included.
- Carlson Wagonlit Travel: "As a worldwide leader in leisure and
business travel with more than 3,000 locations in 141 countries,
Carlson Wagonlit needed a solution that maintained consistent brand
integrity across its over 1,100 affiliated travel agent Web sites in
the United States. The Kinzan platform integrates branded franchised
Web sites with the supply chain reservation system and allows
associates to realize revenue from booking travel online." The Carlson
Wagonlit Travel logo is included.
- Chase Merchant Services: "Chase Merchant Services sought to
strengthen its relationships with its approximately 340,000 small
businesses by offering them the ability to create electronic commerce
enabled Web sites. Their solution, eWEBuilder, powered by Kinzan,
allows the customers of Chase Merchant Services to transition their
operations online quickly and inexpensively by creating customized Web
sites." The Chase Merchant Services logo is included.
- Maytag: "Maytag required a solution for its Home Appliance Center
Channel and additional independent dealers that would leverage the
Maytag brand with over 100 years of brand equity. The Kinzan platform
provides the independent dealers an online brand presence with the
power to edit their Web sites locally and enables Maytag to promote
its brand globally." The Maytag logo is included.
- YMCA: "YMCA required a consistent Web presence for their San
Francisco region. By integrating the Kinzan solution with third-party
applications, YMCA is able to extend its relationship network of 14
branches with branded Web sites, all with the ability to collect camp
registrations and online donations." The YMCA logo is included.
Inside Back Cover: The Kinzan logo appears at the bottom of the page. The
following text describes our platform, applications and customer service:
- "Kinzan's platform provides the foundation for the development and
deployment of rich, hosted Internet applications and services aimed at
helping our customers to extend and manage their business relationship
networks on the Internet."
- "Our first three applications enable our customers and their
affiliates to create, publish and maintain Web sites quickly and
cost-effectively."
- "Our electronic commerce application provides a complete solution for
affiliates of a business relationship network, allowing them to set up
a catalog of products, provide payment options, create shipping
structures and configure store taxes."
- "To enhance the functionality of the Web sites, third-party
applications, such as email, locator services, visual content and
affiliate marketing programs, can be easily integrated."
- "To support the deployment of our technology platform and
applications, we offer professional services to our customers
including programming, implementation and design, and we commit to 24
hours a day, seven days a week customer support to ensure that our
customers have the technical assistance they need."
TABLE OF CONTENTS
PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 28
Management.................................................. 41
Related Party Transactions.................................. 56
Principal Stockholders...................................... 59
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 69
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Financial Statements............................... F-1
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Kinzan, the Kinzan logo, Siteman, Siteman Storefront and
Webmaster-on-Call are trademarks and service marks of Kinzan, Inc. All other
company, product or service names contained in this prospectus are trademarks
and service marks of their respective owners.
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Our executive offices are located at 2111 Palomar Airport Road, Suite
250, Carlsbad, California 92009, and our telephone number is (760) 602-2900. Our
Web site is located at http://www.kinzan.com. Any information that is included
on or linked to our Web site is not a part of this prospectus.
i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS,
BEFORE MAKING AN INVESTMENT DECISION. IN THIS PROSPECTUS, "KINZAN," "WE," "US,"
AND "OUR" REFER TO KINZAN, INC., UNLESS THE CONTEXT OTHERWISE DICTATES.
KINZAN
We provide a leading platform for extending and managing business
relationship networks on the Internet. A business relationship network consists
of a central organization and its many affiliated vendors, partners, members,
representatives and other entities. By utilizing our hosted platform, with its
content management and electronic commerce applications, a central organization
is able to maintain its brand integrity, efficiently distribute time-sensitive
product and service information to affiliates, control company-specific
guidelines and streamline administrative functions. Our platform also enables
affiliates within the network to leverage their relationships with the central
organization and easily and cost-effectively transition their businesses onto
the Internet. By bringing their relationship network online through our
platform, both the central organization and its affiliates can enhance their
business relationships, reduce costs and create incremental revenue.
The rapid expansion in the number of Internet users combined with the
efficiencies gained by conducting business online will continue to facilitate
substantial growth in electronic commerce. International Data Corporation
estimates that there were 1.7 billion URLs as of December 1999 and that this
number will grow to 13 billion URLs by 2003. Large, traditional organizations
have recognized the importance of establishing an online presence. Initially,
central organizations focused their efforts on creating a Web site to be used as
a simple marketing vehicle, or online brochure, that communicated basic
information about the organization and its products or services. Web sites have
quickly evolved to include the ability to sell, take immediate payment, arrange
for delivery of goods and services online and personalize the user experience.
To effectively use the power of the Internet, many central organizations now
realize that they must go beyond simply expanding the capabilities of their
central Web sites. They must integrate their affiliates into their overall
Internet strategy.
Our platform is designed to integrate central organizations and their
affiliates online. It includes a brandable suite of Web applications,
configurable hardware, scalable hosting services, development and deployment
capabilities and customer care programs. We maintain an open-standards platform
which allows third-party service providers to utilize our platform and rapidly
deploy our solution. In addition, our flexible platform allows the central
organization to easily integrate value-added applications and services. We
target large, traditional offline customers including manufacturers of retail
products, major franchisors, automobile manufacturers, media companies,
professional associations and other central organizations that depend on a
network of affiliates to conduct business. We also provide products and services
to newly formed online companies that are aggregating affiliates to consolidate
content and conduct business over the Internet.
Because we market our platform to large, central organizations that
manage business relationship networks with many affiliates, we believe we can
capitalize on the marketing efforts of our customers to accelerate deployment of
our applications with their affiliates. In addition, we intend to expand our
relationships with systems integrators and Internet consultants to increase
adoption of our platform. We generate substantially all of our revenues from two
sources: (1) hosting fees charged to customers who use our Web applications to
deploy Web sites and conduct electronic commerce and (2) service fees for the
implementation of our customers' branded versions of our hosted applications.
Our customers include AutoTrader.com, Avon, Carlson Wagonlit Travel, Chase
Merchant Services, KnightRidder.com, loancity.com, Maytag, MeetChina.com, Vital
Processing and the YMCA.
1
We were formed in November 1998 to acquire a business unit of iXL
Enterprises, Inc. and commenced operations in January 1999. Our operating
history and revenues derived from operations are therefore limited. We have
incurred net losses since we began operations.
THE OFFERING
Common stock offered by Kinzan............... shares
Common stock to be outstanding after this shares
offering...................................
Use of proceeds.............................. For general corporate purposes, including:
(1) operational expenses, such as personnel,
research and development and sales and
marketing,
(2) capital expenditures and (3)
international expansion.
Proposed Nasdaq National Market Symbol....... KNZN
The number of shares to be outstanding after the offering does not
include:
- 2,705,000 shares of our common stock issuable upon exercise of options
outstanding at March 31, 2000 under our 1999 Stock Option/Stock
Issuance Plan, with a weighted average exercise price of $0.68 per
share;
- 26,250 shares of our common stock issuable upon exercise of warrants
outstanding at March 31, 2000 at an exercise price of $4.00 per share;
and
- 157,000 additional shares of our common stock available for future
grant under our 1999 Stock Option/Stock Issuance Plan and an
additional 2,000,000 shares of our common stock available for future
grant under our 2000 Stock Option Plan and 2000 Employee Stock
Purchase Plan, which will become effective upon completion of this
offering.
Unless otherwise noted, all information in this prospectus:
- assumes our reincorporation in the State of Delaware and our change of
name from Kinzan.com to Kinzan, Inc.;
- is based on our shares outstanding as of March 31, 2000;
- assumes the conversion of all our outstanding redeemable convertible
preferred stock into common stock on a one-for-one basis upon
completion of this offering; and
- assumes the exercise of warrants to purchase 8,250 shares of our
common stock upon completion of this offering; and
- assumes no exercise by the underwriters of their option to purchase
additional shares of our common stock to cover over-allotments, if
any.
2
SUMMARY FINANCIAL DATA
THE FOLLOWING TABLES SET FORTH SUMMARY FINANCIAL DATA FOR THE PERIODS
INDICATED. YOU SHOULD READ THIS INFORMATION TOGETHER WITH THE FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS AND THE INFORMATION UNDER "SELECTED FINANCIAL DATA" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS."
PREDECESSOR COMPANY
--------------------------- ----------------------------------
THREE MONTHS
YEAR ENDED JANUARY 1 TO JANUARY 29 ENDED
DECEMBER 31, JANUARY 28, (INCEPTION) TO MARCH 31, 2000
1998 1999 DECEMBER 31, 1999 (UNAUDITED)
------------ ------------ ----------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 1,566,149 $ 123,207 $ 1,972,564 $ 828,528
Cost of revenues..................... 1,106,331 152,562 1,745,417 797,591
----------- --------- ----------- -----------
Gross profit......................... 459,818 (29,355) 227,147 30,937
Total operating expenses............. 1,817,212 88,613 4,542,095 2,486,367
----------- --------- ----------- -----------
Operating loss....................... (1,357,394) (117,968) (4,314,948) (2,455,430)
Net loss............................. $(1,357,394) $(117,968) $(4,331,898) $(2,276,597)
=========== ========= =========== ===========
COMPANY
---------------------------------------
AS OF MARCH 31, 2000
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $12,707,272 $29,867,259 $
Working capital........................................ 11,663,816 28,823,803
Total assets........................................... 17,172,785 34,332,772
Total redeemable convertible preferred stock........... 20,837,976 --
Total stockholders' equity (deficit)................... (6,097,886) 31,900,077
The pro forma data assumes that our Series C redeemable convertible
preferred stock offering closed as of March 31, 2000 and also assumes the
conversion of all of the shares of our outstanding redeemable convertible
preferred stock and the issuance of 8,250 shares of our common stock upon
exercise of warrants upon completion of this offering. The pro forma as adjusted
data gives effect to the foregoing and to the sale of _____ shares of our common
stock that we are offering under this prospectus at an assumed initial offering
price of $____ per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
3
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE PURCHASING SHARES OF OUR COMMON STOCK IN THIS OFFERING. IF ANY ONE
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD SUFFER, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND
WE FACE RISKS ASSOCIATED WITH EARLY STAGE COMPANIES THAT MAY CAUSE OUR BUSINESS
TO SUFFER.
We began operations in January 1999 and have a limited operating
history. As a result, it is difficult to evaluate our business. Our business and
prospects must be considered in light of the risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies like ours that operate in new and rapidly evolving markets. Our
failure to adequately address the risks and uncertainties we face could cause
our business to suffer. These risks and uncertainties include our ability to:
- expand sales and marketing activities to increase sales;
- expand our customer base and retain key customers;
- manage growing domestic and international operations;
- create and maintain strategic relationships;
- introduce enhancements to our current products and services and
develop additional products and services;
- upgrade our systems and infrastructure as necessary to handle
increases in the number of Web sites we host on our platform;
- compete effectively against existing or potential competitors; and
- recruit and train key personnel.
We cannot be certain that we will successfully address any of these
risks and uncertainties and our failure to do so may cause our business to
suffer.
WE HAVE A HISTORY OF NET LOSSES WHICH WILL CONTINUE FOR THE FORESEEABLE FUTURE.
We have incurred net losses in each fiscal quarter since our inception.
We incurred a net loss of $4.3 million for the year ended December 31, 1999 and
$2.3 million for the three months ended March 31, 2000. As of March 31, 2000,
our accumulated deficit was $6.6 million. We have not achieved profitability and
we expect to continue to incur net losses for the foreseeable future. To date,
we have primarily funded our operations from the sale of equity securities and
have not generated significant cash from our operations. We expect to continue
to incur substantial product development, sales and marketing and administrative
expenses and, as a result, we will need to generate significant revenues to
achieve and maintain profitability. Although our revenues have increased in
recent quarters, we cannot be sure that we can sustain these growth rates or
that we will achieve sufficient revenues for profitability. In addition, if we
do achieve profitability, we may be unable to sustain or increase profitability
on a quarterly or annual basis in the future.
4
OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE IN THE FUTURE.
Our revenues and operating results may vary significantly from quarter
to quarter. A number of factors are likely to cause these variations, including
the following:
- acceptance of our platform by central organizations and, in turn,
their ability to market our platform to affiliates in their business
relationship networks;
- our ability to attract new customers and maintain customer
satisfaction;
- the timing of sales and the implementation of our products and
services;
- our ability to establish and maintain strategic relationships;
- increased expenses, including those related to sales and marketing,
research and development, administration or international expansion;
- our ability to enhance our products and services, whether internally
or through the integration of third-party applications;
- the ability of third parties to develop additional applications for
our platform;
- the announcement or introduction of new or enhanced products and
services by competitors;
- continued growth of the Internet and electronic commerce; and
- governmental regulation surrounding the Internet.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful. You should not rely on the
results of one quarter as an indication of our future performance.
We plan to increase our operating expenses to expand our sales and
marketing activities, fund greater levels of research and development, hire
additional personnel and support and improve our operational and financial
systems. If our revenues do not increase along with these expenses, our business
could suffer and net losses in a given quarter would be even greater than
expected.
THE MARKET FOR PRODUCTS AND SERVICES THAT EXTEND BUSINESS RELATIONSHIP NETWORKS
ONTO THE INTERNET IS NEW AND EVOLVING AND WE CANNOT BE CERTAIN THAT A VIABLE
MARKET FOR OUR PRODUCTS AND SERVICES WILL EMERGE OR BE SUBSTANTIAL.
The market for products and services that extend business relationship
networks onto the Internet is new and evolving. We cannot estimate the size or
growth rate of the potential market for our products and services and we do not
know whether our products and services will achieve broad market acceptance.
Accordingly, we cannot be certain that a viable market for our products and
services will emerge or be sustainable. We expect that we will continue to need
intensive sales and marketing efforts to educate prospective customers about the
uses and benefits of our products and services. Organizations that have already
invested substantial resources in particular methods of conducting business
across their business relationship networks may be reluctant or slow to adopt
new approaches to conducting their business. Similarly, affiliates of some
business relationship networks may be hesitant to conduct their business online.
These factors could inhibit the growth and acceptance of our products and
services. If the market for our business relationship network products and
services fails to grow or grows more slowly than we anticipate, our business
would suffer.
5
IF OUR CUSTOMERS DO NOT EFFECTIVELY INTRODUCE OUR PRODUCTS AND SERVICES TO THEIR
AFFILIATES OR THEIR AFFILIATES DO NOT ACCEPT OUR PRODUCTS AND SERVICES, OUR
REVENUES WOULD BE NEGATIVELY IMPACTED AND OUR BUSINESS WOULD SUFFER.
We focus our sales efforts on large, central organizations with business
relationship networks consisting of thousands of affiliates. Although our
strategy provides us with numerous potential end-users, we will not receive the
benefits of our strategy unless our products and services are used throughout
the business relationship networks of our customers. Accordingly, we rely on our
customers to market our services to their affiliates. Because our pricing model
is based in large part on the number of Web sites established by the affiliates
of our customers, our revenues from an individual contract depend on the success
of our customers in marketing and deploying our products and services to their
affiliates. We cannot be certain that our customers will expend the effort
required to attract a sufficiently large number of their affiliates to our
products and services. In addition, even if our customers spend the time
necessary to market our products and services to their affiliates, we cannot be
sure that the affiliates will accept our products and services and extend their
operations online. If our customers fail to market our products and services to
their affiliates or the affiliates do not accept our products and services, our
revenues will be negatively impacted and our business would suffer.
IF WE FAIL TO ATTRACT, RETAIN OR SUCCESSFULLY INTEGRATE OUR SALES AND MARKETING
PERSONNEL, OUR BUSINESS COULD SUFFER.
Our ability to increase our revenues will depend on our ability to
successfully recruit, train, integrate and retain sales and marketing personnel.
Our products and services are complex and require highly trained sales and
marketing personnel to educate prospective customers regarding their uses and
benefits. Accordingly, we plan to continue to invest significant resources to
expand and train our sales and marketing groups. Competition for additional
qualified personnel, however, is intense and we may not be able to hire and
retain sales and marketing personnel with relevant experience or may be required
to pay more for their services. Additionally, our new hires will require time
and training before they are fully integrated into our sales and marketing
groups. Many current members of our sales and marketing groups have recently
joined us and have limited experience working together. As of December 31, 1999,
we had 18 employees in our sales and marketing groups and as of March 31, 2000
we had 24. If we encounter any delays or difficulties in our staffing efforts or
are unsuccessful in integrating our newly hired sales and marketing personnel,
we may not be able to compete against companies with larger and more experienced
sales and marketing groups. Any difficulties could impair our ability to attract
new customers and enhance our relationships with existing customers which would
impact the timing and extent of our revenues.
OUR SALES CYCLE MAY BE LENGTHY DUE TO THE COMPREHENSIVE NATURE OF OUR PLATFORM,
WHICH COULD MAKE IT DIFFICULT TO FORECAST OUR FUTURE REVENUES.
Prior to completing a sale, our sales staff typically spends a
significant amount of time educating potential customers regarding the uses and
benefits of our products and services for their business relationship networks.
Additionally, because our platform offers a solution for a network of
affiliates, our sales efforts are often targeted at senior management of central
organizations. For example, during our sales cycle we consult with and
demonstrate our products and services for various representatives of central
organizations, including the Chief Financial Officer, the Chief Information
Officer, and leaders of the electronic business, marketing and new media groups,
prior to making a sale. As a result, sales of our products and services can take
anywhere from three to nine months from the time we make initial contact with
our customers. Also, we cannot be sure that we will be successful in our sales
efforts. Our business could suffer if we dedicate significant resources to a
particular sale and do not complete it successfully. Our potentially long and
unpredictable sales cycle may make it difficult to forecast our future revenues.
6
WE DEPEND ON A SMALL NUMBER OF LARGE CUSTOMERS AND OUR REVENUES AND OPERATING
RESULTS COULD BE LOWER THAN WE EXPECT IF WE LOSE A MAJOR CUSTOMER.
We currently derive a significant portion of our revenues from a small
number of relatively large customers. For example, Encanto Networks, Inc.
accounted for 38% of our revenues, AutoTrader.com accounted for 32% of our
revenues and TASQ Technology accounted for 10% of our revenues for 1999. In
addition, Ares International accounted for 36% of our revenues, AutoTrader.com
accounted for 34% of our revenues and Chase Merchant Services accounted for 14%
of our revenues for the three months ended March 31, 2000. We expect to continue
to derive the majority of our revenues from a small number of large customers
because we focus our sales efforts on large, central organizations with
thousands of affiliates in their networks. The loss of a large customer or our
inability to attract new large customers would cause our business to suffer.
IF WE FAIL TO ESTABLISH AND MAINTAIN OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS
AND CONSULTING FIRMS, THE GROWTH OF OUR BUSINESS MAY BE IMPAIRED.
In order to execute our business plan, we intend to continue to form
distribution, implementation or other alliance relationships to reach a larger
customer base than we could reach through our direct sales and marketing
efforts. We intend to target systems integrators, consulting firms and other
third parties that develop and deploy Internet applications for their customers.
For example, we currently have relationships with a number of Internet
consulting firms, including iXL Enterprises and marchFirst, Inc., the company
resulting from the merger of USWeb/CKS and Whittman-Hart. We cannot be certain
that we will be able to enter into these relationships on commercially
reasonable terms or at all in the future and, if we successfully establish these
relationships, whether we will be able to maintain them. If we are unable to
establish distribution and implementation relationships, we would be required to
devote substantially more resources to the sale and marketing of our products
and services than we would otherwise need to do. Furthermore, as a result of our
emphasis on these relationships, our success will depend in part both on the
ultimate success of the parties we select and their ability to market our
products and services effectively. The failure of these relationships to result
in the development of an additional sales channel for our products and services
could limit the expansion of our business.
Any distribution or implementation relationship we establish may not
afford us any exclusive rights. In addition, the other parties to these
relationships may not view their relationship with us as significant to their
own businesses. Therefore, they could reduce their commitments to us at any time
in the future. These parties could also pursue alternative technologies or
develop competing products and services either on their own or in alliance with
others. Losing the support of these third parties may limit our ability to
penetrate our markets. If we are unable to enter into distribution or
implementation relationships or maintain those relationships once established,
we may be unable to expand our business.
OUR FAILURE TO PROCURE, MAINTAIN OR INTEGRATE THIRD-PARTY APPLICATIONS TO
ENHANCE OUR PLATFORM COULD CAUSE OUR BUSINESS TO SUFFER AND EXPOSE US TO
ADDITIONAL RISKS.
In order to enhance the benefits our platform offers, we will continue
to enter into licenses and other arrangements with third parties to provide
additional applications for our customers. For example, we currently have
arrangements with Clear Commerce, CyberCash and Signio, Inc., a subsidiary of
VeriSign, Inc., to provide electronic commerce payment services, CommTouch to
provide email services, Mapquest.com, Inc. to provide locator software, Getty
Images to provide visual content and MyComputer.com, Inc. to provide statistical
reporting services to our customers. Our market is new and rapidly evolving and
we will need to enter into additional arrangements to provide further benefits
to our customers and remain competitive. We may not be able to procure these
additional applications on commercially reasonable terms or at all in the
future. If we are unable to enter into arrangements for additional applications,
we may lose our competitive position and our business could suffer.
7
Our reliance on third-party applications may expose us to increased
risks, including risks related to the integration of new technology, the
diversion of resources from the development of proprietary technology and an
inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. If we are unable to obtain any of
these applications, the development of our products and services could be
delayed until equivalent technology can be identified, licensed and integrated.
Any delays could cause us to lose our competitive position and cause our
business to suffer.
IF WE ARE UNABLE TO MANAGE OUR GROWTH AND EXPANSION EFFECTIVELY, OUR BUSINESS
AND OPERATING RESULTS COULD SUFFER.
In order to be successful, we must continue to expand our operations
significantly. Our continued expansion will place a significant burden on our
management, reporting systems and other resources. To manage future growth, we
will need to improve our existing operational, customer service and financial
systems, procedures and controls. Any failure to properly manage these systems
and procedural transitions could impair our ability to attract and service
customers and could cause us to incur higher operating costs. We will also need
to continue the expansion of our operations and employee base. Our number of
employees has increased from 20 at March 31, 1999 to 70 at March 31, 2000. Our
management may not be able to recruit, hire, train, retain, motivate and manage
required personnel. If we cannot manage our growth effectively, our business and
operating results could suffer.
IF WE FAIL TO MANAGE OUR FINANCIAL AND ACCOUNTING SYSTEMS, OUR BUSINESS COULD
SUFFER.
To manage the expected growth of our operations and personnel, we will
need to improve our financial and accounting systems, transaction processing,
procedures and controls. To that end, we must:
- develop our operating, administrative, financial and accounting
systems and controls;
- improve coordination among our engineering, accounting, finance,
marketing and operations personnel; and
- hire and train additional finance and accounting personnel.
If we cannot accomplish these objectives, we may not be able to
adequately support our future operations and our business could suffer.
IF WE FAIL TO TAKE ADVANTAGE OF OUR COMPETITIVE POSITION IN OUR MARKET OR
ADDRESS ADDITIONAL COMPETITION IN THE FUTURE, OUR BUSINESS COULD SUFFER.
Our market is new and rapidly evolving, and we expect competition to
increase significantly in the future. Currently, our direct competition comes
from the internal or outsourced development of custom, proprietary solutions by
or for large organizations. However, we believe few companies offer a platform
specifically designed to manage content, commerce and brand across large numbers
of affiliated Web sites. If we fail to attract and retain a large customer base
and do not establish a prominent market position before our competitors, our
ability to grow our business will be inhibited and our business could suffer.
While we currently do not face significant direct competition, there are
various types of companies that compete with us in different areas including:
- Web site publishing companies such as Netopia, Nextron Communications
and Orbit Commerce;
- providers of integrated electronic business applications such as IBM
and BroadVision;
- Web authoring software providers such as Microsoft, NetObjects and
Adobe;
- content management software vendors such as Interwoven and Vignette;
8
- catalog software providers such as BigStep, CNET Store, Open Market,
InterShop and Yahoo Store!;
- community management systems developers such as Homestead.com,
MyFamily.com, Homepage.com and Koz.com;
- providers of infrastructure enabling software such as BEA Systems and
Tibco; and
- numerous small companies offering some form of Web content or
electronic commerce systems.
Many of these companies have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do and may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many of these companies have wider
name recognition and more extensive customer bases that could be leveraged,
thereby gaining market share at our expense. These companies may be able to
undertake more comprehensive promotional activities, adopt more aggressive
pricing policies and offer more attractive terms to customers than we can. In
addition, these companies may establish cooperative relationships among
themselves or with third parties to enhance their products and services.
Accordingly, it is possible that new competitors may emerge and rapidly acquire
significant market share.
We licensed to Encanto Networks, Inc. the right to use and distribute
our electronic commerce software, including modifications and enhancements, in
exchange for $325,000 and 300,000 shares of Encanto common stock valued at $0.17
per share. While Encanto does not currently compete directly with us, the terms
of this license agreement do not prohibit Encanto from engaging in such
activities.
Increased competition could negatively impact our ability to obtain
revenues from new or existing customers on terms favorable to us. Further,
competitive pressures may require us to reduce the prices of our products and
services. In either case, our business would suffer. We cannot be certain that
we will be able to compete effectively with existing or new competitors or that
increased competition will not harm our business.
IF WE LOSE THE SERVICES OF OUR SENIOR MANAGEMENT TEAM OR ARE UNABLE TO ATTRACT
AND RETAIN OTHER QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER.
Our success depends largely on the skills, experience and performance of
our senior management team. In particular, the success of our business depends
on the services of Gari L. Cheever, our President and Chief Executive Officer,
and Garland Wong, our Chief Technology Officer. We do not maintain key person
life insurance policies on any of our employees. If we are unable to retain the
services of Mr. Cheever, Mr. Wong or other members of our senior management
team, our business could suffer.
Our future success also depends largely on our ability to continue to
attract and retain highly qualified personnel. Competition for qualified
personnel, particularly with Internet-related experience, is intense and we may
be unable to attract the necessary personnel as our business grows. Furthermore,
new employees require training, take time to achieve full productivity and may
be difficult to retain. If we are unable to hire, train and retain qualified
personnel, our business could suffer.
IF WE DO NOT ADDRESS SUCCESSFULLY THE RISKS INHERENT IN OUR PLANNED
INTERNATIONAL EXPANSION, OUR BUSINESS COULD SUFFER.
We intend to expand our operations into international markets both
directly by deploying our sales force and indirectly by entering into reseller
relationships or joint ventures with various partners that operate in our target
international markets. For example, we intend to establish joint ventures in
Asia in 2000. Once established, we plan to license our products to the joint
ventures and provide our joint venture partners with training regarding our
products, services and systems. We expect that our joint venture
9
partners will independently perform the day-to-day operations of our joint
ventures and will be beyond our immediate control. Any failure by our joint
venture partners to successfully implement or maintain services could result in
negative publicity and have an unfavorable impact on the perception of our
business.
We have limited experience in tailoring our products and services to
foreign markets and developing international relationships. If revenues from our
international expansion do not exceed the expense of establishing these
operations, our business could suffer. We face various risks inherent in
expanding our business internationally, such as:
- selecting qualified local partners for our international joint
ventures;
- difficulties and costs of monitoring our international operations;
- varying technology standards;
- difficulties and costs of tailoring our products and services to meet
the demands of foreign markets;
- legal uncertainty regarding liability;
- unexpected changes in regulatory requirements;
- political and economic instability;
- fluctuations in currency exchange rates;
- potentially adverse tax consequences; and
- reduced protection of intellectual property rights in some countries.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THIRD-PARTY SERVICE PROVIDERS TO CONDUCT
OUR BASIC CUSTOMER SERVICE FUNCTIONS, OUR BUSINESS COULD SUFFER.
We rely on third-party service providers to assist us with some of our
basic customer service functions, such as outsourced email and call center
management and staffing. We cannot be certain that we will be able to attract
and retain additional third-party service providers to assist our customers with
the implementation of our products and services. While we provide various
advanced services to our customers, we do not believe that our in-house customer
service professionals will be able to fulfill the expected demand for basic
customer support services as our business grows. We supplement the capabilities
of our customer service professionals through additional third-party service
providers. We may not be successful in attracting these third-party service
providers or retaining our current third-party service providers. In addition,
these third parties may not devote sufficient resources to our service
activities. A shortfall in service capabilities may affect our ability to sell
our products and services.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS, WE
MAY FACE ADDITIONAL COMPETITION AND OUR BUSINESS COULD SUFFER.
We consider our patent, copyrights, software, service marks, trademarks,
trade secrets and other intellectual property to be important to our success. We
rely on patent, trademark, copyright and trade secret law and confidentiality
and license agreements with employees, customers and other third parties to
protect our intellectual property and proprietary rights. Despite these
precautions, unauthorized third parties may infringe our intellectual property,
copy portions of our products and services or reverse-engineer or otherwise
obtain and use software or information we regard as proprietary. End-user
license provisions protecting against unauthorized use, copying, transfer and
disclosure of the licensed product may be unenforceable under the laws of
various states and foreign countries. The status of patent protection in the
software industry is not well defined and will evolve as the U.S. Patent and
Trademark
10
Office grants additional patents and pending court cases are resolved. We
currently hold one patent and have additional applications pending in the United
States. We may also seek additional patents in the future. We do not know if our
patent applications or any future patent applications will be issued or as
extensive as we originally sought, or whether our patent or any future patents
will be challenged or invalidated.
While we protect our source code for our software and related items
through copyright and trade secret laws, these laws do not prohibit the
independent development of the same or similar items by third parties. In
addition, the laws of some foreign countries do not protect proprietary rights
to the same extent as the laws of the United States do. Our means of protecting
proprietary rights in the United States or abroad may not be adequate and our
competitors may independently develop similar technologies. Policing
unauthorized use of our software is difficult and litigation may be necessary in
the future to enforce our intellectual property rights, protect our trade
secrets, determine the validity and scope of proprietary rights of others or
defend claims against infringement or invalidity. Any failure by us to protect
our intellectual property could cause our business to suffer.
WE MAY BE SUBJECT TO CLAIMS OF PATENT INFRINGEMENT WHICH MAY BE TIME-CONSUMING
AND EXPENSIVE.
Patent litigation has recently increased in the software and Internet
industries due to increased competition and the unsettled state of the law
regarding patents for software and business methods. Although we have not
received notice of any alleged infringement by us, we cannot be sure that our
products and services do not and will not be alleged to infringe upon issued
patents of third parties that may relate to our products and services. In
addition, because patent applications in the United States are not publicly
disclosed until the patent is issued, applications may have been filed by third
parties which relate to our software. We may be subject to legal proceedings and
claims from time to time in the ordinary course of business, including alleged
infringement of intellectual property rights of third parties. Intellectual
property litigation is expensive and time-consuming, regardless of the merits of
any claims against us, and could divert the attention of management from
operating our business. In addition, if we were to lose an infringement suit, we
could be forced to pay costly damages or license fees or be required to stop
using or selling a particular product or service until it was properly modified.
Any of these events could cause our business to suffer.
OUR PRODUCTS AND SERVICES COULD HAVE UNKNOWN DEFECTS OR ERRORS, WHICH COULD
RESULT IN A LOSS OF OR DELAY IN REVENUES.
Software products and services as complex as those we offer or develop
often contain undetected defects and errors. Despite testing, defects and errors
may occur in our existing or new products and services which could result in
loss of or delay in revenues, decrease in market share, failure to achieve broad
market acceptance, diversion of development resources, injury to our reputation,
warranty claims and increased insurance, service or warranty costs, any one of
which could harm our business. Furthermore, we often provide implementation,
customization, consulting and other technical services in connection with our
products and services. The performance of these services involves working with
sophisticated software, computing and communications systems. Our failure or
inability to meet customer expectations or project requirements in a timely
manner could also result in the loss of or delay in revenues, decrease in market
share, failure to achieve broad market acceptance, injury to our reputation and
increased costs.
UNPLANNED SYSTEMS INTERRUPTIONS COULD REDUCE OUR ABILITY TO PROVIDE OUR SERVICES
AND CAUSE OUR BUSINESS TO SUFFER.
We depend on the uninterrupted operation of our systems to serve our
customers effectively. We must protect our systems from loss, damage or
interruption caused by fire, earthquake, power loss, telecommunications failure
or other events beyond our control. Most of our systems are currently located
11
at, and most of our customer information is stored in, a third-party facility in
Memphis, Tennessee. We have a disaster recovery facility in San Jose,
California, an area susceptible to earthquakes. Any damage or failure that
causes interruptions in our systems could subject us to increased operating
costs and cause our business to suffer. In addition, our products and services
depend on the efficient operation of the Internet through Web browsers, Internet
service providers and Internet backbone service providers, all of which have had
periodic operational problems or experienced outages in the past. Any of these
problems or periodic outages could decrease our customer satisfaction and cause
our business to suffer.
Our standard service agreement with our customers requires us to provide
virtually uninterrupted service. Our ability to provide this level of service
depends on the integrity of our systems and the ability of our third-party
service providers to maintain their systems. If we fail to provide the required
levels of service to our customers due to interruptions in our systems or those
of our third-party providers, our customers could terminate their relationships
with us and we could be subject to contractual monetary penalties. Unplanned
service interruptions may negatively affect our ability to attract and retain
customers.
ANY BREACHES OF OUR NETWORK SECURITY COULD SUBJECT US TO INCREASED OPERATING
COSTS AND CAUSE OUR BUSINESS TO SUFFER.
The secure transmission of confidential information over the Internet is
essential to maintaining customer confidence in our business. It is critical to
our business strategy that our facilities and infrastructure remain, and are
perceived by the marketplace to be, secure. If third parties breach our
security, confidential information of our customers and their affiliates could
be compromised. Our infrastructure may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. It is possible that
advances in computer capabilities, new discoveries or other developments could
result in a compromise or breach of the technology that we use to protect
confidential information. We cannot be certain that our security measures will
prevent security breaches. Substantial, ongoing or highly-publicized breaches of
security on our systems or the systems of other companies could significantly
harm our business. We may incur substantial expense to protect against and
remedy security breaches and their consequences. In addition, if our customers
are harmed as a result of any breaches of our security, they could seek damages
from us for their losses. Any claim brought against us, even if not successful,
would likely be time-consuming and costly. Any penetration of our network
security or misappropriation of our or our customers' confidential information
could cause interruptions in our operations and subject us to liability, which
could cause our business to suffer.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WHICH COULD LIMIT THE
GROWTH OF OUR BUSINESS.
We currently anticipate that the net proceeds of this offering, together
with our current cash, will be sufficient to satisfy our anticipated needs for
working capital, capital expenditures and business expansion for at least the
next 12 months. After that time, we may need additional capital. However, if our
growth rate exceeds our expectations, we may need to raise additional funds
sooner in order to fund expansion, develop new or enhanced services or respond
to competitive pressures.
Additional financing may not be available to us on commercially
reasonable terms or at all. If adequate funds are not available on acceptable
terms, we may not be able to continue to expand our business operations and our
business could suffer. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our existing
stockholders will be diluted. Furthermore, any new securities could have rights,
preferences and privileges senior to those of our common stock.
12
RISKS RELATED TO THE INTERNET INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH AND ACCEPTANCE OF ELECTRONIC COMMERCE
AS A COMMERCIAL MEDIUM.
Our future success depends heavily on the acceptance and wide use of the
Internet for electronic commerce. If electronic commerce does not continue to
grow or grows more slowly than expected, demand for our products and services
will be reduced. Consumers and businesses may not accept the Internet as a
viable commercial medium for a number of reasons, including potentially
inadequate network infrastructure, slow development of technologies,
insufficient commercial support or privacy concerns. The Internet's
infrastructure may not be able to support the demands placed on it by increased
usage. In addition, delays in the development or adoption of new standards and
protocols required to handle increased levels of activity could cause the
Internet to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols and complementary products, services and
facilities are developed, we may incur substantial expenses adapting our
solution to changing or emerging technologies.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES COULD IMPAIR THE GROWTH OF THE
INTERNET AND DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES OR INCREASE OUR COST
OF DOING BUSINESS.
A number of laws in the United States and other countries have been
enacted or proposed involving the Internet, including laws addressing user
privacy, taxes, libel, obscenity and consumer protection. The adoption of
additional laws or regulations may impair the growth of the Internet, which
could decrease the demand for our products and services, increase our cost of
doing business and ultimately cause our business to suffer. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve.
IF WE ARE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGES RELATING TO THE
INTERNET, OUR BUSINESS WILL SUFFER.
The market for our products and services is marked by rapid
technological change, frequent new product and service introductions and
Internet-related technology enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards. We cannot be certain that
we will successfully develop and market new products and services or
enhancements that comply with present or emerging Internet technology standards.
New products or services based on new technologies or industry standards could
render our products and services obsolete or unmarketable. To succeed, we will
need to enhance our current products and services and develop new products and
services in a timely manner to keep pace with developments related to Internet
technology and satisfy the increasingly sophisticated requirements of customers.
Electronic business technology is complex and new products and services or the
enhancement of existing products and services often requires long development
and testing periods. Any delays in developing and releasing enhanced or new
products and services could cause us to lose revenue opportunities and customers
which would cause our business to suffer.
RISKS RELATED TO THIS OFFERING
PRIOR TO THIS OFFERING, THERE HAS BEEN NO MARKET FOR OUR COMMON STOCK, AND WE
CANNOT GUARANTEE THAT AN ACTIVE MARKET WILL DEVELOP FOLLOWING COMPLETION OF THIS
OFFERING.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which a market will develop or how liquid
that market will eventually become. The initial public offering price for the
shares of our common stock will be determined by negotiations among us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market.
13
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION FOLLOWING COMPLETION OF
THIS OFFERING.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock. The pro forma net tangible book
value of our common stock as of March 31, 2000 was $30.1 million, or
approximately $1.71 per share. To the extent options or warrants are exercised
following the completion of this offering, you will experience further dilution.
OUR STOCK PRICE COULD BE VOLATILE AND MAY DECLINE FOLLOWING THIS OFFERING.
The stock market has recently experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been highly volatile. Trading prices may
fluctuate in response to a number of events and factors including:
- introduction of new products and services and strategic developments
by us or our competitors;
- quarterly variations in our operating results;
- changes in expectations as to our future performance, including
financial estimates by securities analysts and investors;
- our failure to meet the expectations of securities analysts or
investors;
- announcements of significant claims or legal proceedings against us;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic relationships, joint ventures or capital
commitments;
- departures of key personnel; and
- future sales of our common stock.
The trading price for our common stock may decline below the initial
offering price and you may not be able to resell your shares at or above the
initial public offering price.
In the past, some companies that have experienced volatility in the
market price of their stock have been subject to securities class action
litigation. Securities class action litigation involving us would result in
substantial costs and a diversion of management's attention and resources and
would harm our stock price.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE NET PROCEEDS OF THIS
OFFERING AND MAY NOT USE THE PROCEEDS FOR PURPOSES YOU APPROVE.
Our management will have broad discretion with respect to the use of the
net proceeds from this offering. Although we currently intend to use the net
proceeds from this offering for the purposes we describe, we operate in a
dynamic and rapidly changing industry, and it is possible that unforeseen events
will require us to adapt or change our plans in order to remain competitive. As
a result, we cannot assure you that management will use the net proceeds from
this offering for purposes you approve.
OUR EXECUTIVE OFFICERS, DIRECTORS AND SOME OF OUR STOCKHOLDERS EXERCISE
SIGNIFICANT CONTROL OVER OUR BUSINESS AND MAY HAVE INTERESTS THAT ARE DIFFERENT
THAN YOURS.
Upon completion of this offering, our executive officers, directors and
some of our stockholders, and related entities controlled by them, will, in the
aggregate, own approximately % of our outstanding common stock. As a result,
these persons, acting together, will have the ability to influence all matters
submitted to the stockholders for approval, including the election and removal
of directors and any merger, consolidation or sale of all or substantially all
of our assets. Accordingly, this concentration of ownership may have the effect
of delaying, deferring or preventing a change in control, impeding a merger,
14
consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of our business, even if the transaction would be beneficial to other
stockholders.
FUTURE SALES OF OUR STOCK BY EXISTING STOCKHOLDERS COULD CAUSE OUR STOCK PRICE
TO DECLINE.
The sale of a substantial number of shares of our common stock in the
public market following this offering could cause the market price of our common
stock to decline, possibly significantly. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional equity
securities in the future. Upon completion of this offering, we will have
shares outstanding, shares if the underwriters exercise
their over-allotment option in full. All of our executive officers and
directors, the holders of % of our of common stock and the holders of % of
our options have agreed, for a period of 180 days from the date of this
prospectus, without the prior written consent of Chase Securities Inc., not to,
directly or indirectly, sell or otherwise dispose of any of their shares. When
these lock-up agreements expire, these shares and the shares underlying any
options held by these individuals will become eligible for sale, in some cases
subject only to the volume, manner of sale and notice requirements of Rule 144
of the Securities Act of 1933.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS WILL CONTAIN PROVISIONS WHICH COULD
DELAY OR PREVENT A CHANGE OF CONTROL.
Our certificate of incorporation and bylaws will contain provisions that
could delay or prevent a change of control of our company. These provisions
could limit the price that investors might be willing to pay in the future for
shares of our common stock. Some of these provisions will:
- authorize the issuance of preferred stock which can be created and
issued by the board of directors without prior stockholder approval,
commonly referred to as "blank check" preferred stock, with rights and
preferences senior to those of common stock;
- prohibit cumulative voting in the election of our directors;
- limit the persons who may call special meetings of stockholders;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can
be acted upon by stockholders at a meeting.
15
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties. Forward-looking statements include the words "believe,"
"may," "will," "estimate," "intend," "continue," "pro forma," "expect,"
"anticipate" or other similar words. All forward-looking statements speak only
as of the date of this prospectus. The forward-looking statements contained in
this prospectus are generally located in "Prospectus Summary," "Risk Factors,"
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," but may also be found in other
sections of this prospectus. These forward-looking statements generally relate
to our plans and objectives for future operations and are based on management's
estimates of future results or trends. Although we believe that our plans and
objectives reflected in or suggested by these forward-looking statements are
reasonable, we may not achieve the plans or objectives and cannot guarantee
future results, levels of activity, performance or achievements. Actual results
may differ from projected results due to unforeseen developments, including
those discussed in "Risk Factors."
You should read this prospectus completely and with the understanding
that actual results may be materially different from what we expect. Except as
required by law, we undertake no obligation after the date of this prospectus to
update any forward-looking statements even though our situation may change in
the future.
16
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be
approximately $ million, or $ million if the underwriters exercise their
over-allotment option in full, assuming an initial public offering price of
$ per share and after deducting estimated underwriting discounts and
commissions and other estimated offering expenses.
We intend to use the net proceeds of this offering for general corporate
purposes, including: (1) operational expenses, such as personnel, research and
development and sales and marketing, (2) capital expenditures and
(3) international expansion. At this time, we cannot assign any particular
amount to a specific use. The amounts and timing of our capital expenditures
will depend on numerous factors, including the status of our marketing and
branding activities, the need to hire new employees and the amount of cash
generated or used by our operations. We may also use a portion of the net
proceeds, currently intended for general corporate purposes, to acquire or
invest in complementary businesses, technologies, products or services. We have
no present plans or commitments and we are not currently engaged in negotiations
for any such transactions. Our management will retain broad discretion in the
allocation of the net proceeds of this offering.
Pending use of the net proceeds, we intend to invest the funds in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock
since our inception and we do not intend to pay any cash dividends on our common
stock for the foreseeable future. We intend to retain future earnings, if any,
to finance the expansion of our business. Any future payment of dividends will
be at the discretion of our board of directors and will depend upon such factors
as future earnings, capital requirements, our financial condition and general
business conditions.
17
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis after giving effect to the issuance of
1,392,438 shares of our Series C redeemable convertible preferred
stock on April 19 and 26, 2000 for approximately $17.1 million, the
conversion of all outstanding shares of our redeemable convertible
preferred stock into an aggregate of 11,143,445 shares of our common
stock upon the closing of this offering and the issuance of
8,250 shares of our common stock upon exercise of warrants upon
completion of this offering; and
- on a pro forma basis as adjusted to reflect the sale of
shares of our common stock in this offering and the receipt of
the estimated net proceeds of this offering, after deducting
underwriting discounts and commissions and estimated offering
expenses.
You should read the information below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes to those financial statements appearing
at the end of this prospectus.
AS OF MARCH 31, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
Redeemable Convertible Preferred Stock, no par value;
10,847,895 shares authorized actual, 13,347,895
shares authorized pro forma, no shares authorized
pro forma as adjusted; 9,751,007 shares issued and
outstanding actual, 11,151,695 shares issued and
outstanding pro forma and no shares issued and
outstanding pro forma as adjusted................... $20,837,976 $ -- $ --
Stockholders' equity (deficit):
Common Stock, no par value; 70,000,000 shares
authorized actual, 70,000,000 shares authorized
pro forma, 100,000,000 shares authorized pro
forma as adjusted; 6,489,754 shares issued and
outstanding actual, 17,641,449 shares issued and
outstanding pro forma, shares issued and
outstanding pro forma as adjusted............... 2,370,826 40,368,789
Note receivable from related parties.............. (511,545) (511,545)
Deferred compensation............................. (1,348,672) (1,348,672)
Accumulated deficit............................... (6,608,495) (6,608,495)
----------- ----------- -------
Total stockholders' equity (deficit)............ (6,097,886) (31,900,077)
----------- ----------- -------
Total capitalization.......................... $14,740,090 $31,900,077 $
=========== =========== =======
The information regarding the number of shares of common stock to be
outstanding after this offering does not include:
- 2,705,000 shares of our common stock issuable upon exercise of options
outstanding at March 31, 2000 under our 1999 Stock Option/Stock
Issuance Plan, with a weighted average exercise price of $0.68 per
share;
- 26,250 shares of our common stock issuable upon exercise of warrants
outstanding at March 31, 2000 at an exercise price of $4.00 per share;
and
- 157,000 additional shares of our common stock available for future
grant under our 1999 Stock Option/Stock Issuance Plan and an
additional 2,000,000 shares of our common stock available for future
grant under our 2000 Stock Option Plan and our 2000 Employee Stock
Purchase Plan, which will become effective upon completion of this
offering.
18
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was
approximately $30.1 million, or approximately $1.71 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 and divided by
the total number of shares of our common stock outstanding, after giving effect
to the sale by us of 1,392,438 shares of our Series C redeemable convertible
preferred in April 2000 to several private investors, the conversion of all
outstanding shares of redeemable convertible preferred stock into common stock
and the assumed issuance of 8,250 shares of our common stock upon conversion and
exercise of warrants upon completion of this offering. Assuming the sale by us
of shares of our common stock in this offering at an assumed initial
public offering price of $ per share, and after deducting assumed underwriting
discounts and commissions and estimated expenses, the as adjusted pro forma net
tangible book value of our common stock as of March 31, 2000 would have been
$ , or $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and an
immediate and substantial dilution in pro forma net tangible book value of
$ per share to new public investors. The following table illustrates this
per share dilution:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of March
31, 2000................................................ $1.71
Increase per share attributable to new investors.......... $
-----
Pro forma net tangible book value per share after this
offering.................................................. $
----------
Dilution in pro forma net tangible book value per share to
new investors
==========
The following table summarizes, on a pro forma basis as of March 31,
2000 after giving effect to the sale by us of 1,392,438 shares of our Series C
redeemable convertible preferred stock in April 2000 to several private
investors, the assumed issuance of 8,250 shares of our common stock upon
conversion and exercise of warrants upon completion of this offering and the
sale of shares of our common stock in this offering at an assumed
initial public offering price of $ per share, and after deducting the
underwriting discounts and commissions and estimated expenses, the differences
between existing stockholders and new public investors in this offering with
respect to the number of shares of common stock purchased from us, the total
consideration paid for those shares and the average price per share:
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
Existing stockholders.......... 17,641,449 $40,368,789 $2.29
New investors..................
--- ---
Total........................ 100% 100%
========== === =========== ===
The foregoing tables and calculations do not include:
- 2,705,000 shares of our common stock issuable upon exercise of options
outstanding at March 31, 2000 under our 1999 Stock Option/Stock
Issuance Plan, with a weighted average exercise price of $0.68 per
share;
- 26,250 shares of our common stock issuable upon exercise of warrants
outstanding at March 31, 2000 at an exercise price of $4.00 per share;
and
- 157,000 additional shares of our common stock available for future
grant under our 1999 Stock Option/Stock Issuance Plan and an
additional 2,000,000 shares of our common stock available for future
grant under our 2000 Stock Option Plan and our 2000 Employee Stock
Purchase Plan which will become effective upon completion of this
offering.
To the extent outstanding options and warrants are exercised, there will
be further dilution to the new investors.
19
SELECTED FINANCIAL DATA
You should read the following selected historical financial data
together with the financial statements and the notes to those statements
appearing elsewhere in this prospectus and the information under "Management's
Discussion and Analysis of Financial Condition and Operating Results." We
derived the statements of operations data of our predecessor for the year ended
December 31, 1998 and the period from January 1 to January 28, 1999 and the
balance sheet data of our predecessor as of December 31, 1998 and January 28,
1999 from the financial statements of our predecessor audited by Ernst & Young
LLP, which appear elsewhere in this prospectus. We derived our statements of
operations data for the period from January 29, 1999 to December 31, 1999 and
our balance sheet data as of December 31, 1999 from our financial statements
audited by Ernst & Young LLP, which appear elsewhere in this prospectus. Our
statements of operations data for the period from January 29, 1999 to March 31,
1999 and the three months ended March 31, 2000 and our balance sheet data as of
March 31, 2000 are derived from our unaudited financial results included
elsewhere in this prospectus. We have prepared our unaudited financial
statements on the same basis as our audited financial statements. In the opinion
of our management, our unaudited financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the information in those statements. Our historical results are
not necessarily indicative of operating results to be expected in the future.
The following pro forma data assumes that our Series C redeemable
convertible preferred stock offering closed as of March 31, 2000 and also
assumes the conversion of all of the shares of our outstanding redeemable
convertible preferred stock and the issuance of 8,250 shares of our common stock
upon exercise of warrants upon completion of this offering. The following pro
forma as adjusted data gives effect to the foregoing and to the sale of
shares of our common stock that we are offering under this prospectus at an
assumed initial offering price of $ per share and after deducting the
underwriting discounts and commissions and estimated offering expenses. For a
description of the computation of the historical net loss per share and the
number of shares used in the historical per share calculation, see note 5 to our
financial statements included in this prospectus.
20
PREDECESSOR COMPANY
----------------------- --------------------------------------
JANUARY 29 THREE
(INCEPTION) MONTHS
YEAR ENDED JANUARY 1 TO JANUARY 29 ENDED
DECEMBER TO DECEMBER TO MARCH 31,
JANUARY MARCH 31,
31, 28, 31, 1999 2000
1998 1999 1999
----------- --------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues........................ $1,566,149 $123,207 $1,972,564 $ 254,094 $ 828,528
Cost of revenues................ 1,106,331 152,562 1,745,417 189,200 797,591
----------- --------- ----------- ---------- -----------
Gross profit.................... 459,818 (29,355) 227,147 64,894 30,937
Operating expenses:
Selling and marketing......... 613,365 36,068 2,261,951 112,793 1,544,270
Research and development...... 764,036 10,845 1,353,749 90,672 349,802
General and administrative.... 439,811 41,700 461,988 45,716 401,224
Amortization of intangibles... -- -- 427,174 77,668 116,501
Amortization of deferred
compensation................ -- -- 37,233 849 74,570
----------- --------- ----------- ---------- -----------
Total operating expenses........ 1,817,212 88,613 4,542,095 327,698 2,486,367
----------- --------- ----------- ---------- -----------
Operating loss.................. (1,357,394) (117,968) (4,314,948) (262,804) (2,455,430)
----------- --------- ----------- ---------- -----------
Interest income (expense),
net........................... -- -- (16,950) (23,364) 178,833
----------- --------- ----------- ---------- -----------
Net loss........................ $(1,357,394) $(117,968) $(4,331,898) $(286,168) $(2,276,597)
=========== ========= =========== ========== ===========
Basic and diluted net loss per
share......................... $ -- $ -- $ (1.50) $ (0.13) $ (0.67)
=========== ========= =========== ========== ===========
Shares used in computing basic
and diluted net loss per
share......................... -- -- 2,896,145 2,213,714 3,418,664
=========== ========= =========== ========== ===========
Pro forma basic and diluted net
loss per share (unaudited).... $ (0.59) $ (0.13) $ (0.17)
=========== ========== ===========
Pro forma shares used in
computing basic and diluted
net loss per share
(unaudited)................... 7,382,055 2,213,714 13,168,599
=========== ========== ===========
PREDECESSOR COMPANY
------------ -----------------------------------------------------
MARCH 31, 2000
---------------------------------------
DECEMBER 31, DECEMBER PRO PRO FORMA
1998 31, 1999 ACTUAL FORMA AS ADJUSTED
------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents........ $ -- $13,802,332 $12,707,272 $29,867,259 $
Working capital.................. 196,989 13,822,370 11,663,816 28,823,803
Total assets..................... 400,967 17,725,618 17,172,785 34,332,772
Total redeemable convertible
preferred stock................ -- 20,828,976 20,837,976 --
Total stockholders' equity
(deficit)...................... 374,417 (4,073,665) (6,097,886) 31,900,077
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL DATA
AND RELATED NOTES AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE IN THIS
PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION AND
OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVES
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY THE FORWARD-LOOKING INFORMATION DUE TO THE FACTORS DISCUSSED IN
"RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We provide a leading platform for extending and managing business
relationship networks on the Internet. We began operations on January 29, 1999
after we purchased Siteman, a small business unit of iXL Enterprises, Inc.
Siteman offered a hosted Web application that enabled customers to develop and
manage multiple Web sites. The following discussion includes financial
information for the Siteman business, as it existed under the ownership of iXL
for the year ended December 31, 1998 and the period from January 1 to
January 28, 1999.
The following discussion includes financial information for the period
from January 29 (inception) to December 31, 1999 and the three months ended
March 31, 2000. We did not include a discussion of our financial information for
the period from January 29 to March 31, 1999 as we believe this information is
not meaningful to you. Our operating history and revenues derived from
operations are limited and we have incurred net losses since we began
operations. As of March 31, 2000, we had an accumulated deficit of $6.6 million
derived from a net loss of $4.3 million for the period from our inception to
December 31, 1999 and $2.3 million for the three months ended March 31, 2000.
Since early 1999, we have focused on building our sales and services
organizations as well as our network operations infrastructure to support the
delivery of our hosted Web applications to customers. In addition, we expended
significant efforts to build our underlying platform and enhance our Web
applications. We anticipate that we will derive the substantial majority of our
future revenues from the sale of our hosted Web applications through our selling
efforts and through selling arrangements with channel and alliance partners. We
expect to continue to incur losses over at least the next two years as we expand
operations and increase our product development and selling and marketing
activities.
In January 1999, we purchased the Siteman business unit from iXL. We
received a patent, licenses, equipment and acquired some customer accounts in
exchange for a cash payment of $2.0 million and the issuance of a convertible
promissory note for $500,000. In connection with this transaction, we recorded
an intangible asset consisting of patents and licenses of $2.3 million. In
April 1999, the promissory note was converted into 561,339 shares of our
Series A redeemable convertible preferred stock.
We derive revenues primarily from: (1) hosting fees charged to customers
who use our Web applications to deploy Web sites and conduct electronic
commerce, (2) service fees for the implementation of our customers' branded
versions of our hosted applications, (3) engineering and related services in
connection with application development and (4) customer technical support and
maintenance.
We recognize revenues for hosting services on a straight-line basis over
the term of the hosting agreement for customers who sign one to two year
agreements and pay an upfront fee. We recognize revenues for customers who do
not pay an upfront fee based on the number of affiliate Web sites as and when
such Web sites are deployed, pursuant to the hosting agreement. Services
rendered for the implementation of our customers' branded versions of our hosted
applications are recorded as revenue after the services are rendered.
Engineering and related services for application development are recorded as
revenue when the services are rendered and after there are no obligations
remaining to the customer relating to the services rendered. Customer support
and maintenance fees are recorded as revenue based on a per Web site charge as
Web sites are deployed. Certain agreements contain minimum fees for
22
customer support unrelated to the number of Web sites deployed. These revenues
are recognized on a monthly basis per the terms of the agreement. We record
amounts billed to customers in excess of recognized revenue as deferred revenue
on our balance sheet. As of March 31, 2000, we had $900,000 of deferred revenue.
Many of our new customer agreements include upfront payments for hosting
services, fees for services rendered to implement our customers' branded
versions of our hosted applications and fees for customer support over one to
two year terms. The upfront fees are fully utilized after a certain number of
Web sites are deployed. Thereafter, we receive hosting fees for each Web site
deployed under the terms of the agreement. Once the minimum number of Web sites
deployed per the term of the agreement is exceeded, we earn revenues for
customer support and maintenance based on the number of Web sites deployed. Some
of our agreements include one-time set up fees and domain name registration fees
for each new Web site deployed. Moreover, we often receive revenues for
application and content development requested by our customers.
Our cost of revenues consists primarily of salaries and benefits for
network operation, engineering, project management and customer support
personnel associated with the delivery of our services as well as an allocation
of facility and depreciation expenses.
RESULTS OF OPERATIONS
PREDECESSOR COMPANY RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
PERIOD FROM JANUARY 1 TO JANUARY 28, 1999, AND OUR OPERATING RESULTS FROM
JANUARY 29 (INCEPTION) TO DECEMBER 31, 1999 AND THE THREE MONTHS ENDED
MARCH 31, 2000.
REVENUES. Predecessor company revenues totaled $1.6 million for the
year ended December 31, 1998 and $123,000 for the period from January 1 to
January 28, 1999. Included in these amounts were $354,000 for 1998 and $42,000
for the four weeks ended January 28, 1999 derived from a two-year hosting
agreement with WebMD not assumed by us as part of the asset purchase agreement.
Our revenues totaled $2.0 million for the period from inception to December 31,
1999 of which $1.1 million was derived from hosting fees, $318,000 from
professional services and $18,000 from customer support. In addition, we earned
one-time fees totaling $525,000 for application development. 80% of our 1999
revenues were derived from three customers.
Our revenues for the first quarter of 2000 totaled $829,000 of which
$324,000 was from hosting services, $493,000 from professional services and
$11,000 from customer support. We anticipate that revenues from hosting fees
will grow as a percentage of overall revenues as additional Web sites are
deployed for current and new customers. Further, our revenues from any one
individual customer as a percentage of total revenues will lessen over time as
we obtain more customers. Our mix of revenues will fluctuate from quarter to
quarter depending on the amount of revenues recognized for services rendered.
THE FOLLOWING DISCUSSION OF EXPENSES INCLUDES INFORMATION FOR OUR
COMPANY ONLY. THE PREDECESSOR COMPANY OPERATED AS A SMALL BUSINESS UNIT WITHIN A
MUCH LARGER ORGANIZATION, AND THEREFORE, COMPARISONS TO THE EXPENSES OF THE
PREDECESSOR COMPANY ARE NOT MEANINGFUL.
COST OF REVENUES. Our cost of revenues totaled $1.7 million for the
period from inception to December 31, 1999 and $798,000 for the first quarter of
2000. During mid-1999, we expended significant efforts toward the creation of
our primary data center in Memphis, Tennessee for hosting our Web applications
and a disaster recovery facility in San Jose, California. The primary data
center became operational during the fourth quarter of 1999. We expect our
disaster recovery facility to become a full data center by the end of 2000. The
allocation of network personnel towards this effort was charged to research and
development expense until the primary data center became operational, and
thereafter, was included in cost of revenues. As a result, our gross margins
fluctuated from quarter to quarter and may fluctuate from quarter to quarter in
the future. We expect to hire additional personnel in network
23
operations, project management, engineering and customer support and maintenance
in support of our anticipated new customers. In addition, we intend to make
substantial capital investments in new computer equipment for our data centers
to support the anticipated expanded customer base. As a result, we expect cost
of revenues to increase substantially in absolute dollars during 2000.
SELLING AND MARKETING EXPENSES. Our selling and marketing expenses
totaled $2.3 million during the period from inception to December 31, 1999 and
$1.5 million for the first quarter of 2000. Our selling and marketing expenses
consisted primarily of salaries, commissions, bonuses, benefits, travel and
related expenses of personnel engaged in sales and marketing activities. In
addition, selling and marketing expenses included spending for advertising,
promotional and public relations campaigns. We intend to work with marketing
partners to sell our hosted Web applications. Our current marketing agreements
typically require us to pay our partners a commission on upfront and recurring
hosting fees. We anticipate that the future marketing arrangements we enter into
will have similar terms. These commissions are expensed in the period a customer
agreement is signed for upfront fees and as Web sites are deployed for recurring
hosting fees. We expect our selling and marketing expenses to increase
significantly as we expand our marketing and public relations programs, hire
additional personnel and pay commissions to our marketing and alliance partners.
Our selling and marketing expense will further increase as we intend to expand
our operations into international markets both directly through our sales force
and indirectly by entering into reseller relationships or joint ventures with
various partners. For example, we expect to finalize joint ventures in Asia in
2000.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development
expenses totaled $1.4 million for the period from inception to December 31, 1999
and $350,000 for the first quarter of 2000. Our research and development
expenses consisted primarily of salaries for engineering and network operations
personnel, consultants and an allocation of facility and depreciation expenses.
We expense all research and development costs as incurred. To date, we have not
capitalized application development costs. We expect to continue to devote
substantial resources to research and development as we develop new applications
and enhance our underlying platform infrastructure.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses totaled $462,000 for the period from inception to December 31, 1999 and
$401,000 for the first quarter of 2000. Our general and administrative expenses
consisted primarily of salaries, benefits and related expenses for our
executive, accounting, and administrative personnel as well as third party
professional service fees and allocated facility and depreciation expenses. We
expect general and administrative expenses to increase in the future, reflecting
growth in our operations and increased expenses associated with being a public
company.
AMORTIZATION OF INTANGIBLES. In connection with the purchase of the
Siteman business unit from iXL, we recorded an intangible asset consisting of a
patent and licenses of $2.3 million. This amount is being amortized on a
straight-line basis over five years. We recognized $427,000 of amortization
expense for the period from inception to December 31, 1999 and $117,000 for the
first quarter of 2000.
AMORTIZATION OF DEFERRED COMPENSATION. As a result of the grant of
stock options during the period from inception to December 31, 1999, we recorded
$950,000 in deferred stock-based compensation within stockholders' equity.
During the first quarter of 2000, we recorded an additional $510,000 of deferred
stock-based compensation. These options were considered compensatory because the
deemed fair value, as determined solely for financial reporting purposes, was
greater than the exercise prices determined by the board of directors on the
date of grant. We are amortizing deferred stock-based compensation on a
straight-line basis over the vesting period of the related options, which is
generally four years. As of December 31, 1999, we had approximately $913,000 of
deferred stock-based compensation remaining to be amortized as follows: $237,000
during fiscal years 2000, 2001 and 2002 and $202,000 during 2003.
24
Our financial statements do not reflect any income tax benefit arising
from our historical losses because we have recorded a full valuation allowance
against any deferred tax assets available to us for use in future periods.
Realization of these assets is primarily dependent on generating taxable net
income in the future. As of December 31, 1999, we had net operating loss
carryforwards of approximately $4.1 million for federal and California reporting
purposes. The federal loss carryforwards will begin expiring in 2019, unless
previously utilized, while the California losses will begin expiring in 2007.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly operating information
for the period from inception to March 31, 1999 and for each of the subsequent
four quarters. This data has been prepared on the same basis as the audited
financial statements contained elsewhere in this prospectus and, in the opinion
of management, includes all adjustments necessary for the fair presentation of
the information for the periods presented. This information should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere in this prospectus. Due to our limited operating history and
the rapidly evolving nature of our business, we believe that period-to-period
comparisons of our results are not meaningful and should not be relied upon as
an indicator of future performance.
THREE MONTHS ENDED
JANUARY 29 ------------------------------------------------------
TO MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
------------ --------- ------------- ------------ -----------
Revenues.......................... $ 254,094 $ 399,020 $ 572,328 $ 747,122 $ 828,528
Cost of revenues.................. 189,200 359,071 528,623 668,523 797,591
--------- --------- ----------- ----------- -----------
Gross profit...................... 64,894 39,949 43,705 78,599 30,937
Operating expenses:
Selling and marketing........... 112,793 416,469 781,020 951,669 1,544,270
Research and development........ 90,672 280,490 477,012 505,575 349,802
General and administrative...... 45,716 93,074 156,386 166,812 401,224
Amortization of intangibles..... 77,668 116,502 116,502 116,502 116,501
Amortization of deferred
compensation.................. 849 2,546 4,016 29,822 74,570
--------- --------- ----------- ----------- -----------
Total operating expenses.......... 327,698 909,081 1,534,936 1,770,380 2,486,367
Operating loss.................... (262,804) (869,132) (1,491,231) (1,691,781) (2,455,430)
Interest income (expense), net.... (23,364) (1,959) 6,104 2,268 178,833
--------- --------- ----------- ----------- -----------
Net loss.......................... $(286,168) $(871,091) $(1,485,127) $(1,689,513) $(2,276,597)
========= ========= =========== =========== ===========
Our gross profit and research and development expenses have fluctuated
in the past. During mid-1999, we expended significant efforts towards the
creation of our primary data center in Memphis for hosting our Web applications
and a disaster recovery facility in San Jose. The primary data center became
operational during the fourth quarter of 1999. We expect our disaster recovery
facility to become a full data center by the end of 2000. The allocation of
network operations personnel towards this effort was charged to research and
development expense until the primary data center became operational and
thereafter was included in cost of revenues. As a result, our gross profit and
research and development expenses fluctuated significantly during these periods.
We expect to purchase additional equipment, build new data centers and perform
research and development to enhance our underlying platform infrastructure.
Thus, our gross profit and research and development expenses may continue to
fluctuate from quarter to quarter in the future.
25
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the
private sale of equity securities and through short-term debt. At March 31,
2000, we had cash and cash equivalents of $12.7 million and an accumulated
deficit of $6.6 million. During April 2000, we sold 1,392,438 shares of
Series C redeemable convertible preferred stock and raised net proceeds of
approximately $17.1 million.
Net cash used in operating activities was $3.7 million for the period
from inception to December 31, 1999 and $921,000 for the quarter ended
March 31, 2000. The cash used in operations reflects our net loss partially
offset by depreciation and amortization, an increase in accounts receivable and
a decrease in accounts payable and accrued payroll expenses.
Net cash used in investing activities was $3.0 million during the period
from inception to December 31, 1999 and $360,000 for the quarter ended
March 31, 2000. Net cash used in investing activities during 1999 was made up
primarily of cash paid to iXL in connection with the purchase of the Siteman
business unit in January 1999 totaling $2.0 million. As part of the acquisition,
we agreed to purchase from iXL, directly or through our customers or
contractors, $1.5 million of services within 30 months from the acquistion date.
If iXL has not been engaged by us or our designees to perform services totaling
$1.5 million by July 2001, we will be required to pay iXL a lump sum payment for
the difference between the original obligation and the fees received by iXL
during the 30 month period. As of March 31, 2000, we have expended $515,000
under the service agreement with iXL. We anticipate no difficulties in engaging
iXL to render the appropriate services to satisfy the remaining amount.
Net cash used in investing activities was also affected by the purchase
of capital equipment in the amount of $1.0 million and $360,000 for the period
from inception to December 31, 1999 and for the quarter ended March 31, 2000,
respectively. In March 2000, we signed an agreement with a leasing company that
will provide an equipment lease credit line of $3.0 million to finance new and
used equipment purchases. The lease is secured by the equipment financed.
Principal and interest payments on the outstanding amounts drawn are payable
over a 42 month term. We issued warrants to purchase 26,250 shares of our
Series B redeemable convertible preferred stock to the leasing company. In
addition, the leasing company was granted the right to purchase shares of our
Series C redeemable convertible preferred stock with a minimum purchase of
$250,000. In April 2000, the leasing company exercised this right and purchased
20,325 shares of our Series C redeemable convertible preferred stock for
$250,000. We have drawn down $292,000 of this lease credit line as of
April 2000. We expect interest expense to increase in the future as a result of
this lease line.
Net cash provided by financing activities was $20.5 million for the
period from inception to December 31, 1999 and $187,000 for the quarter ended
March 31, 2000. In April 1999, we received net proceeds of $4.7 million from the
sale of Series A redeemable convertible preferred stock. In December 1999, we
received net proceeds of $15.6 million from the sale of Series B redeemable
convertible preferred stock. Net cash from financing activities during the first
quarter of 2000 consisted primarily of cash received from the exercise of stock
options. This was partially offset by promissory notes from certain employees
who exercised stock options. In April 2000, we sold 1,392,438 shares of
Series C redeemable convertible preferred stock and raised net proceeds of
approximately $17.1 million.
We believe our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs through at least the next 12 months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities or attempt to obtain a
larger credit facility. Additional debt would result in increased expenses and
could result in covenants that would restrict our operations. We have not made
arrangements to obtain additional financing and there is no assurance that
additional financing, if required, will be available in amounts or on terms
acceptable to us, if available at all.
26
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1) "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires companies to
capitalize qualifying computer software costs that are incurred during the
application development stage and amortize these costs over the estimated useful
life of the software. SOP 98-1 was effective for fiscal years beginning after
December 15, 1998. We adopted SOP 98-1 effective January 1, 1999 with no
material effect on the financial statements. In the future, accounting for
transactions under SOP 98-1 could result in the capitalization of significant
amounts of computer software and Web site development costs.
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 will require all
derivatives to be reported on the balance sheet at fair value. The FASB has
subsequently delayed implementation of the standard to fiscal years beginning
after June 15, 2000. We expect to adopt SFAS 133 effective January 1, 2001. The
impact on our financial statements is not expected to be material.
In December 1998, the SEC, issued Staff Accounting Bulletin No. 101
(SAB 101), "Revenue Recognition". SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
Management believes that our revenue recognition policies comply with the
provisions of SAB 101.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from our
investments in cash equivalents. Under our current policies, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes.
27
BUSINESS
OVERVIEW
We provide a leading platform for extending and managing business
relationship networks on the Internet. By utilizing our outsourced and hosted
platform with its content management and electronic commerce applications, our
customers are able to transition their businesses online, while maintaining the
integrity of their brands and controlling the distribution of company-specific
content. We offer an open-standards platform which allows third-party service
providers to more easily utilize our platform as well as speed deployment of our
solution. Our flexible platform allows central organizations to easily integrate
value-added applications and services.
We target large, traditional offline central organizations that depend
on a network of affiliates to conduct business. We also provide products and
services to newly formed online companies that are aggregating affiliates to
consolidate content and conduct business over the Internet. We offer our
solution as an integrated, outsourced and hosted service to our customers. We
generate substantially all of our revenues from two sources: (1) hosting fees
charged to customers who use our web applications to deploy Web sites and
conduct electronic commerce and (2) service fees to implement our customers'
branded versions of our hosted applications. Our customers include
AutoTrader.com, Avon, Carlson Wagonlit Travel, Chase Merchant Services,
KnightRidder.com, loancity.com, Maytag, MeetChina.com, Vital Processing and the
YMCA. We believe that by using our platform, our customers will be able to
strengthen their business relationship networks and develop incremental revenue
streams.
INDUSTRY BACKGROUND
The Internet has emerged as a unique global communications medium,
enabling millions of people to interact and conduct business electronically.
International Data Corporation, or IDC, estimates that there were 1.7 billion
URLs as of December 1999 and that this number will grow to 13 billion URLs by
2003. Furthermore, IDC estimates that U.S. businesses will spend $2.2 trillion
by 2004 on developing an Internet presence. The rapid expansion of the Internet
combined with its business efficiencies will continue to facilitate growth in
electronic business and attract a broad group of users. We believe a significant
portion of the future growth of the Internet will result from large, traditional
organizations extending their operations online.
Large, traditional organizations conduct their operations through
complex and dynamic relationships with numerous affiliated individuals or
entities. These interactions form the basis for their business relationship
networks. A business relationship network typically consists of a central
organization and its distributed affiliated companies or individuals that
inter-operate in order to conduct business. Examples of these networks include:
- automobile manufacturers, appliance manufacturers and consumer
electronics companies and their affiliated dealer networks;
- franchisors and thousands of their local franchisees, such as
fast-food restaurant chains and their local restaurants, or global
petroleum companies and their gas stations;
- real estate firms, insurance companies, travel agencies and other
service companies and their local agents or representatives;
- television networks, radio stations, theater chains, newspapers and
other media organizations, and their local affiliated stations,
theaters, publications or other entities;
- banks, brokerage firms and similar financial institutions with their
local branches and small business customer relationships;
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- dealer/distributor arrangements in which branded products are sold
through affiliated representatives, such as direct marketing
organizations;
- professional associations, such as the American Medical Association
and the American Bar Association, which include a central membership
organization and its numerous local chapters and individual members;
and
- social, charitable and religious organizations and their regional and
local chapters and members.
A strong business relationship network provides large organizations with
a key competitive advantage. For example, according to the International
Franchise Association, more than 50% of all U.S. retail sales in 1999 were made
through franchised businesses. In addition, according to the American Society of
Association Executives, nine out of ten Americans are affiliated with a
membership association.
Many large, central organizations have spent millions of dollars to
establish their businesses online, but few have been able to effectively
transition their relationship networks onto the Internet. Initially, central
organizations focused their efforts on creating a central Web site to be used as
a simple marketing vehicle, or online brochure, that communicated basic
information about the organization and its products or services. Due to wide
public acceptance of the use of business Web sites as well as rapid innovation
in Internet technology, the Web sites of these central organizations quickly
evolved to include the ability to sell, take immediate payment and arrange for
delivery of goods and services online. From that point, these Web sites quickly
matured to include personalization of the electronic commerce experience and
online interactive customer support, as well as numerous other capabilities
designed to make it easier for customers to conduct business. However, this
rapid expansion focused principally on increasing the functionality of the
single, centrally-controlled Web site of the central organization. Other than
simple locators that enabled customers to obtain the name, address and phone
number of local affiliates, central organizations have rarely expanded their
Internet operations to include any part of their relationship networks.
Many organizations are realizing that they must extend their existing
relationship networks online in order to effectively implement an Internet
strategy that integrates their most valuable assets, their affiliates. In some
cases, affiliates have started to establish their own online offerings on an
individual basis, separate from the central organization. However, these
affiliates are learning that maintaining an association with and obtaining
support from their central organization is essential in order to compete
effectively on the Internet. Therefore, many central organizations are seeking a
way to quickly and effectively transition their traditional business
relationship networks online. Likewise, their affiliates are looking for a
cost-effective way to move online in an effort to leverage the benefits of their
relationship with the central organization, use the Internet as a new
distribution channel and participate in rapidly growing electronic commerce
opportunities. Finally, many newly-formed online companies have realized that
establishing a strong online business relationship network may be the key to a
successful operation. To date, there has been no coordinated, simple solution to
translate these complex business relationship networks and their business
standards online.
THE KINZAN SOLUTION
We provide a leading platform for enabling organizations to extend and
manage their business relationship networks on the Internet. Our platform
facilitates the development and deployment of rich, hosted Internet
applications, and consists of proprietary software technology, scalable hardware
and sophisticated processes and methodologies. We have designed our platform to
be extendable, configurable and brandable to meet the diverse needs of our
customers. Our target customers are large, traditional offline organizations
that are extending their relationship networks online, and include manufacturers
of retail products, major franchisors, automobile manufacturers, media
companies, professional associations and other central organizations whose
operations depend on a network of affiliates. We also target online
29
companies that are aggregating affiliates to consolidate content and conduct
business over the Internet. Because we offer our platform as an outsourced,
hosted solution, neither central organizations nor their affiliates are required
to develop the expertise or hire the technical personnel that would be necessary
to internally create an Internet presence across the organization. Our solution
enables the central organization to effectively manage its business relationship
network by efficiently distributing content, commerce and other information and
creating additional revenue opportunities for the entire network.
We offer our central organization customers the following key benefits:
- CREATION AND MANAGEMENT OF ONLINE BUSINESS RELATIONSHIP
NETWORKS. Many organizations have built valuable networks of
relationships as part of their traditional offline businesses. Our
solution allows our customers to rapidly and easily transition those
relationships onto the Internet. We enable our customers to retain
control of the key elements of their business by allowing them to
effectively manage a widely distributed, often highly diverse,
affiliate network. Furthermore, the central organization has the
ability to provide access to proprietary content and information,
useful business services and highly targeted programs that can improve
communication throughout the network.
- THE TRANSFER AND EVOLUTION OF BUSINESS PRACTICES ONLINE. We believe
that in order to evolve into a successful online business relationship
network, the central organization must develop practices similar to
those that have been established to manage traditional, offline
business relationship networks. In those traditional relationships,
the larger organization typically has guidelines regarding use of
branding and marketing messages, as well as standards for pricing and
managing preferred vendors and potential distribution channel
conflicts.
- IMPROVED BRAND MANAGEMENT. Our solution allows central organizations
to control their brand and marketing messages across their affiliate
networks even as additional affiliates move online. Logos, marketing
messages, color schemes and other important branding elements appear
consistently across all Web sites in the relationship network. Rather
than allowing each individual affiliate to move online independently,
which creates the potential for massive brand dilution, our flexible
platform enables the central organization to specify the level of
customization permitted by each affiliate. This allows the central
organization to control the business and brand elements it views as
critical while providing its affiliates the ability to specify those
elements of the business most applicable to their local competitive
positioning.
- STRENGTHENED RELATIONSHIP NETWORKS AND INCREASED AFFILIATE
LOYALTY. By extending its relationship network online, the central
organization can strengthen its network of affiliates and make its
overall operations more efficient. Our solution enables central
organizations to automate many administrative tasks, such as ordering,
billing and reporting, which eliminates a significant amount of
paperwork for the affiliates. Additionally, the central organization
is able to distribute information and content throughout its network
quickly and inexpensively. As the number of affiliates creating Web
sites and the amount of business conducted online increase, the
interdependence among the central organization and its affiliates will
solidify the relationship network. This interdependence will make it
less likely that affiliates will discontinue doing business with the
central organization.
- INCREMENTAL REVENUE OPPORTUNITIES. Our solution creates additional
revenue opportunities for central organizations by enabling them to
offer their affiliates a base Internet business platform as well as
value-added services. The central organization typically offers our
Internet business platform to its affiliates as a monthly subscription
service, creating a recurring revenue source. Furthermore, affiliates
may select value-added services such as email, that would provide an
incremental revenue stream for the central organization.
30
Our platform offers affiliates of the central organization the following
key benefits:
- SIMPLIFIED MIGRATION ONLINE. Our hosted Internet business platform
offers affiliates of the central organization the ability to quickly
and cost-effectively establish an online presence. Affiliates are
offered a customized solution, designed by the central organization,
avoiding the need to separately transition their offline businesses to
the Internet.
- INCREMENTAL REVENUE OPPORTUNITIES AND COST SAVINGS. With our
outsourced solution, affiliates gain access to a new commerce channel.
Affiliates are directly linked to their central organization, allowing
for the sharing of business leads, additional promotional materials
and critical business data, which can result in higher sales
generation. In addition, by integrating their business processes with
the central organization, affiliates can take advantage of the
automation of traditional administrative tasks, such as ordering,
billing and reporting, and eliminate much of the time and expense
traditionally associated with these responsibilities.
- BRAND LEVERAGE. Our solution allows affiliates to more effectively
leverage the brand and marketing resources of the central
organization. By offering our services directly to its affiliates, the
central organization can control the use of its brand, which allows it
to permit broader and more effective use of the brand by affiliates of
the central organization than in an independent, uncontrolled setting.
- ACCESS TO INFORMATION AND CONTENT FROM THE CENTRAL ORGANIZATION. By
effectively extending existing traditional relationships onto the
Internet, we enable affiliates to leverage content, commerce and
community offerings available from their central organization. The
content provided by the central organization can be integrated in the
Web sites of affiliates, creating more impressive and competitive Web
sites throughout the relationship network.
- LOWER TOTAL COST OF OWNERSHIP. We believe that the cost of
developing, operating and maintaining a competitive Internet business
is beyond the resources of many individual affiliates of larger
organizations. With our hosted platform, affiliates do not need to
develop, lease, buy or continually upgrade existing hardware and
software to deploy their Internet businesses. In addition, affiliates
do not have to participate in the expensive and often difficult
process of recruiting and retaining software and operations engineers
to create and maintain their Web sites.
STRATEGY
Our objective is to provide the leading platform for enabling
organizations to extend and manage their business relationship networks on the
Internet. Key elements of our strategy are to:
- LEVERAGE THE BRAND AND EXISTING AFFILIATE RELATIONSHIPS OF OUR CENTRAL
ORGANIZATION CUSTOMERS. We will leverage the ability of our customers
to deploy our platform throughout their business relationship
networks. We will focus our sales and marketing efforts on large,
central organizations that manage networks of thousands of affiliates.
Once central organizations select our services, they have an incentive
to move their affiliates online to derive the full benefit of
extending their relationship networks onto the Internet. We will rely
principally on the central organizations to market and sell their
branded versions of our services to their affiliates. As a result, we
can deploy our solution to a large number of affiliates by
capitalizing on the marketing efforts of our central organization
customers.
- OFFER ADDITIONAL VALUE-ADDED APPLICATIONS AND SERVICES AS PART OF OUR
PLATFORM. We plan to offer additional value-added applications and
services as part of our platform. We believe that our Internet
business platform will continue to serve as the foundation for a wide
range of applications and services. While we have developed certain
applications ourselves, such as our core commerce or content
management functions, we will leverage the development
31
efforts of other leading Internet software and services providers to
extend the capabilities of the relationship network. We believe that
the flexibility and ease of incorporating additional applications and
services into our platform will differentiate us in the outsourced
Internet business services market. These additional applications and
services are intended to provide us with additional revenue
opportunities from our existing customers and enable us to attract new
customers.
- MAINTAIN AN OPEN-STANDARDS PLATFORM. In order to allow third-party
services providers to more easily utilize our platform as well as to
speed deployment of our solution, we intend to maintain open-standards
for our Internet business platform. As part of this effort, we will
continue to train professional services firms in the core tools and
processes required to develop applications and services on our
Internet business platform. In addition, we are developing tools and
standard interfaces for our platform to allow other software
developers to more easily integrate their software and services into
our solution.
- DEVELOP ADDITIONAL STRATEGIC RELATIONSHIPS. We intend to expand our
marketing and distribution channels through strategic relationships
with key Internet infrastructure and software vendors, professional
services providers, telecommunications and Web hosting companies, and
major corporations and professional groups. For example, we will
continue to establish distribution and implementation relationships
with various Internet professional services firms in order to
accelerate the deployment of our Internet business platform. In
addition, we will pursue strategic relationships with other leading
Internet software and service providers to expand the functionality we
offer to our customers and generate additional revenue streams. We
intend to leverage our existing and future strategic relationships in
order to expand into new domestic and international markets.
- PURSUE INTERNATIONAL EXPANSION. To capitalize on the global nature of
the Internet and the international needs of our target customers, we
intend to establish operations in other countries. We intend to expand
our operations into international markets both directly by deploying
our sales force and indirectly by entering into reseller relationships
or joint ventures with various partners that operate in our target
international markets. For example, we expect to finalize joint
ventures in Asia in 2000. In addition, we plan to localize our
platform and application interfaces in a variety of languages and
dialects.
PRODUCTS AND SERVICES
We offer our solution as an integrated, outsourced and hosted service to
our customers. Our solution is based on our proprietary technology platform
which allows our customers to rapidly and easily deploy applications to manage
and strengthen their business relationship networks. Due to the open nature of
our solution, customers can also integrate existing enterprise applications or
applications developed by third parties. Pricing for our services is generally a
per month charge based on the level of usage, including the number of Web sites,
and the functionality of the applications deployed on our platform. Our target
customers are traditional offline organizations that are extending their
relationship networks to include an online dimension, including large
manufacturers of retail products, major franchisors, automobile manufacturers,
televisions networks, professional associations and other substantial central
organizations that depend on a network of affiliates.
KINZAN TECHNOLOGY PLATFORM. Our proprietary technology platform
combines an enterprise-class Internet application platform, development tools
and implementation, hosting and support services. Our platform forms the
foundation of our product and service offerings and is designed to provide our
customers a high degree of flexibility in the design and implementation of their
business relationship network applications. Our open standards environment
allows third-party developers to easily write applications to be deployed on our
platform. This also allows our customers to rapidly create an Internet
32
presence by deploying one of our pre-built applications or developing a
custom-built application solution. Our customers can designate the level of
control they give their affiliates in designing and deploying their online
businesses, allowing a great deal of customization within our basic core
applications.
Our internally-developed applications offer content and electronic
commerce management. These initial applications are used to create, publish and
maintain Web sites for our customers and their affiliates. In addition to our
proprietary software and services, our software platform also allows for the
easy integration of third-party applications, such as email and locator
services.
CONTENT MANAGEMENT APPLICATIONS. Our content management applications
enable central organizations to quickly, easily and cost-effectively create
large networks of branded Web sites with a consistent look and feel, while
maintaining the flexibility to update the content as necessary. Our application
offers Web site publishing, advanced content management and Web site
administration capabilities without the requirement of a programming background.
ELECTRONIC COMMERCE APPLICATION. Our electronic commerce application
allows users to include catalogs, shopping baskets and payment solutions. Our
electronic commerce application is a complete solution for small businesses,
allowing users to set up a catalog, create departments and products, provide
offline and online payment options, create shipping structures and configure
store taxes.
THIRD-PARTY APPLICATIONS. We also currently offer our customers a
number of third-party applications that are integrated into our platform,
including the following:
- email services provided by CommTouch;
- locator software provided by Mapquest;
- email management provided by eGain;
- affiliate marketing programs provided by Commission Junction;
- visual content provided by Getty Images;
- electronic commerce payment services provided by Signio, Clear
Commerce and CyberCash; and
- statistical reporting services provided by MyComputer.com.
We intend to offer additional value-added applications and services to
our platform, both through internal development as well as through the
integration of additional third-party applications.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
In addition to working with third-party system integrators, we provide
professional services to our customers, including programming, implementation
and design services to support the deployment of our technology platform and
deployed applications. We have also developed a professional service called
Extranet to train and educate external designers and developers regarding the
deployment of our platform.
We provide customer support 24 hours a day, seven days a week to our
central organization customers and we offer our customer support services to
their affiliates for a fee. We classify customer support requests according to a
two-tiered system. Tier 1 customer support includes technical support in
response to general inquiries and is generally outsourced to third-party
technical support firms or provided by our customers directly to their
affiliates. Tier 2 customer support includes technical assistance for our
customers and their affiliates via toll-free telephone access and email
correspondence managed by our team of trained technical support representatives.
We also offer a service to assist the affiliates of our customers in building
their Web sites and catalogs.
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CASE STUDIES
The following case studies illustrate the experiences of and the
potential benefits realized by three representative clients utilizing our
business relationship network platform.
AUTOTRADER.COM
AutoTrader.com, with listings of over 1.5 million used vehicles, is the
leading Internet destination and marketplace for buyers of used vehicles and
consumers seeking information regarding automotive products and services. In
establishing its business online, AutoTrader.com encountered a significant
challenge because most independent and franchised dealers lacked a sophisticated
online presence. AutoTrader.com needed a platform that would enable dealers to
conveniently and cost-effectively transition themselves online.
AutoTrader.com selected our solution to create its business relationship
network of used vehicle dealers on the Internet. By utilizing our content
management and Web site editing tools, AutoTrader.com is able to provide its
dealers with a cost-effective way to create, edit and manage their own Web
sites. Dealers have access to AutoTrader.com's online database of used vehicles
and can receive direct sales leads. As more dealers move online, the scalability
of our platform enables AutoTrader.com to easily refine and simplify its Web
site templates. AutoTrader.com has also created a revenue stream by offering our
Web site creation and management services to dealers for a monthly fee.
CHASE MERCHANT SERVICES
Chase Merchant Services, L.L.C., is a joint venture between Chase
Merchant Ventures, Inc., a subsidiary of The Chase Manhattan Bank, and First
Data Merchant Services, a subsidiary of First Data Corp. Chase Merchant Services
wanted to leverage its relationships with approximately 340,000 small businesses
to secure a market leading position in small business electronic commerce and
transaction services. Chase Merchant Services believed it could strengthen its
relationships with its broad range of small business customers by offering them
the ability to create electronic commerce enabled Web sites. At the same time,
Chase Merchant Services wanted to communicate important information and
promotional events online to its customers. In order to accomplish this goal,
Chase Merchant Services needed a product that could support its transaction
processing capability while providing a high degree of flexibility for its
network of small business customers.
To meet the specific needs of its broad base of small business
customers, Chase Merchant Services selected our solution to power its branded
eWEBuilder-SM- application. eWEBuilder allows small business customers to
transition their operations online by creating customized Web sites quickly and
inexpensively. The Web sites can be enhanced with images, text and a catalog of
products and services. By extending eWEBuilder to its small business customers,
Chase Merchant Services is able to secure long-term relationships, as customers
rely on the support and services of the online network relationship. Chase
Merchant Services offers eWEBuilder for a monthly fee and plans to integrate
additional value-added functionality and applications in the future. Chase
Securities Inc., a subsidiary of the Chase Manhattan Corporation, is serving as
a representative of the underwriters in this offering.
AVON
Avon Products, Inc. is the largest direct seller of beauty and related
products, marketing its products to women in 135 countries through its
approximately three million independent sales representatives worldwide.
Recently Avon.com, a division of Avon Products, was formed to develop an online
presence that could facilitate electronic commerce by its domestic
representatives, create efficiencies in its administrative processes and provide
convenient access to time-sensitive information for its representatives and
their customers. Avon required a solution that would allow its representatives
to
34
customize their own Web sites while ensuring Avon maintained the integrity of
its brand, consistency of its marketing message and adherence to its standard
business practices.
Avon recently selected our solution as part of its multi-vendor
E-Representative strategy to enable its U.S. representatives to create, edit and
maintain an online presence. By extending their businesses online, the
representatives will gain access to an additional distribution channel, as well
as information and content generated by Avon. In addition, representatives will
be able to streamline many of the traditionally time-consuming elements of their
businesses, such as product ordering. Avon will be able to protect its brand and
control product related content. Avon expects to deploy its E-Representative
strategy domestically in late 2000 and thereafter to selected global locations.
STRATEGIC RELATIONSHIPS
A key element of our strategy is to establish strategic relationships to
expand our marketing and distribution channels and enhance our platform by
offering additional applications. Our strategic relationships fall into two
categories: (1) distribution and implementation relationships and (2)
applications relationships.
DISTRIBUTION AND IMPLEMENTATION RELATIONSHIPS. We focus on establishing
distribution and implementation relationships with Internet infrastructure and
software vendors, professional services providers, telecommunications and Web
hosting companies, and major corporations and professional groups to expand our
marketing and distribution channels. For example, we currently have distribution
and implementation relationships with Internet professional services firms,
including iXL Enterprises and marchFirst, Inc., the company resulting from the
merger of USWeb/CKS and Whittman-Hart, to accelerate the deployment of our
Internet business platform. These companies will introduce our platform as part
of their services when undertaking systems integration, electronic commerce
solution or network design projects for their customers. We will continue to
pursue these relationships to gain market presence and increase our market
share. Through these relationships, we will be able to reach a broader domestic
and international customer base than we could solely through our direct sales
and marketing efforts. In addition, we believe that we will be able to shorten
our sales cycle and increase our revenues by leveraging our distribution and
implementation relationships.
APPLICATIONS RELATIONSHIPS. We believe that our open-standards platform
is extremely valuable to our customers. As the needs of a business relationship
network expand, we can add additional applications to our platform to enhance
our offerings. While we will continue to develop applications internally, we
believe we can offer a broader range of applications to our customers by
establishing relationships with leading Internet software and service providers.
For example, we currently have relationships with CommTouch for email services,
eGain for email management services, Getty Images for visual content and
imagery, Commission Junction for affiliate marketing programs, Mapquest for
locator services, MyComputer.com for statistical reporting services and Signio,
Clear Commerce and CyberCash for electronic payment services. These
relationships not only increase the functionality we offer to our customers,
they also generate additional revenue streams for us. We will continue to deploy
additional third-party applications in an effort to provide more value-added
services to our customers.
SALES AND MARKETING
We offer our products and services through direct and indirect sales
channels. We maintain our own direct sales force organized geographically and by
industry segment to introduce and educate prospective customers and partners
about our products and services. Our target customers are large, central
organizations that are extending their relationship networks onto the Internet
and include manufacturers of retail products, major franchisors, Fortune 500
organizations with dealer/distributor channels, automobile manufacturers and
dealers, media companies, professional associations and other
35
central organizations which depend on large distributed networks of affiliates.
As of March 31, 2000, we had 24 employees in our sales and marketing group.
We currently have domestic sales offices or sales representatives in the
Atlanta, Boston, Dallas, New York, San Diego and San Jose metropolitan areas and
an international sales office in Germany. Within our direct sales group, our
client strategy and account management teams focus on pre-sale consulting and
strategy to determine the needs of our customers, and post-sale follow-up to
retain our customers and increase their use of our products and services. Our
client strategy and account management groups are critical to ensuring both
pre-engagement planning and post-launch satisfaction and success by educating
our customers about the benefits of our products and services.
Our indirect sales channel uses the sales forces of third parties to
offer our services to their affiliates. To gain market presence and market
share, we team with leading consulting organizations, interactive agencies,
system integrators, advertising agencies and technology resellers that have
strong industry backgrounds and market presence in their respective markets and
geographic regions, as well as those that have a strong presence in targeted
vertical markets.
Our marketing strategy is focused on media relations and public
relations in order to develop a reputation as an industry leader. We use focused
print and online advertising campaigns to create awareness of and demand for our
products and services. We use direct marketing to target customer segments and
generate leads. As the cornerstone of our direct marketing efforts, we will
participate in focused executive forums and targeted trade shows. We will also
use co-branded and cooperative marketing arrangements with key partners to
leverage indirect channels. In addition, we will partner closely with particular
customers to highlight our success within market segments and use industry
events, forums and trade shows to promote our business-to business brand
presence.
RESEARCH AND DEVELOPMENT
We believe that our future success will depend in large part on our
ability to continue to maintain and enhance our platform offerings. To this end,
we are continuing to enhance our technology platform and develop additional
applications, as well as integrate additional third-party applications. Research
and development expenses were approximately $1.4 million in the period from our
inception to December 31, 1999 and approximately $350,000 for the three months
ended March 31, 2000. We intend to continue to recruit and hire experienced
research and development personnel and to make investments in research and
development.
TECHNOLOGY
In offering our products and services, we employ advanced software and
hardware, combining our internal expertise with industry standard technology to
create our proprietary platform. We utilize an integrated set of software
applications, components, services, toolkits and server infrastructure which
collectively make up our platform. This platform serves as the foundation for
our Web network management solution and the integrated Web sites of our
customers and their affiliates. We have designed the various modules of our
technology platform to support its extension to and integration with external
services and third-party developers. We can also replicate the various modules
of our platform in order to manage an increase in the number of our customers
and offer redundancy in our systems. The major elements of our proprietary
technology platform include:
SOFTWARE PLATFORM. Our software platform is an integrated suite of
components that form the foundation of our product and service offerings. We are
actively leveraging and extending the latest Java technologies as the technical
foundation of our technology platform. We have made a significant commitment to
a Java 2 platform from Sun Microsystems. We believe Java-based technologies
provide us the ability to build scaleable, extendable and configurable Web-based
solutions for our customers. Our technology team has many years of experience in
successfully deploying server- and Java-based Internet
36
solutions, including the deployment of one of the first Java servelet-based
electronic commerce solutions in 1997. In addition, we utilize database systems
from Oracle and Sybase to provide highly reliable and scaleable information
management for our platform.
In addition to our proprietary software and services, our software
platform integrates third-party applications, such as email services provided by
CommTouch, Web site hit tracking and reporting by MyComputer.com and locator
services provided by Mapquest. Our software platform also integrates third-
party services such as domain name registration services from Network Solutions,
affiliate marketing with Commission Junction and an image library from Getty
Images. Our software platform hosts externally developed services, such as
electronic payment engines from Clear Commerce, Signio and Cybercash. We support
an integrated application development kit that enables third-party developers to
integrate additional functionality into our software platform. We are currently
developing a series of integrated processes that will allow third-party
developers to develop, test and deploy applications on our technology platform.
Our software platform also contains support for security management, application
state management and templated assembly of components into Web-based
applications.
APPLICATION WIZARDS AND BUILDERS. We have developed a library of
application components, wizards and builders that assist in the rapid
development of applications using our proprietary technology platform. We are in
the process of integrating some of our development tools with tools commonly
used by third-party developers.
APPLICATIONS. We currently provide three of our own applications. These
applications are used to create, publish and maintain large networks of
distributed Web sites, including electronic commerce sites, for our customers
and their affiliates. These applications, used individually or in any
combination, can be rapidly assembled, modified, configured and branded into an
integrated offering for our customers. Any future applications we develop for
our platform will be designed to enhance and extend the integrated branded
offerings of our customers.
COMMON PRESENTATION LAYER. We have developed template languages that
allow for rapid configuration and branding of all of our applications. We
provide a service to our customers that allows them to define the parameters of
their systems. Central organizations employing our solution are able to provide
their affiliates with branded content because they are able to control the
templates available to affiliates.
INFRASTRUCTURE
We believe that our highly reliable and scalable operations
infrastructure represents a strategic advantage in providing distributed Web
site solutions. Our primary data center, located in Memphis, Tennessee, operates
24 hours a day, seven days a week and supports all aspects of the Web site
networks we host. By leveraging our platform architecture, we can optimize the
functionality of our data center by configuring it based on customer
requirements for availability, capacity and accessibility. Our second facility
in San Jose, California is currently a disaster recovery facility and is
scheduled to become a full data center later this year with capabilities similar
to those of our Memphis facility. Once completed, our San Jose facility will
provide geographical load-balancing and redundancy between Memphis and San Jose.
Both of our data centers are operated remotely from our network operations
center in Carlsbad, California. Key features of our infrastructure include the
following:
DISTRIBUTED SERVERS. We deploy a large number of high-speed redundant
servers to support capacity, availability and accessibility demands. We can
deploy additional servers to support increases in Web site traffic and the
number of Web sites we host and the introduction of new services without
interruptions or time degradation. Our technology platform architecture provides
automatic fail-over, load-balancing and threshold monitoring on our critical
servers.
37
ADVANCED TELECOMMUNICATIONS. We deploy redundant telecommunications and
routing hardware. We also co-locate our data centers in hosting facilities that
maintain multiple high-speed peering connections to multiple tier one network
providers to ensure that our services are readily available to our customers at
all times.
NETWORK SECURITY. We incorporate advanced architectural concepts such
as protected domains, restricted nodes and distributed access control in our
systems architecture. We have also developed a strongly authenticated
communications protocol within and between our technology platform architecture
modules that we believe will restrict our vulnerability to most electronic
attacks and limit any potential exposure of our customers. In addition, we use
the latest network security technologies, including firewalls and intrusion
detection software. We also periodically employ security consultants who perform
security risk audits of our systems. We plan to continue to evaluate and deploy
new technological defenses as they become available.
EXTERNAL INTEGRATION. We are developing processes that allow companies
who furnish additional applications to our platform to deploy their
customizations and configurations on our common infrastructure. This process
includes mechanisms that enable us to perform quality assurance and acceptance
tests before we deploy externally developed software to our common
infrastructure.
DISASTER RECOVERY PLANS. While we believe our operations facilities are
highly resistant to systems failure and sabotage, we have developed a disaster
recovery and contingency operations plan. All of our customers' Web sites are
linked to advanced storage systems that provide data protection through
techniques such as mirroring and replication. Currently, if we were to lose our
primary facility in Memphis, we would manually transfer data from our Memphis
storage systems to our San Jose facility and could be fully operational within
approximately 24 to 48 hours. We are in the process of expanding our San Jose
facility to include redundancy and load-balancing which would allow for the
uninterrupted operation of our customers' Web sites. We expect the San Jose
facility to be fully operational by the end of 2000.
INTELLECTUAL PROPERTY
Our success and competitive position depend on our ability to develop,
maintain and protect the proprietary aspects of our technology and to operate
without infringing the proprietary rights of others. We rely on a combination of
patent, trademark, copyright and trade secret laws and confidentiality and
license agreements to protect our intellectual property and proprietary rights.
These laws, however, afford only limited protection for our technology. We
currently hold one patent and have another application pending in the United
States. We may also seek additional patents in the future. We seek to protect
our source code, software, documentation and other written materials under trade
secret and copyright laws. Finally, we seek to prevent disclosure of our
intellectual property by requiring our employees and consultants with access to
our proprietary information to execute confidentiality agreements with us.
Despite our efforts to protect our proprietary rights, unauthorized
third-parties may attempt to copy aspects of our products and services or obtain
and use software or information we regard as proprietary. Policing unauthorized
use of our products and services is difficult and litigation may be necessary in
the future to enforce our intellectual property rights, protect our trade
secrets, determine the validity and scope of proprietary rights of others or
defend claims against infringement or invalidity. Any resulting litigation could
result in substantial costs and diversion of resources and could cause our
business to suffer. We cannot be certain that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to protect our
intellectual property could cause our business to suffer.
To date, we have not been notified that our products or services
infringe the proprietary rights of third parties, but we cannot be certain that
third-parties will not claim infringement with respect to our
38
current or future products. As the number of products and competitors in our
industry grows and the functionality of products overlaps, we expect that
software developers will increasingly be subject to infringement claims. Patent
litigation has recently increased in the software and Internet industry, due to
increased competition and the unsettled state of the law regarding patents for
software and business methods. Any infringement claims, whether with or without
merit, could be time-consuming to defend, result in costly litigation, divert
the attention of management, cause product delays or force us to enter into
royalty or license agreements. These royalty or license agreements may not be
available on terms acceptable to us or at all. In addition, if we were to lose
an infringement suit, we would be forced to pay costly damages or license fees
and/or to stop using or selling a particular product or service until it is
properly modified. A successful claim of patent infringement against us or our
failure or inability to license the infringed technology or to develop or
license technology with comparable functionality would cause our business to
suffer.
COMPETITION
Our market is new and rapidly evolving and we expect competition to
increase significantly in the future. We believe few companies currently have a
solution specifically designed to manage content, commerce and brand across
large numbers of affiliated Web sites. To date, organizations that have created
large numbers of related Web sites have done so through the development of a
custom, proprietary solution, which can be time-consuming and expensive.
Accordingly, we believe that there may be a significant advantage in
establishing a large customer base before current competitors increase the
sophistication of their product offerings and new participants enter the market.
If we fail to attract and retain a large customer base and do not establish a
prominent market position, our ability to grow our business will be inhibited
and our business could suffer.
While we currently do not face significant direct competition, there are
various types of companies that compete with us in different areas. These
companies include:
- Web site publishing such as Netopia, Nextron Communications and Orbit
Commerce;
- providers of integrated electronic business applications such as IBM
and BroadVision;
- Web authoring software providers such as Microsoft, Netobjects and
Adobe;
- content management software vendors such as Interwoven and Vignette;
- catalog software providers such as BigStep, CNET Store, Open Market,
InterShop and Yahoo Store!;
- community management systems developers such as Homestead.com,
MyFamily.com, Homepage.com and Koz.com;
- providers of infrastructure enabling software such as BEA Systems and
Tibco; and
- numerous small companies offering some form of Web content or
electronic commerce systems.
Many of these companies have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do and may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many of these companies have wider
name recognition and more extensive customer bases that could be leveraged,
thereby gaining market share at our expense. These companies may be able to
undertake more extensive promotional activities, adopt more aggressive pricing
policies and offer more attractive terms to customers than we can. In addition,
these companies may establish cooperative relationships among themselves or with
third parties to enhance their products and services. Accordingly, it is
possible that new competitors may emerge and rapidly acquire significant market
share.
39
Increased competition could materially and adversely affect our ability
to obtain revenues from new or existing customers on terms favorable to us.
Further, competitive pressures may require us to reduce the prices of our
products and services. In either case, our business would be materially harmed.
We cannot be certain that we will be able to compete effectively with existing
or new competitors or that increased competition will not harm our business.
PROPERTIES
Our headquarters are currently located in a leased facility in Carlsbad,
California, consisting of approximately 3,500 square feet under a lease that
expires in August 2003. Under our lease, we have an option to lease
approximately 1,500 square feet of additional office space in our current
building. In addition, we have temporary use license agreements for two
additional office suites in our current building consisting of approximately
4,900 square feet. This agreement expires in September 2000. We also have leased
domestic sales offices in the Boston and San Jose metropolitan areas.
EMPLOYEES
As of March 31, 2000, we had 70 employees. Of our total number of
employees, 25 were in engineering, 24 were in sales and marketing, 16 were in
professional services and five were in finance and administration. Our future
success will depend in large part on our ability to attract, retain and motivate
highly qualified technical and management personnel, for whom competition is
intense. Our employees are not represented by a collective bargaining unit and
we have never experienced a work stoppage. We believe our relations with our
employees are good.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information, as of March 31, 2000, with
respect to those individuals who serve as members of our Board of Directors or
as our executive officers.
NAME AGE POSITION(S)
- ---- -------- -----------
Robert J. Frankenberg (1) (2)........ 52 Chairman and Director
Gari L. Cheever...................... 43 President, Chief Executive Officer and Director
Dana S. McGowan...................... 41 Chief Financial Officer and Vice President--Finance
Garland Wong......................... 37 Chief Technology Officer
Douglas J. Perry..................... 52 Chief Operating Officer and Vice President--Services
Thomas M. Aitchison.................. 39 Vice President--Sales
Lauren J. Essex...................... 38 Vice President--Marketing
Ray Ghanbari, Ph.D................... 33 Vice President--Engineering
Jeffrey P. Higgins................... Vice President--Corporate Development and General
34 Counsel
H. Dubose Montgomery (1)............. 51 Director
Alejandro Perez (2).................. 51 Director
Peter S. Sealey, Ph.D (1)............ 59 Director
Kenneth Tai (2)...................... 49 Director
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
ROBERT J. FRANKENBERG has served as Chairman of our board of directors
since he co-founded the company in 1998. Mr. Frankenberg is currently serving as
Chairman of the Board, President and Chief Executive Officer of Encanto
Networks, Inc., a provider of small business Internet solutions, and has been
with Encanto since 1997. From 1994 to 1997, he served as Chairman of the Board,
President and Chief Executive Officer of Novell, Inc. Prior to that time,
Mr. Frankenberg served 25 years at Hewlett-Packard Company, during which time he
served as Vice President and General Manager of the Personal Information
Products Group. Mr. Frankenberg serves on the board of directors of several
companies, including the following public companies: Daw Technologies, Inc.,
ElectroGlas, Inc., National Semiconductor, Inc, Secure Computing, Inc. and
Scansoft. In addition, Mr. Frankenberg serves on the board of directors of the
following organizations: the Sundance Film Festival, Utah Valley State College
and Westminster College. Mr. Frankenberg received a Bachelor of Science degree
from San Jose State University and is a graduate of the executive program of the
Stanford University School of Business.
GARI L. CHEEVER has served as our President, Chief Executive Officer and
a member of our board of directors since he co-founded our company in
November 1998. From 1997 to 1999 Mr. Cheever served as Executive Vice President
and Chief Financial Officer of Encanto Networks, Inc. From 1990 to 1997,
Mr. Cheever was a partner at the law firm of Brobeck, Phleger & Harrison and
from 1986 to 1990 he was an associate at the firm, where he specialized in
securities and corporate law. Mr. Cheever received two Bachelor of Science
degrees from Arizona State University and a Juris Doctor degree from Stanford
University.
DANA S. MCGOWAN has served as our Vice President--Finance and Chief
Financial Officer since December 1999. From January 1994 to April 1999,
Ms. McGowan served as Vice President, Finance and Chief Financial Officer at
DepoTech Corporation, a biotechnology firm, that was acquired by SkyePharma PLC
in April 1999. From May 1994 to November 1994, Ms. McGowan also worked as an
independent consultant to various biotechnology companies. Prior to that time,
Ms. McGowan held financial management positions with Alliance Pharmaceutical
Corporation and Cytel Corporation. In addition, Ms. McGowan worked for
approximately five years in various financial positions at SAIC, a Fortune 500
41
company with businesses ranging from technology to health care. Ms. McGowan is a
certified public accountant. She received a Bachelor of Science degree from San
Diego State University.
GARLAND WONG has served as our Chief Technology Officer since he
co-founded our company in November 1998. Mr. Wong also served as our Vice
President--Engineering from November 1998 to February 2000. From July 1998 to
February 1999, Mr. Wong served as General Manager of the Siteman division of iXL
Enterprises and from July 1991 to July 1998 and he served as Chief Technology
Officer of CommerceWAVE, Inc., an electronic commerce company. Since 1994,
Mr. Wong has had extensive involvement with electronic commerce, serving as one
of the primary architects of CyberCash, one of the first secure real-time
Internet credit card payment system, and as a consultant to CyberCoin, one of
the first micropayment systems. Mr. Wong holds a patent on the management of
electronic storefronts using only a browser. Mr. Wong received a Bachelor of
Science degree from the University of California at San Diego.
DOUGLAS J. PERRY has served as our Vice President--Services and our
Chief Operating Officer since March 2000. From September 1999 to March 2000, he
served as our Vice President--Marketing and Vice President--Network Services.
From September 1997 to January 1999, Mr. Perry served as Vice President of
Service and Support of Encanto Networks, Inc. and from January 1999 to
September 1999 he also served as Vice President of Engineering of Encanto
Networks. From January 1995 to September 1997, Mr. Perry directed New Media
Technologies for the Applied Information Management Institute, a non-profit
enterprise focused on facilitating information technology growth. Mr. Perry has
also served as Vice President of Marketing for Inacom, a national distributor
and integrator of computer and communications products and services, and held
various management roles with US West. Mr. Perry received Bachelor of Science
and Master of Science degrees from Stanford University.
THOMAS M. AITCHISON has served as our Vice President--Sales since
March 1999. From 1998 to February 1999, Mr. Aitchison served as Vice
President--North American Sales of Live Picture, Inc. While at Live Picture,
Mr. Aitchison established the North American sales organization, working with
interactive agencies and integrators to deliver Internet imaging solutions. From
1995 to 1998, Mr. Aitchison served as Director of Sales for McAfee Associates.
From 1991 to 1995, Mr. Aitchison served as Director of Northwestern and Western
Canadian Sales for Legent Corporation and from 1988 to 1991 he worked with
Computer Associates International. Mr. Aitchison received a Bachelor of Science
degree from Arizona State University.
LAUREN J. ESSEX has served as our Vice President--Marketing since
February 2000. From 1998 to 1999, Ms. Essex served as Vice President, Consumer
Marketing at Women First HealthCare where she was responsible for the launch of
womenfirst.com, a comprehensive health resource and electronic commerce
marketplace for midlife women. From 1997 to 1998, Ms. Essex served as Vice
President, Marketing for Cosmederm Technologies from and from 1994 to 1997 she
served as Vice President, Marketing, Sales and Customer Service for La Costa
Products International. From 1984 to 1994, Ms. Essex held a variety of brand
management positions at Helene Curtis where she was responsible for nationally
advertised consumer brands. Ms. Essex received a Bachelor of Arts degree from
the University of Rochester and a Master of Management degree from J.L. Kellogg
Graduate School of Management at Northwestern University.
RAY GHANBARI, PH.D. has served as Vice President--Engineering since
February 2000. From July 1999 to February 2000, Dr. Ghanbari served as Vice
President--Engineering of MedData Healthcare Systems. From April 1998 to
July 1999, Dr. Ghanbari served as Director of Information Architecture of
Agouron Pharmaceuticals, and from March 1995 to April 1998, he served as
Director of Research Computing at the Mayo Clinic. From November 1991 to
June 1996, Dr. Ghanbari founded and served as Principal of Digital Tool Works.
Dr. Ghanbari received a Bachelor of Science degree from the University of
Illinois--Urbana, a Master of Philosophy degree from Cambridge University and a
Doctor of Philosophy degree from the Massachusetts Institute of Technology.
42
JEFFREY P. HIGGINS has served as our Vice President--Corporate
Development and General Counsel since February 2000. From September 1997 to
February 2000, Mr. Higgins was a partner at the law firm of Gunderson, Dettmer,
Stough, Villeneuve, Franklin & Hachigian LLP. From January 1997 to
September 1997, Mr. Higgins was a partner at the law firm of Brobeck, Phleger &
Harrison and from September 1990 to January 1997 he was an associate at that
firm. Mr. Higgins received a Bachelor of Arts degree from Claremont McKenna
College and a Juris Doctor degree from Hastings College of Law.
H. DUBOSE MONTGOMERY has served as a member of our board of directors
since December 1999. Mr. Montgomery is a General Partner and the Managing
Director of Menlo Ventures, a venture capital firm which he co-founded in 1976.
He currently serves as a director of many of the firm's privately-held
companies. Prior to founding Menlo Ventures, he worked as a small business
management consultant and a communications researcher for Bell Laboratories.
Mr. Montgomery received Bachelor of Science and Master of Science degrees from
the Massachusetts Institute of Technology and a Master of Business
Administration degree from the Harvard University Graduate School of Business
Administration.
ALEJANDRO PEREZ has served as a member of our board of directors since
December 1998. Since 1991, Mr. Perez has served in various capacities at Pulsar
Internacional S.A. de C.V., a company headquartered in Monterey, Mexico.
Mr. Perez currently serves as the President of the Technology Group of Pulsar
Internacional, where he manages investments in several technology companies.
Mr. Perez serves on the board of directors of Binova Holding Corporation,
Weblink Wireless, Encanto Networks, Inc., Dextra Technology, Merkafon and
Novaweb Technology.
PETER S. SEALEY, PH.D. has served as a member of our board of directors
since September 1999. Since April 1995, Dr. Sealey has been employed by the Haas
School of Business at the University of California at Berkeley as a visiting
lecturer and adjunct professor of marketing. Since 1998, he has served as a
co-director of the Center of Marketing and Technology at the Haas School of
Business. Dr. Sealey is also currently the President and Chairman of The Los
Altos Group, Inc., a venture capital and marketing consulting firm, which he
founded in 1997. Through contacts made with The Los Altos Group, Dr. Sealey has
consulted for numerous companes, including Sony New Technologies, Inc., Visa
U.S.A., Nokia, Hewlett-Packard and The Eastman Kodak Company, among others.
Prior to his employment with the University of California at Berkeley,
Dr. Sealey served as President and Chief Operating Officer of Interactive
Network, Inc., a subscription-based media company. He also held various
executive positions including Senior Vice President of Global Marketing at The
Coca-Cola Company where he served for a total of twenty-two years. Dr. Sealey
serves on the boards of directors of AutoWeb.com, Encanto Networks, Inc.,
CyberGold, Inc, L 90, Inc., marchFirst, Inc., MediaPlex, Inc., T/R
Systems, Inc. and United Parcel Service Capital Corporation. Dr. Sealey received
a Bachelor of Science degree from the University of Florida, a Master of
Industrial Administration degree from Yale University and Master of Arts and
Doctor of Philosophy degrees from the Peter F. Drucker Graduate Management
Center at The Claremont Graduate School.
KENNETH TAI has served as a member of our board of directors since
December 1999. Mr. Tai is the Chairman of Investar Capital, Inc., a venture
capital firm, a position he has held since April 1996. Since April 1998, he has
served as the Chairman of DigiTimes Publication, Inc., a daily electronic
newspaper reporting on technology issues in Taiwan. From March 1993 to
December 1995, Mr. Tai served as the Vice-Chairman of UMAX USA, a computer
peripherals manufacturer. From 1990 to March 1993, Mr. Tai co-founded the Acer
Group and held various executive positions including Vice President of Worldwide
Sales and Marketing and President. Mr. Tai serves on the board of directors of
Altigen Communications and Sage, Inc. Mr. Tai received a Master of Business
Administration from Tamkang University in Taiwan.
43
BOARD COMPOSITION
We currently have six directors. Mr. Perez is currently serving on our
board of directors as a representative of the holders of our Series A redeemable
convertible preferred stock and Messrs. Montgomery and Tai are currently serving
as representatives of the holders of our Series B redeemable convertible
preferred stock. The holders of our Series A redeemable convertible preferred
stock are entitled to elect one director and the holders of our Series B
redeemable convertible preferred stock are entitled to elect two directors, all
as set forth in our current amended and restated certificate of incorporation.
Upon the closing of this offering, the outstanding shares of each class of our
redeemable convertible preferred stock will convert into shares of our common
stock and the holders of our redeemable convertible preferred stock will no
longer have the right to appoint any directors. All of our directors are elected
to hold office until our next annual meeting of stockholders and until their
successors have been elected.
Each of our officers is elected by our board of directors at the first
board of directors meeting following the annual meeting of stockholders at which
the directors are elected. Each officer serves at the discretion of our board of
directors. Our officers and directors, other than our non-employee directors,
devote their full time to our affairs. Our non-employee directors devote their
time to our affairs as is necessary to satisfy their duties. There is no family
relationship among any of our directors, officers or key employees.
BOARD COMMITTEES
The audit committee of our board of directors reviews our internal
accounting procedures and consults with and reviews the services provided by our
independent accountants. The audit committee consists of Messrs. Frankenberg,
Perez and Tai.
The compensation committee of our board of directors reviews the
compensation and benefits provided of all our executive officers, recommends the
amounts of compensation we pay to our executive officers, administers our stock
option plan and establishes general policies relating to compensation of our
employees. The compensation committee consists of Messrs. Frankenberg,
Montgomery and Sealey.
DIRECTOR COMPENSATION
We do not currently compensate our directors for the services they
provide to us as members of our board of directors, although we do reimburse
them for expenses incurred in connection with attendance at board and committee
meetings. We also do not compensate our directors for committee participation or
special assignments. We have granted some of our directors options to purchase
shares of our common stock under our 1999 Stock Option/Stock Issuance Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Historically, compensation decisions were made by our entire board of
directors. Mr. Cheever served as both an executive officer and a director during
1999 and participated in deliberations of our board of directors concerning
compensation of executive officers. As of April 2000, compensation decisions are
made by the compensation committee of the board of directors, which consists of
Messrs. Frankenberg, Montgomery and Sealey. Mr. Frankenberg is President, Chief
Executive Officer and Chairman of the board of directors of Encanto Networks.
Mr. Sealey is a member of the board of directors of Encanto Networks.
44
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by us
during the fiscal year ended December 31, 1999 to our Chief Executive Officer
and our other executive officers whose salary and bonus exceeded $100,000 during
our last fiscal year for services rendered in all capacities to us.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1)
-------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (2) BONUS COMPENSATION COMPENSATION
- --------------------------- ---------- -------- ------------- -------------
Gari L. Cheever,
President and Chief Executive Officer.... $102,083 $ -- $ -- $ --
Thomas M. Aitchison,
Vice President--Sales.................... 139,221 12,000 -- --
Garland Wong,
Chief Technology Officer................. 131,826 -- -- --
- ------------------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisite and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the named executive
officer.
(2) The amounts shown represent the salaries of the executive officers for only
part of 1999. Mr. Cheever began receiving his salary in June, Mr. Aitchison
began receiving his salary in March and Mr. Wong began receiving his salary
in February.
45
OPTION GRANTS
The following table sets forth information for the year ended
December 31, 1999 with respect to each grant of stock options to the named
executive officers:
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999
INDIVIDUAL GRANTS (1) POTENTIAL REALIZABLE
----------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (4)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED IN 1999 (3) PER SHARE DATE 0% 5% 10%
- ---- ---------- ----------- -------------- ---------- -------- -------- --------
Gari L. Cheever (1).. 1,600,000 29.6% $0.10 3/21/09 $ $ $
Thomas M. Aitchison
(1) (2)............ 275,000 5.1 0.10 3/21/09
Garland Wong (1)..... 600,000 11.1 0.10 3/21/09
- ------------------------
(1) Each of these options was granted under our 1999 Stock Option/Stock Purchase
Plan and is subject to the terms of that plan. Except as otherwise noted,
these 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 and, as long as the optionee remains in continuous employment
with us, vest over a four year period at a rate of 25% after the first year
and in 36 equal monthly installments thereafter. All of the options granted
to each executive officer were immediately exercisable upon grant and are
subject to particular rights of repurchase in the event the optionee does
not remain in continuous employment with us.
(2) Options granted to Mr. Aitchison to purchase 25,000 shares of our common
stock vest on March 15, 2006.
(3) In 1999, we granted employees and directors options to purchase an aggregate
of 5,422,000 shares of our common stock.
(4) The assumed annual rates of stock price appreciation are required by the
rules of the SEC and do not represent our estimate or projection of our
future stock price. The potential realizable value is calculated by assuming
that the estimated initial public offering price of $ per share
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day at
the appreciated price. The potential realizable value is net of the
applicable exercise price, but does not take into account applicable federal
or state income tax consequences and other expenses of option exercises.
46
The following table provides summary information concerning the shares
of common stock acquired upon exercise of options in 1999, and the year-end
number and value of unvested options with respect to each of the officers listed
in the summary compensation table as of December 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND DECEMBER 31, 1999 OPTION VALUES
VALUE OF IN-THE-
NUMBER OF MONEY
OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, DECEMBER 31,
ACQUIRED 1999 (2) 1999 (3)
UPON OPTIONS VALUE -------------------- --------------------
NAME EXERCISE REALIZED (1) VESTED UNVESTED VESTED UNVESTED
- ---- ------------- ------------ -------- --------- -------- ---------
Gari L. Cheever............. 1,600,000 $ 0 0 1,600,000
Thomas M. Aitchison......... -- -- 0 275,000
Garland Wong................ -- -- 0 600,000
- ------------------------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for the shares.
(2) The options are immediately exercisable for all of the shares issuable
thereunder, but any shares purchased under those options will be subject to
repurchase by us at the original exercise price paid per share, if the
optionee ceases service with us before vesting in those shares. The heading
"vested" refers to those shares that are no longer subject to repurchase and
the heading "unvested" refers to those shares subject to repurchase as of
December 31, 1999.
(3) Based upon the assumed initial public offering price of $ per share less
the exercise price per share.
EMPLOYMENT AGREEMENT
We entered into an employment agreement with Gari L. Cheever on June 1,
1999. Under his employment agreement, Mr. Cheever will serve as our President
and Chief Executive Officer through June 1, 2002. During the period of his
employment, Mr. Cheever is required to devote sufficient time and energy to
fulfill his responsibilities to our business and shall not engage in any
competitive business activity, other than certain passive investments, without
our express written consent. Mr. Cheever has also agreed not to use or disclose
any of our proprietary information or encourage or solicit any of our employees
or affiliates to leave us for a period of one year following his termination.
Mr. Cheever's compensation under his employment agreement includes a
base salary of $175,000 for the initial 12 months of his employment, and
thereafter an amount to be mutually agreed upon by Mr. Cheever and the
compensation committee of our board of directors. Mr. Cheever's base salary is
subject to increase at any time during his employment at the sole discretion of
the compensation committee of our board of directors without the consent of
Mr. Cheever. Mr. Cheever is also eligible for a bonus as determined by our board
of directors and all benefits that are generally available to our other
executives. In addition, we granted Mr. Cheever options to purchase 1,600,000
shares of our common stock at an exercise price of $0.10 per share under his
employment agreement. The first 25% of Mr. Cheever's options vested on
January 29, 2000 and the remaining 75% will vest in 36 equal monthly
installments commencing on January 29, 2000. Mr. Cheever's options will vest in
full upon a change of control of our company.
Mr. Cheever's employment agreement provides that if he is terminated by
us without cause, he shall be entitled to payment of his base salary for a
period of one year following the date of his termination by us. However, if
Mr. Cheever is terminated for cause, voluntarily departs, dies or becomes
47
incapacitated, he will not be entitled to any additional compensation or other
rights or benefits from us and we shall only be obligated to pay that portion of
his base salary earned by Mr. Cheever prior to his termination.
BENEFIT PLANS
1999 STOCK OPTION/STOCK ISSUANCE PLAN
INTRODUCTION. We adopted on March 22, 1999, and our shareholders
approved in April 1999, our 1999 Stock Option/Stock Issuance Plan. The purpose
of the 1999 plan is to attract and retain the best available personnel by
providing them with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in our company. The 1999 plan is
divided into two separate equity programs, consisting of an option grant program
and a stock issuance program.
ADMINISTRATION. The 1999 plan is administered by our board of directors
or a committee thereof comprised of two or more members of the board. The plan
administrator has power and authority, among other things, to:
- determine the persons eligible to receive, and the terms and
conditions relating to, stock options or stock issuances;
- establish any rules and regulations for proper administration of the
1999 plan; and
- make determinations under, and issue interpretations of, the 1999 plan
and any outstanding stock options or stock issuances.
ELIGIBILITY. Persons eligible to participate in the 1999 plan are
employees, non-employee members of the board of directors, and consultants
providing services to us.
SHARES AVAILABLE. A maximum of 6,300,000 shares of our common stock is
reserved for issuance under the 1999 plan, subject to appropriate adjustment for
particular events affecting our outstanding common stock as a class without our
receipt of consideration. To the extent a stock option granted under the 1999
plan expires, terminates or is cancelled, the shares subject to such option are
available for subsequent issuance under the 1999 plan. Any unvested shares
issued under the 1999 plan and subsequently repurchased by us pursuant to our
repurchase rights also are available for reissuance under the 1999 plan.
OPTION GRANT PROGRAM. A stock option granted under the 1999 plan may be
either an "incentive stock option" as that term is defined in Section 422 of the
Internal Revenue Code or an option that does not so qualify. The terms and
conditions of each option grant are determined by the plan administrator and set
forth in a stock option agreement. Each option grant must comply with the
following requirements:
- The exercise price per share is determined by the plan administrator.
The exercise price may not be less than 85% of the fair market value
per share of our common stock on the option grant date. However, in
the case of a participant who is a 10% stockholder, the exercise price
may not be less than 110% of the fair market value.
- The exercise and term of each stock option are determined by the plan
administrator. However, if the grant is made to an individual who is
not an officer or member of our board of directors, or a consultant to
us, at least 20% of the total number of shares subject to each option
grant must become exercisable each year, beginning no later than the
option grant date. In addition, no stock option may have a term that
exceeds 10 years from the option grant date.
- In the event a participant terminates service with us other than by
reason of misconduct or dies, the participant or, if applicable, the
executors or personal administrator of the participant's estate or the
person(s) who acquired the options by beneficiary designation,
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bequest or inheritance, has a period of time to exercise any stock
options held by the participant to the extent the options are vested
and, after that period, the options will lapse. Upon a participant's
termination of service, any stock options held by the participant will
lapse to the extent it is unvested as of the date of termination of
service. The plan administrator has discretion at the time a stock
option is granted or while the option remains outstanding to extend
the period of exercise following a participant termination of service
or death and permit the exercise of one or more installments of shares
in which the participant would have vested had the participant
continued service. However, in no event may a stock option be
exercised after its expiration date.
- In the event a participant's service is terminated for misconduct, all
stock optons held by the participant terminate immediately.
- The plan administrator may grant options exercisable for unvested
shares of our common stock. In the event that a participant terminates
service with us while holding any unvested shares subject to options,
we have the right to repurchase, at the exercise price, all or any
unvested shares.
- The plan administrator has the authority to cancel any or all
outstanding stock options and to grant in substitution therefor new
options in accordance with the 1999 plan.
- Any incentive stock option granted under the 1999 plan also must
comply with the incentive stock option provisions of the plan.
STOCK ISSUANCE PROGRAM. We may issue shares of our common stock through
immediate purchase of shares or as a bonus for services. The terms and
conditions of each stock issuance are determined by the plan administrator and
set forth in a stock issuance agreement. Each stock issuance must comply with
the following requirements:
- The purchase price per share is determined by the plan administrator.
The purchase price may not be less than 85% of the fair market value
per share of our common stock on the stock issuance date. However, in
the case of a participant who is a 10% shareholder, the purchase price
may not be less than 110% of the fair market value. Consideration for
the purchase price includes past services rendered to us.
- The vesting of each stock issuance is determined by the plan
administrator. Shares may be fully and immediately vested upon
issuance or may vest in one or more installments over the
participant's period of service or attainment of specified performance
objectives. However, if the stock issuance is made to an individual
who is not an officer or member of our board of directors, or a
consultant to us, at least 20% of the total number of shares subject
to each issuance grant must become vested each year, beginning no
later than one year after the stock issuance date.
FIRST REFUSAL RIGHTS. Until our common stock is registered under
Section 12(g) of the Securities Exchange Act of 1934, we have a right of first
refusal regarding any proposed disposition of any shares of our common stock
issued under the 1999 plan.
CORPORATE TRANSACTION. In the event of a change of control of our
company or the sale, transfer or other disposition of all or substantially all
of our assets in complete liquidation or dissolution of our company:
- all outstanding stock options will automatically accelerate and become
fully exercisable immediately prior to the effective date of such
event, except to the extent (1) the options are assumed by the
successor corporation or its parent and our repurchase rights with
respect to the unvested option shares are assigned to the successor
corporation or its parent, (2) the
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options are replaced with a substantially similar equity incentive
program of the successor corporation, or (3) the acceleration is
subject to other limitations imposed by the plan administrator at the
time of the grant;
- all outstanding repurchase rights will automatically terminate, and
the shares subject to those rights will vest in full, except to the
extent (1) our repurchase rights are assigned to the successor
corporation or its parent or (2) the accelerated vesting is precluded
by other limitations imposed by the plan administrator at the time the
repurchase right is issued;
- all outstanding stock options terminate and cease to be outstanding
immediately following the consummation of such event, except to the
extent assumed by the successor corporation or its parent; and
- each option which is assumed will be appropriately adjusted.
Notwithstanding that any stock options are to be assumed and any
repurchase rights are to be assigned in connection with a change of control of
our company or the sale, transfer or other disposition of all or substantially
all of our assets in complete liquidation or dissolution of our company, the
plan administrator has discretion:
- to provide for automatic acceleration in whole or part of one or more
outstanding options, and immediate termination of the repurchase
rights with respect to the shares subject to such options, upon the
occurrence of such event;
- to grant stock options which automatically accelerate in the event of
a participant's involuntary termination within a period not to exceed
18 months following the event, with the options to remain exercisable
until the earlier of (1) the expiration of such options or (2) one
year from the date of such involuntary termination, and to provide
that one or more of our repurchase rights with respect to shares held
by the participant at the time of the involuntary termination will
immediately terminate and the shares subject to those repurchase
rights will vest in full; and
- to provide that repurchase rights with respect to unvested shares will
automatically terminate and the shares subject to those terminated
rights will immediately vest in the event of a participant's
involuntary termination within a period not to exceed 18 months
following such event.
TERM OF PLAN. The 1999 plan terminates upon the earliest of
(1) March 21, 2009, (2) the date on which all shares available for issuance have
been issued in connection with the exercise of options or issuance of shares
under the plan, or (3) the termination of all outstanding options in connection
with a transaction described above.
AMENDMENT OF PLAN. Our board of directors may amend the plan, but no
amendment may negatively impact the rights and obligations with respect to
outstanding options or unvested stock issuances without the consent of the
participant, as applicable.
2000 EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION. Our 2000 Employee Stock Purchase Plan was adopted by our
board of directors on April 28, 2000 and will be submitted to our stockholders
for their approval prior to the completion of this offering. The 2000 stock
purchase plan is intended to qualify under Section 423 of the Internal Revenue
Code and is designed to allow our eligible employees to purchase shares of our
common stock by accumulated payroll deductions.
SHARES AVAILABLE. 500,000 shares of our common stock are available for
issuance under the 2000 stock purchase plan during the 10 years following its
adoption.
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ELIGIBILITY. All employees who have been continuously employed by us
for at least six months and who regularly work more than 20 hours a week and
more than five months a year are eligible to participate in the 2000 stock
purchase plan. Any individual whose employment with us terminates for any
reason, other than disability, before the end of an offering will become
ineligible to purchase common stock under the 2000 stock purchase plan.
OFFERING PERIODS. We will make six-month offerings beginning on
January 1 and July 1 of each year, commencing at a time as determined at our
discretion, and may make additional offerings for different periods, provided
that each period does not exceed 27 months.
PURCHASE PRICE. The purchase price per share is equal to 85% of the
lesser of the fair market value of a share on the first day of the offering
period or the fair market value of a share on the last day of the offering
period.
PURCHASE OF SHARES. Eligible employees may accumulate savings through
payroll deductions over an offering period in order to purchase common stock at
the end of that period. Purchases of our common stock under the 2000 stock
purchase plan may only be made with accumulated savings from payroll deductions,
and an employee cannot complete a purchase using other resources. The
accumulated savings for an offering will be automatically applied at the end of
offering period to purchase as many shares of common stock as feasible, and the
unused balance shall be carried over to the next offering.
PAYROLL DEDUCTIONS. The rate of an employee's payroll deduction must be
established before the offering, and we reserve the right to establish a minimum
and maximum rate applicable to all eligible employees. An employee's payroll
deduction authorization for one offering will apply to successive offerings
unless the employee changes the authorization. An employee may reduce, but not
increase, his or her rate of payroll deductions during an offering or withdraw
from an offering at any time. Upon withdrawal from any offering, the employee's
accumulated savings for the offering shall be returned, without interest, to the
employee.
LIMITATIONS AND RESTRICTIONS. In no event shall the fair market value
of all shares purchased by an employee under the 2000 stock purchase plan exceed
$25,000 with respect to any calendar year. Further, no employee will be
permitted to complete the purchase of common stock under the 2000 stock purchase
plan if, immediately after the purchase, the employee would own shares
possessing at least 5% of our total combined voting power
MERGERS OR OTHER CONSOLIDATIONS. In the event we are a party to a
merger or consolidation, outstanding options under the 2000 stock purchase plan
will be subject to the agreement of merger or consolidation, which, without the
consent of any participant, may provide for:
- the continuation of any outstanding options by us if we are the
surviving corporation;
- the assumption of the 2000 stock purchase plan and any outstanding
options by the surviving corporation or its parent;
- the substitution by the surviving entity or its parent of options with
substantially similar terms; or
- the cancellation of any outstanding options without payment of any
consideration other than the return of contributions credited to
participant accounts, without interest.
AMENDMENT OR TERMINATION OF PLAN. Our board of directors may amend or
terminate the 2000 stock purchase plan at any time; provided, however, that no
increase in the number of shares of our common stock reserved for issuance under
the 2000 stock purchase plan may be made without shareholder approval.
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2000 STOCK PLAN
INTRODUCTION. Our 2000 Stock Plan was adopted by our board of directors
on April 28, 2000 and will be submitted to our stockholders for their approval
prior to the completion of this offering. The purpose of the 2000 plan is to
attract and retain the best available personnel by providing them with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in our company. The 2000 plan provides for the direct
award or sale of shares of our common stock and for the grant of options to
purchase shares. As of the effective date of the 2000 plan, no stock option
grants of such issuances will be made under the 1999 plan.
ADMINISTRATION. The 2000 plan is administered by one or more committees
comprised of one or more members of our board of directors. Each committee has
authority and responsibility for functions our board of directors has assigned
to it. If no committee has been appointed, the entire board of directors will
administer the 2000 plan. Subject to the foregoing, our board of directors will
establish a committee comprised solely of not less than two members of the our
board of directors who each qualify as (1) a "non-employee director" within the
meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934 and
(2) an "outside director" within the meaning of Section 162(m) of the Internal
Revenue Code, and unless our board of directors determines otherwise, the
committee will have authority to make awards or sales of shares or grants of
stock options to employees who generally qualify as "covered employees" within
the meaning of Section 162(m). References to our board of directors with respect
to this summary of the 2000 plan should be construed as the context requires as
a reference to the committee, if any, to whom our board of directors has
assigned a particular function. The authority of our board of directors includes
determining the persons to whom awards or sales are made or stock options are
granted, and the terms and conditions relating thereto.
ELIGIBILITY. Persons eligible to participate in the 2000 plan are
employees, non-employee members of the board of directors, and consultants
providing services to us, as determined by our board of directors.
SHARES AVAILABLE. A maximum of 1,500,000 shares of our common stock are
reserved for issuance under the 2000 plan, plus (1) an additional number of
shares of our common stock as of the first day of each calendar year equal to
500,000 shares, (2) shares available for issuance under the 1999 plan, and
(3) shares issued or issuable under the 2000 plan by reason of options or other
rights being assumed or substituted, in all cases, subject to appropriate
adjustment for particular events affecting our outstanding common stock. To the
extent shares subject to stock options or other rights granted under the 1999 or
2000 plan expire, terminate or are cancelled, or shares are issued under the
1999 or 2000 plan and reacquired by us pursuant to any forfeiture, right of
repurchase or right of first refusal provision, these shares will again be
available for purposes of the 2000 plan. The maximum number of shares underlying
all options or other rights granted under the 2000 plan that may be granted to
any single employee, including as a director or consultant, over any three-year
period during the term of the plan is 500,000 shares, subject to appropriate
adjustment for particular events affecting our outstanding common stock.
TERMS AND CONDITIONS OF AWARDS OR SALES. Each award or sale of shares,
other than upon exercise of a stock option, is evidenced by a stock purchase
agreement. The award or sale is subject to the terms and conditions of the 2000
plan and may be subject to any other terms and conditions not inconsistent with
the plan as determined by our board of directors.
- Any right to acquire shares under the 2000 plan, other than a stock
option, automatically expires if not exercised by the participant
within 30 days after grant of such right.
- The purchase price per share is determined by our board of directors.
Consideration for the purchase price includes past services rendered
to us.
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- The vesting, special forfeiture conditions, rights of repurchase,
rights of first refusal and other transfer restrictions applicable to
each award or sale of shares are determined by our board of directors.
TERMS AND CONDITIONS OF OPTIONS. Each grant of a stock option is
evidenced by a stock option agreement. The option is subject to the terms and
conditions of the 2000 plan and may be subject to any other terms and conditions
not inconsistent with the plan as determined by our board of directors.
- The number of shares subject to the option, and whether the option is
an incentive stock option or a non-qualified stock option if
determined by our board of directors. Any incentive stock option
granted under the 2000 plan also must comply with the incentive stock
option provisions of the plan.
- The exercise price is determined by our board of directors. The
exercise price of an incentive stock option will not be less than 100%
of the fair market value per share of our common stock on the option
grant date.
- The vesting and exercisability relating to the option are determined
by our board of directors. Unless the stock option agreement provides
otherwise, all of an participant's options will become exercisable in
full if we experience a change of control before the participant's
service terminates, we do not continue the options, and the surviving
corporation or its parent does not assume the options or does not
substitute its options with substantially the same terms for the
options.
- The term of the option is determined by our board of directors.
However, no option may have a term that exceeds 10 years from the
option grant date.
- In the event a participant terminates service with us, other than for
cause, or dies, the participant or, if applicable, the executors or
personal administrator of the participant's estate or the person(s)
who acquired the options by beneficiary designation, bequest or
inheritance, has a prescribed period of time to exercise any stock
options held by the participant to the extent the options are vested
and exercisable and, after the period, the options will lapse. Upon a
participant's termination of service, any stock options held by the
participant will lapse to the extent it is unvested as of the date of
termination of service. However, in no event may a stock option be
exercised after its expiration date.
- Unless otherwise determined by our board of directors, all stock
options, whether vested or unvested, held by a participant are
cancelled and forfeited upon the termination of a participant's
service for cause.
- Our board of directors may modify, extend or assume any outstanding
options or may provide for the cancellation of outstanding options in
return for the grant of new options in accordance with the 2000 plan,
but no such modification will, without the consent of the participant,
negatively impact the participant's right or increase the
participant's obligations under the option.
- The vesting, special forfeiture conditions, rights of repurchase,
rights of first refusal and other transfer restrictions applicable to
the shares issued upon exercise of an option are determined by our
board of directors.
PERFORMANCE MEASURES. In the event of an award or sale of shares or
grant of stock options with a purchase or exercise price of less than fair
market value at the time of such award, sale or grant, the committee comprised
of non-employee directors and outside directors may at its discretion determine
and administer the terms and conditions of such award, sale or grant so as to
qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code. The grant, payment, vesting and/or
exercisability of the award, sale or grant will be subject to the achievement
during a
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performance period or periods of a level or levels of one or more performance
measures, in each case as established at the discretion of the committee. The
establishment of performance measures applicable to any award, sale or grant
will be made before either 90 days or 25% of the applicable performance period
have elapsed. The amount of compensation payable under the terms of any the
award, sale or grant upon the achievement of any applicable performance measure
will not be subject to any increase as a result of discretion exercised,
directly or indirectly, by the committee. No compensation attributable to an
award, sale or grant will be paid to or otherwise received by an employee who
generally qualifies as a "covered employee" within the meaning of
Section 162(m) of the Internal Revenue Code with respect to any performance
period until the committee certifies in writing that the performance measures
applicable to the award, sale or grant and the performance period have been
satisfied.
CHANGE IN CONTROL. Unless otherwise provided in the stock purchase
agreement or stock option agreement, upon the consummation of a change of
control or the sale, transfer or other disposition of all or substantially all
of our assets before a participant's service terminates, any right to repurchase
the participant's shares at the original purchase, if any, or exercise price
upon termination of the participant's service will lapse and all of the shares
will become vested, at the discretion of our board of directors.
MERGERS OR OTHER CONSOLIDATIONS. In the event we are a party to a
merger or consolidation, outstanding options under the 2000 plan will be subject
to the agreement of merger or consolidation, which, without the consent of any
participant, may provide for:
- the continuation of any outstanding options by us if we are the
surviving corporation;
- the assumption of the 2000 plan and any outstanding options by the
surviving corporation or its parent;
- the substitution by the surviving entity or its parent of options with
substantially similar terms; or
- the cancellation of the vested portion, and not the unvested portion,
of outstanding options or other rights by cash payment of the excess,
if any, of the fair market value of shares subject to the vested
portion of any such option or other right over the aggregate exercise
with respect to such portion.
TERM OF PLAN. The 2000 plan became effective April 28, 2000, subject to
our shareholder approval. In the event that shareholder approval is not obtained
within 12 months after the adoption of this 2000 plan, any sales, awards or
grants that already have occurred will be rescinded, and no additional sales,
awards or grants will be made thereafter under the 2000 plan. The 2000 plan
automatically terminates 10 years after its adoption, but may be earlier
terminated by our board of directors.
AMENDMENT OR TERMINATION OF PLAN. Our board of directors may amend or
terminate the 2000 plan at any time; provided, however, that no increase in the
number of shares of our common stock reserved for issuance under the 2000 plan
and no material change in the class of persons who are eligible for incentive
stock options may be made without stockholder approval.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by Delaware law, we will adopt provisions in our amended
and restated certificate of incorporation and bylaws that limit or eliminate the
personal liability of our directors for a breach of their fiduciary duty of care
as a director. The duty of care generally requires that, when acting on behalf
of the corporation, directors exercise an informed business judgment based on
all material information reasonably available to them. Consequently, a director
will not be personally liable to us or our
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stockholders for monetary damages for breach of their fiduciary duties as
directors, except liability arising from:
- a breach of their duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock purchases or
redemptions; or
- any transaction from which the director derived an improper benefit.
Our amended and restated certificate of incorporation and bylaws will
provide that we shall indemnify our directors, officers, employees and other
agents to the fullest extent permitted by Delaware law. Our amended and restated
certificate of incorporation and bylaws will also permit us to secure insurance
on behalf of any of our directors, officers, employees or other agents for any
liability arising out of his or her actions in that capacity.
We have entered into agreements to indemnify our directors and officers,
in addition to the indemnification provided by our amended and restated
certificate of incorporation and bylaws. These agreements, among other things,
indemnify our directors and officers for particular expenses, including
attorneys' fees, judgments, fines and settlement amounts incurred by the
director or officer in any action or proceeding arising out of the director's or
officer's services as one of our directors, officers, agents or fiduciaries or
services provided to any other company or enterprise at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as our directors and officers.
Presently, there is no pending litigation or proceeding involving any of
our directors or officers in which indemnification is required or permitted, and
we are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
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RELATED PARTY TRANSACTIONS
PREFERRED STOCK FINANCINGS
Since our inception, we have issued shares of our redeemable convertible
preferred stock to investors in the following private placement transactions: a
total of 5,847,895 shares of our Series A redeemable convertible preferred stock
at a price of $0.90 per share between April and July 1999, a total of 3,903,112
shares of our Series B redeemable convertible preferred stock at a price of
$4.00 per share between December 1999 and February 2000, and 1,392,438 shares of
our Series C redeemable convertible preferred stock at a price of $12.30 per
share in April 2000. The following table sets forth the number of shares of our
preferred stock purchased by our executive officers, directors and 5%
stockholders and persons and entities associated with them in these private
placement transactions. All of our shares of preferred stock will convert into
common stock on a one-for-one basis upon completion of this offering.
SERIES A SERIES B TOTAL
PREFERRED STOCK PREFERRED STOCK CONSIDERATION
--------------- --------------- -------------
Entities affiliated with InveStar Capital, Inc....... 833,334 500,000 $2,750,000
Entities affiliated with Menlo Ventures.............. - 1,312,500 5,250,000
Luna Mare, LLC....................................... 1,234,946 450,000 2,911,451
Gari L. Cheever...................................... 814,694 - 733,224
Robert J. Frankenberg................................ 728,584 - 655,725
Garland Wong......................................... 100,000 - 90,000
Kenneth Tai, H. Dubose Montgomery and Alejandro Perez each serve as
members of our board of directors as representatives of the holders of our
redeemable convertible preferred stock. Mr. Perez is currently serving on our
board of directors as a representative of the holders of our Series A redeemable
convertible preferred stock and Messrs. Montgomery and Tai are currently serving
as representatives of the holders of our Series B redeemable convertible
preferred stock. Kenneth Tai is the Chairman of InveStar Capital, Inc., an
affiliate of InveStar Excelsus Venture Capital (Int'l), Inc. LDC, Forefront
Venture Partners, L.P., InveStar Burgeon Venture Capital, Inc. and InveStar
Dayspring Venture Capital, Inc., each of which are record holders of our
Series A or Series B redeemable convertible preferred stock. Mr. Montgomery is a
managing member of MV Management VIII, L.L.C., the ultimate general partner of
Menlo Ventures VIII, L.P., Menlo Entrepreneurs Fund VIII, L.P. and MMEF VIII,
L.P., each of which are record holders of our Series B redeemable convertible
preferred stock. Mr. Perez is the President of the Technology Group of Pulsar
International S.A. de C.V., the ultimate parent entity of Luna Mare, LLC.
Gari L. Cheever is our President, Chief Executive Officer and a
director, Robert J. Frankenberg is our Chairman and Garland Wong is our Chief
Technology Officer. In addition to Mr. Cheever's purchase of our Series A
redeemable convertible preferred stock, he also purchased 1,275,001 shares of
our common stock for an aggregate purchase price of $25,500 and exercised
options to purchase 1,600,000 shares of our common stock for an aggregate
exercise price of $160,000. In addition to Mr. Frankenberg's purchase of our
Series A redeemable convertible preferred stock, he also purchased 1,275,001
shares of our common stock for an aggregate purchase price of $25,500. Mr.
Frankenberg is also the Chairman of the Board, President and Chief Executive
Officer of Encanto Networks, Inc., one of our founding stockholders. In addition
to Mr. Wong's purchase of our Series A redeemable convertible preferred stock,
he also purchased 150,000 shares of our common stock for an aggregate purchase
price of $3,000 and exercised options to purchase 625,000 shares of our common
stock for an aggregate exercise price of $110,000.
LOANS TO EXECUTIVE OFFICERS FOR OPTION EXERCISES
In February and March 2000, the following executive officers delivered
promissory notes to us in the amounts set forth below to pay the exercise price
of their stock options:
- Dr. Ray Ghanbari, Vice President - Engineering: $80,000;
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- Jeffrey P. Higgins, Vice President - Corporate Development and General
Counsel: $320,000; and
- Garland Wong, Chief Technology Officer: $110,000.
The outstanding principal balance and accrued but unpaid interest on
each note must be paid to us on or before February 11, 2005 for Mr. Higgins and
March 16, 2005 for Dr. Ghanbari and Mr. Wong. Each loan accrues interest at a
rate of 6.8% per year until paid. Each note may be prepaid at the option of the
executive officer, in full or in part, at any time without premium or penalty.
Each note is full recourse to the executive officer and entitled to the benefits
of a pledge agreement entered into by us and each of the executive officers.
Dr. Ghanbari pledged 40,000 shares of our common stock, Mr. Higgins pledged
160,000 shares of our common stock and Mr. Wong pledged 625,000 shares of our
common stock to secure their notes. In the event that the executive officer
defaults on his note, we have the right to accelerate the payment or performance
of all obligations under the note and the pledge agreement and have all rights
and remedies under law, including the right to sell the shares of common stock
pledged as security.
COMMERCIAL RELATIONSHIPS
In August 1997, CommerceWave, one of our predecessors, entered into a
development and license agreement with Encanto Networks, Inc. under which
Encanto agreed to pay CommerceWave $205,200 in exchange for a license to use and
distribute, as part of an Encanto hardware product, a version of our electronic
commerce software, including modifications and enhancements to this software. In
January 1999, we amended the agreement to provide Encanto the right to use or
distribute this software other than as part of the Encanto hardware product. In
exchange for this amendment, Encanto paid us $325,000 and issued 300,000 shares
of Encanto common stock to us valued at $0.17 per share. At the same time, we
agreed to provide additional development services as well as electronic commerce
hosting services to Encanto for which we were paid a total of $425,000. Encanto
is one of our founding stockholders and holds a total of 350,000 shares of our
common stock.
In a separate arrangement with Encanto, Encanto's German subsidiary,
Encanto GmbH, will provide marketing and sales services to us in Europe. Under
this arrangement, we pay Encanto GmbH approximately half of its monthly rent and
personnel costs. Encanto is one of our founding stockholders and owns 350,000
shares of our common stock. In addition, Robert Frankenberg, one of our founders
and the chairman of our board of directors, is currently serving as Chairman,
Chief Executive Officer and President of Encanto. In addition, two of our
directors, Alejandro Perez and Peter S. Sealey, are members of the board of
directors of Encanto.
In January 1999, we acquired Siteman and various contracts relating to
Siteman from iXL Enterprises. As a result of this acquisition, we have several
agreements with iXL. Our primary license agreement gives iXL the right, subject
to the payment of royalties to us, to sublicense our electronic commerce and
content management software to the clients iXL hosts on its platform. We also
agreed to allow iXL to develop enhancements to our software, which we will own
jointly with iXL, and further agreed not to sue iXL at any time regarding the
patent relating to the browser-based storefront iXL assigned to us. As part of
the acquisition, we agreed to purchase from iXL, directly or through our
customers or contractors, $1,500,000 of services within 30 months from the
acquistion date. If iXL has not been engaged by us or our designees to perform
services totaling $1,500,000 by July 2001, we will be required to pay iXL a lump
sum payment for the difference between the original obligation and the fees
received by iXL during the 30 month period. As of March 31, 2000, we have
expended $515,010 under the service agreement with iXL. In addition, we have
subleased our corporate office space in Carlsbad, California from iXL for
approximately $8,500 per month through August 2003. iXL holds 561,339 shares of
our Series A redeemable convertible preferred stock.
In April 1999, we entered into a three-year consulting services
agreement with Dextra Technologies, Inc. under which Dextra is to provide
engineering consulting services to us on various
57
negotiated projects for fees between $35 and $45 per hour. Dextra Technologies
is an affiliate of Pulsar International S.A. de C.V., the ultimate parent entity
of Luna Mare, LLC, a holder of two shares of our common stock, 1,234,946 shares
of our Series A redeemable convertible preferred stock and 450,000 of our
Series B redeemable convertible preferred stock. In addition, Alejandro Perez,
one of our directors, formerly served as president of Dextra Technologies and
currently serves on the Board of Directors of Dextra and as the President of the
Technology Group of Pulsar Internacional S.A. de C.V.
We believe that each of the foregoing transactions is in our best
interests, on terms no less favorable to us than we could obtain from
unaffiliated third parties and reasonably expected to benefit us.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
We have entered into agreements to indemnify our directors and officers,
in addition to the indemnification provided by our amended and restated
certificate of incorporation and bylaws. These agreements, among other things,
require us to indemnify our directors and officers for particular expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
the director or officer in any action or proceeding arising out of the
director's or officer's services as one of our directors, officers, agents or
fiduciaries or services provided to any other company or enterprise at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as our directors and officers.
58
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 26, 2000, as adjusted to reflect the
sale of shares in this offering, by:
- each person or group of affiliated persons known by us to own
beneficially more than 5% of the outstanding shares of our common
stock;
- each of our directors;
- each of our executive officers; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Unless otherwise noted in the footnotes to the table below, each
person or group identified possesses sole voting and investment power with
respect to the shares beneficially owned by the stockholder, subject to
applicable community property laws. Beneficial ownership percentage is based on
17,633,199 shares of common stock outstanding as of April 26, 2000. Shares of
common stock that a person has the right to acquire within 60 days of April 26,
2000 are deemed outstanding for purposes of computing the beneficial ownership
percentage of the person holding such rights, but are not deemed outstanding for
purposes of computing the beneficial ownership percentage of any other person,
except with respect to the beneficial ownership percentage of all directors and
executive officers as a group. The address for each officer and director is 2111
Palomar Airport Road, Suite 250, Carlsbad, California 92009.
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- ---------
Entities affiliated with InveStar Capital Inc. 1,614,862 9.2%
(1)...............................................
1737 North First Street, Suite 650
San Jose, California 95112
Entities affiliated with Menlo Ventures (2)......... 1,312,500 7.4%
3000 Sand Hill Road, Building 4
Menlo Park, California 94025
Luna Mare, LLC (3).................................. 2,034,948 11.5%
686 No. DuPont Blvd. #200
Milford, Delaware 19963
Robert J. Frankenberg (4)........................... 3,153,585 17.1%
Gari L. Cheever (5)................................. 3,689,695 20.9%
Dana S. McGowan (6)................................. 175,000 *
Garland Wong (7).................................... 875,000 5.0%
Douglas J. Perry (8)................................ 200,000 1.1%
Thomas M. Aitchison (9)............................. 275,000 1.5%
Lauren J. Essex (10)................................ 160,000 *
Ray Ghanbari (11)................................... 160,000 *
Jeffrey P. Higgins (12)............................. 185,000 1.0%
H. Dubose Montgomery (13)........................... 1,312,500 7.4%
Alejandro Perez (14)................................ 2,034,948 11.5%
Peter S. Sealey (15)................................ 635,555 3.6%
Kenneth Tai (16).................................... 1,614,862 9.2%
All directors and executive officers
as a group (13 persons) (17)...................... 14,471,145 75.0%
59
- ------------------------
* Less than 1%
(1) Consists of 833,334 shares held by InveStar Excelsus Venture Capital
(Int'l), Inc. LDC, 277,778 shares held by Forefront Venture Partners, L.P.,
250,000 shares held by InveStar Burgeon Venture Capital, Inc., 250,000
shares held by InveStar Dayspring Venture Capital, Inc. and 3,750 shares
subject to immediately exercisable warrants.
(2) Consists of 1,250,000 shares held by Menlo Ventures VIII, L.P., 49,500
shares held by Menlo Entrepreneurs Fund VIII, L.P. and 13,000 shares held
by MMEF VIII, L.P.
(3) Includes 350,000 shares held by Encanto Networks, Inc. Pulsar Internacional
S.A. de C.V., the majority stockholder of Encanto Networks, is the ultimate
parent entity of Luna Mare, LLC.
(4) Includes 800,000 immediately exercisable options, 533,333 of which are
subject to repurchase rights, and 350,000 shares held by Encanto Networks.
Mr. Frankenberg is the Chairman, Chief Executive Officer and President of
Encanto Networks, Inc. Mr. Frankenberg disclaims beneficial ownership of
the shares held by Encanto Networks.
(5) Includes 615,159 shares held by UMB Bank, N.A., as successor trustee of BPH
LLP Retirement Savings Trustee for Gari. L. Cheever. Includes
1,066,667 shares subject to repurchase rights.
(6) Consists solely of immediately exercisable options, all of which are
subject to repurchase rights.
(7) Includes 425,000 shares subject to repurchase rights.
(8) Consists solely of immediately exercisable options, all of which are
subject to repurchase rights.
(9) Includes 200,000 exercisable options and 196,875 shares subject to
repurchase rights.
(10) Consists solely of immediately exercisable options all of which are subject
to repurchase rights.
(11) Includes 120,000 immediately exercisable options and 160,000 shares which
are subject to repurchase rights.
(12) Includes 160,000 shares subject to repurchase rights.
(13) Consists of 1,250,000 shares held by Menlo Ventures VIII, L.P., 49,500
shares held by Menlo Entrepreneurs Fund VIII, L.P. and 13,000 shares held
by MMEF VIII, L.P. The ultimate general partner of Menlo Ventures VIII,
L.P., Menlo Entrepreneurs Fund VIII, L.P. and MMEF VIII, L.P. is MV
Management VIII, L.L.C., of which Mr. Montgomery is a managing member.
Mr. Montgomery disclaims beneficial ownership of the shares held by the
entities affiliated with Menlo Ventures except to the extent of his
pecuniary interest therein.
(14) Consists of 1,684,948 shares held by Luna Mare, LLC and 350,000 shares held
by Encanto Networks, Inc. Mr. Perez has been designated by Luna Mare, LLC
to serve on our board of directors. Pulsar Internacional S.A. de C.V. is
the majority stockholder of Encanto Networks. Mr. Perez is the president of
the Technology Group of Pulsar Internacional S.A. de C.V. Mr. Perez
disclaims beneficial ownership of the shares held by Luna Mare, LLC and
Encanto Networks except to the extent of his pecuniary interest therein.
(15) Consists of 555,555 shares held by Digacomm, LLC and 80,000 shares subject
to repurchase rights. Mr Sealy disclaims beneficial ownership of the shares
held by Digacomm, LLC except to the extent of his pecuniary interest
therein.
(16) Consists of 833,334 shares held by InveStar Excelsus Venture Capital
(Int'l), Inc. LDC, 277,778 shares held by Forefront Venture
Partners, L.P., 250,000 shares held by InveStar Burgeon Venture
Capital, Inc., 250,000 shares held by InveStar Dayspring Venture
Capital, Inc. and 3,750 shares subject to immediately exercisable warrants.
Mr. Tai is the Chairman of InveStar Capital, Inc. Mr. Tai disclaims
beneficial ownership of the shares held by the entities affiliated with
InveStar Capital, Inc. except to the extent of his pecuniary interest
therein.
(17) Includes 3,750 shares subject to immediate exercisable warrants, 1,655,000
immediately exercisable options and 3,156,875 shares subject to repurchase
rights.
60
DESCRIPTION OF CAPITAL STOCK
Our amended and restated certificate of incorporation, which will become
effective following our reincorporation in the State of Delaware, will authorize
the issuance of up to 100,000,000 shares of common stock, par value $0.001 per
share, and 5,000,000 shares of preferred stock, par value $0.001 per share, the
rights and privileges of which may be established by our board of directors. As
of April 26, 2000, after giving effect to the conversion of all of the
outstanding shares of our Series A, B and C preferred stock and the exercise of
8,250 warrants upon completion of this offering, 17,641,449 shares of our common
stock were issued and outstanding and held by approximately 90 stockholders.
The following is a summary description of our capital stock. Our amended
and restated certificate of incorporation and amended and restated bylaws will
provide further information about our capital stock.
COMMON STOCK
Each holder of our common stock will be entitled to one vote per share
on all matters to be voted upon by the stockholders. Subject to preferences that
may be applicable to any outstanding preferred stock, each holder of our common
stock will be entitled to receive dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available. In the
event of our liquidation, dissolution or winding up, each holder of our common
stock will be entitled to share ratably in all assets remaining after payment of
liabilities, subject to the rights of the holders of any class of preferred
stock then outstanding. The holders of our common stock will have no preemptive
or conversion rights or other subscription rights. There will be no redemption
or sinking fund provisions applicable to our common stock. All outstanding
shares of our common stock are fully paid and nonassessable.
PREFERRED STOCK
Our board of directors will have the authority to issue preferred stock
in one or more classes or series and to fix the rights, preferences, privileges
and related restrictions, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or series or the
designation of the class or series, without the approval of our stockholders.
The authority of our board of directors to issue preferred stock without
approval of our stockholders may have the effect of delaying, deferring or
preventing a change of control of our company and may adversely affect the
voting and other rights of the holders of our common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of our common stock, including the loss of voting
control to others. As of the closing of this offering, no shares of our
preferred stock will be outstanding.
REGISTRATION RIGHTS
Set forth below is a summary of the registration rights of the holders
of our Series A redeemable convertible preferred stock, Series B redeemable
convertible preferred stock and Series C redeemable convertible preferred stock,
each of which will convert into common stock upon consummation of this offering.
DEMAND REGISTRATION RIGHTS. At any time after six months following the
effective date of the registration statement relating to our initial public
offering, the holders of at least 50% of the shares with registration rights may
request us to register their shares if the anticipated aggregate offering price
is at least $20,000,000, subject to our right, upon advice from the
underwriters, to reduce the number of shares the holders propose to be
registered. If shares requested to be included in a registration must be
excluded based on the advice of the underwriters, the shares registered will be
allocated among all holders with rights to be included in the registration on a
pro rata basis. We are not obligated to effect a demand registrations under the
following circumstances: after we have effected two demand registrations; during
the period starting 60 days prior to filing of, and ending 180 days after the
effective date of, a registration initiated by us; or, if we shall furnish to
the holders requesting registration of their shares a certificate
61
signed by our Chief Executive Officer or Chairman of the Board stating that in
the good faith judgment of our board of directors, it would be seriously
detrimental to us and our stockholders for a registration statement to be
effected at that time. Upon the delivery of the certificate, we shall have the
right to defer the request for a period of not more than 90 days, provided that
we may not exercise the right of deferral more than once in any 12 month period.
PIGGYBACK REGISTRATION RIGHTS. The holders of shares with registration
rights have the right to include their shares in any registration we initiate
for our capital stock, other than registrations relating solely to the sale of
securities to participants in a stock plan, a registration relating to a
corporate reorganization or other transaction under Rule 145 of the Securities
Act, a registration on a form that does not include substantially the same
information as would be required to be included in a registration statement
covering their shares or a registration in which the only common stock being
registered is common stock issuable upon the conversion of debt securities also
being registered. In our initial registration, the underwriters may, in their
sole discretion, exclude all or part of the shares requested to be registered on
behalf of all holders having the right to include shares in the registration. In
our subsequent registrations, the underwriters may, in their sole discretion,
limit the number of shares requested to be registered on behalf of all holders
having the right to include shares in the registration to not less than 25%. If
shares to be included in a registration must be excluded based on the advice of
the underwriters, the shares registered will be allocated among all holders with
rights to be included in the registration on a pro rata basis. We have the right
to terminate any registration we initiate prior to its effectiveness regardless
of any request for inclusion by any stockholders.
FORM S-3 REGISTRATION RIGHTS. After we have qualified for registration
on Form S-3, which will not occur until at least 12 months after we become a
public reporting company, holders of at least 50% of the shares with
registration rights may request in writing that we effect a registration of
their shares on Form S-3. We are not obligated to effect a registration on
Form S-3 if Form S-3 is not available for the offering by the holders; the
holders, together with holders of any other securities entitled to inclusion in
the registration, propose to sell securities at an aggregate price to the public
of less than $500,000; we shall furnish to the holders requesting registration
of their shares a certificate signed by our Chief Executive Officer or Chairman
of the Board stating that in the good faith judgment of our board of directors,
it would be seriously detrimental to us and our stockholders for a registration
statement to be effected at that time; or, we have, within the 12 month period
preceding the date of the request, already effected two registrations on
Form S-3 for the holders of shares with registration rights.
TERMINATION OF REGISTRATION RIGHTS. No holder of shares with
registration rights shall be entitled to exercise any registration rights after
five years following the consummation of our initial public offering or, as to
any holder, such earlier time at which our common stock is traded on a
recognized national exchange, the holder owns less than 5% of our outstanding
shares and all registrable shares held by the holder can be sold under Rule 144
of the Securities Act during a three-month period without registration.
WARRANTS
As of March 31, 2000, we had outstanding warrants to purchase an
aggregate of 34,500 shares of our Series B redeemable convertible preferred
stock at an exercise price per share of $4.00. The exercise price and number of
shares of our Series B redeemable convertible preferred stock issuable in
connection with these warrants are subject to adjustment for subdivisions,
combinations and other issuances of our redeemable convertible preferred stock,
and for any reclassifications, capital reorganization or other change in our
redeemable convertible preferred stock. We issued 26,250 warrants to
Comdisco, Inc. in connection with equipment lease financing. These warrants are
exercisable for seven years from the date of issuance or five years after our
initial public offering of our common stock, whichever is earlier, and will be
exercisable for shares of common stock upon completion of this offering. The
remaining 8,250 warrants are exercisable until the earlier of September 30,
2001, our initial public offering or the sale of our company.
62
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW, OUR AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND OUR AMENDED AND RESTATED BYLAWS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We will be a Delaware corporation subject to the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 generally
provides that a stockholder acquiring more than 15%, but less than 85%, of the
outstanding voting stock of a corporation subject to Section 203 may not engage
in a "business combination," as defined in Section 203, with the corporation for
a period of three years from the date on which that stockholder became an
"interested stockholder," as defined in Section 203, unless:
- prior to that date the board of directors of the corporation approved
either the business combination or the transaction in which the
stockholder became an interested stockholder; or
- the business combination is approved by the board of directors of the
corporation and authorized by the holders of at least 66 2/3% of the
outstanding voting stock of the corporation not owned by the
interested stockholder.
A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to a stockholder. In general, an
"interested stockholder" is a person who, together with its affiliates, owns, or
within three years prior to the determination of the interested stockholder
status, did own, 15% or more of the voting stock of the corporation.
Section 203 could prohibit or delay a merger or other takeover or change of
control transaction of Kinzan and, accordingly, may discourage actions that
could result in a premium over the market price for the shares held by our
stockholders.
ISSUANCE OF PREFERRED STOCK
Our board of directors will be authorized to issue 5,000,000 shares of
preferred stock and determine the powers, preferences and special rights of any
unissued series of preferred stock, including voting rights, dividend rights,
terms of redemption, conversion rights and the designation of the series,
without the approval of our stockholders. As a result, our board of directors
could issue preferred stock quickly and easily, which could adversely affect the
rights of holders of our common stock. Our board of directors could issue the
preferred stock with terms calculated to delay or prevent a change in control or
make removal of management more difficult.
STOCKHOLDER ACTION; SPECIAL MEETINGS OF STOCKHOLDERS
Our amended and restated bylaws will provide that our stockholders may
not take action by written consent, and can only take action at a duly called
annual or special meeting of our stockholders. Our bylaws will further provide
that, unless otherwise prescribed by statute or by our amended and restated
certificate of incorporation, special meetings of our stockholders may only be
called by the Chairman of the Board, the President or the Secretary of our
company, at the written request of at least a majority of the entire board of
directors or the record holders of at least a majority of the outstanding shares
of our common stock. These provisions could discourage potential acquisition
proposals and could delay or prevent a change in control. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by the
board of directors and to discourage particular transactions that may involve an
actual or threatened change of control. These provisions are designed to reduce
our vulnerability to an unsolicited acquisition proposal and to discourage
particular tactics that may be used in proxy contests. These provisions could
have the effect of discouraging others from making tender offers for our shares.
NASDAQ SYMBOL
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol KNZN.
63
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate
of shares of common stock, assuming no exercise of the underwriters'
over-allotment option. All of the shares of common stock sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares of
our common stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 of the Securities Act. These 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 701 under the
Securities Act. These rules are summarized below.
Sales of substantial amounts of our common stock, including shares
issued upon exercise of outstanding options, in the public market after this
offering could cause the prevailing market price of our common stock to fall or
impair our ability to raise equity capital in the future. The following table
indicates when the approximately shares of our common stock that are not
being sold in the offering, but which will be outstanding upon completion of
this offering, will be eligible for sale into the public market:
NUMBER OF SHARES DATE
- ---------------- ----
0 ............. Immediately after the date of this prospectus
............. At various times after the date of this prospectus and
prior to 180 days after the effective date of the
registration statement containing this prospectus
............. 180 days after the effective date of the registration
statement containing this prospectus, subject in some cases
to volume limitations
............. At various times after 180 days following the effective
date of the registration statement containing this
prospectus
LOCK-UP AGREEMENTS
All of our executive officers and directors, the holders of
approximately % of our common stock and the holders of % of our options have
agreed, for a period of 180 days from the date of this prospectus, without the
prior written consent of Chase Securities Inc., not to, directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in, make
any short sale, pledge or otherwise dispose of any shares of our common stock or
any securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire our common stock, other than the exercise of stock
options and specific family and estate planning transfers. In addition, if the
holder is not an individual, the holder may transfer shares of our common stock
or any securities convertible into or exchangeable or exercisable for or any
other rights to purchase or acquire our common stock to its members,
stockholders, partners or affiliates, so long as the transferee agrees to be
bound by the terms of this paragraph. Chase Securities Inc. may remove these
lock-up restrictions prior to the expiration of the lock-up period without prior
public notice.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares of
our common stock for at least one year,
64
including the holding period of any prior owner other than an affiliate, would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this
offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Kinzan.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares of our common
stock in connection with a compensatory stock or option plan or other written
agreement is eligible to resell those shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
Six months after the effective date of the registration statement
containing this prospectus, the holders of shares of our common
stock, or their transferees, will be entitled to registration rights under the
Securities Act. Please see "Description of Capital Stock--Registration Rights."
After registration, these shares will generally be freely tradable without
restriction under the Securities Act. These sales could cause the trading price
of our common stock to decline, perhaps substantially.
STOCK OPTIONS
As of March 31, 2000, we had granted options to purchase 6,168,000
shares of our common stock, of which 2,705,000 are outstanding. Within
12 months after this offering, we intend to file a registration statement under
the Securities Act covering 6,300,000 shares of our common stock issued or
reserved for issuance under our 1999 Stock Option/Stock Issuance Plan and
2,000,000 shares of our common stock available for future grant under our 2000
Stock Option Plan and our 2000 Employee Stock Purchase Plan which will become
effective upon completion of this offering. Shares of our common stock
registered under that registration statement will, subject to vesting provisions
and Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after any applicable 180-day lock-up
agreements expire or are terminated.
65
UNDERWRITING
We have entered into an underwriting agreement with the underwriters
named below. Chase Securities Inc., Thomas Weisel Partners LLC and William
Blair & Company, L.L.C. are acting as representatives of the underwriters. Chase
H&Q is the business name Chase Securities Inc. uses to describe its equity
underwriting business. Subject to the terms and conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the number of
shares of common stock set forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
Chase Securities Inc.....................................
Thomas Weisel Partners LLC...............................
William Blair & Company, L.L.C...........................
----------
Total....................................................
==========
The underwriting agreement provides that the obligations of the
underwriters are subject to specified conditions, including the absence of any
material adverse change in our business and the receipt of certificates,
opinions and letters from us, our counsel and our independent auditors. The
underwriters are committed to purchase all the shares of common stock offered by
us, other than those shares covered by the over-allotment option described
below, if they purchase any of the shares.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price shown on the cover page of this
prospectus and to selected dealers at that price less a concession not in excess
of $ per share. The underwriters may allow, and those dealers may
re-allow, a concession not in excess of $ per share to other dealers.
After the initial public offering of shares, the underwriters may change the
public offering price and other selling terms. The representatives have advised
us that the underwriters do not intend to confirm discretionary sales in excess
of 5% of the shares of common stock offered hereby.
We have granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to
additional shares of common stock at the initial public offering
price, less the underwriting discounts shown on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of those additional shares which the number of shares of common stock
offered to be purchased by it shown in the above table bears to the total number
of shares of common stock offered by us. We will be obligated pursuant to this
option to sell shares to the underwriters to the extent the option is exercised.
The underwriters may exercise this option only to cover over-allotments made in
connection with the sale of shares of common stock offered by us.
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us in connection with this offering.
The underwriting discount was determined through negotiations with the
underwriters, and equals the public offering price per share of common stock,
less the amount paid by the underwriters to us per share of common stock. These
amounts are shown assuming
66
both no exercise and full exercise of the underwriters' option to purchase
additional shares of our common stock.
TOTAL
---------------------
WITHOUT WITH
OVER- OVER-
ALLOTMENT ALLOTMENT
--------- ---------
Per share............................................. $ $
Total.................................................
We will pay the offering expenses, estimated to be $ million, excluding
the underwriting discounts and commissions.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
All of our executive officers, directors, the holders of % of our
common stock and the holders of % of our options have agreed, for a period of
180 days from the date of this prospectus, without the prior written consent of
Chase Securities Inc., not to sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of our common stock or any securities convertible into our
exchangeable or exercisable for or any other rights to purchase or acquire our
common stock, other than the exercise of stock options and specific family and
estate planning transfers. In addition, if the holder is not an individual, the
holder may transfer shares of our common stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire our common stock to its members, stockholders, partners or affiliates,
so long as the transferee agrees to be bound by the terms of this paragraph.
During this period, each of our executive officers and directors, the holders of
% of our common stock and the holders of % of our options have agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of common stock or other securities issued by us for a period of 180
days from the date of this prospectus.
We have agreed that without the prior written consent of Chase
Securities Inc., we will not, for a period of 180 days following the date of
this prospectus, directly or indirectly, sell, offer, contract to sell, make any
short sale, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of common stock or any securities convertible
into or exercisable for or any rights to purchase or acquire common stock, or
enter into any swap or other agreement that transfers, either in whole or in
part, the economic consequences of ownership of common stock. The preceding
sentence shall not apply to (1) the shares of our common stock to be sold in
this offering, (2) shares of our common stock issued upon the exercise of
options or warrants outstanding as of the date of this prospectus and (3) the
issuance of options under our stock option plans, provided that, in each case,
the recipients of the options agree to be bound by the terms of our agreement
with Chase Securities Inc.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to shares of common stock to be sold in this
offering for sale to our employees, directors and parties related to them, and
to service providers and other third parties with whom we have business
relationships. These reserved shares will be sold at the public offering price
that appears on the cover page of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent that any
reserved shares are purchased by these persons. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus.
67
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock in this offering
will be determined by negotiation between us and the representatives of the
underwriters. The factors to be considered in determining the initial public
offering price include prevailing market and economic conditions, the history of
and the prospects for the industry in which we compete, an assessment of our
management, our prospectus, our capital structure, our results of operations in
recent periods and other factors deemed relevant.
Some of the persons participating in this offering may over-allot or
effect transactions that stabilize, maintain or otherwise affect the market
price of the common stock at levels above those that might otherwise prevail in
the open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting syndicate
or the effecting of any purchase to reduce a short position created in
connection with the offering. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member in connection with the offering when
shares of common stock sold by the syndicate member are purchased in a syndicate
covering transaction. Stabilizing transactions may be effected on the Nasdaq
National Market, in the over-the-counter market, or otherwise. Stabilizing
transactions, if commenced, may be discontinued at any time.
In April 2000, entities affiliated with Chase Securities Inc. purchased
an aggregate of 24,391 shares of our Series C redeemable convertible preferred
stock, for an aggregate purchase price of approximately $300,009 million or
$12.30 per share. All of these shares will automatically convert into shares of
common stock on a one-for-one basis upon completion of this offering. The
holders of these shares have agreed for a period of 180 days from the date of
this prospectus not to sell, transfer, assign, pledge or hypothecate these
shares.
Thomas Weisel Partners LLC was organized and registered as a
broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners LLC
has been named as a lead or co-manager on 165 filed public offerings of equity
securities, of which 112 have been completed, and has acted as a syndicate
member in an additional 91 public offerings of equity securities. In
April 2000, an individual affiliated with Thomas Weisel Partners LLC purchased
an aggregate of 813 shares of our Series C redeemable convertible preferred
stock, for an aggregate purchase price of approximately $10,000 or $12.30 per
share. All of these shares will automatically convert into shares of common
stock on a one-for-one basis upon completion of this offering. The holder of
these shares has agreed for a period of 180 days from the date of this
prospectus not to sell, transfer, assign, pledge or hypothecate these shares.
Thomas Weisel Partners LLC does not have any other material relationship with us
or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us under the underwriting agreement
entered into in connection with this offering.
68
LEGAL MATTERS
Weil, Gotshal & Manges LLP, Menlo Park, California will pass upon the
validity of the shares of common stock offered by Kinzan in this prospectus. As
of the date of this prospectus, a partner of Weil, Gotshal & Manges LLP and an
investment partnership composed of partners of Weil, Gotshal & Manges LLP
beneficially own an aggregate of 77,269 shares of our common stock. Simpson
Thacher & Bartlett, New York, New York and Palo Alto, California will pass upon
certain legal matters in connection with this offering for the underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial
statements of our predecessor at December 31, 1998 and for the year ended
December 31, 1998 and for the period from January 1, 1999 to January 28, 1999,
and our financial statements at December 31, 1999 and for the period from
January 29, 1999 to December 31, 1999. We have included the financial statements
of our predecessor and our financial statements in this prospectus and elsewhere
in this registration statement in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act for the common stock offered by this prospectus. This
prospectus, which constitutes a part of that registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to Kinzan
and the common stock offered by this prospectus, we refer you to the
registration statement and to the exhibits and schedules thereto. Statements
made in this prospectus concerning the contents of any document referred to in
this prospectus are not necessarily complete. With respect to each such document
filed as an exhibit to the registration statement, please refer to the exhibit
for a more complete description of the matter involved.
These documents and other information we file with the SEC can be
inspected and copied at the public reference facilities that the SEC maintains
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at 7 World Trade Center, 13th Floor, New York, New York
10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at the principal offices of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information
regarding the operation of the public reference room by calling
1(800) SEC-0330. The SEC also maintains a Web site at HTTP://WWW.SEC.GOV that
makes available the documents and other information we have filed with the SEC.
69
KINZAN, INC. AND PREDECESSOR
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheet of the Predecessor as of December 31, 1998 and
the Company as of December 31, 1999 and March 31, 2000
(unaudited)............................................... F-3
Statements of Operations of the Predecessor for the year
ended December 31, 1998 and the period from January 1,
1999 to January 28, 1999, and the Company for the period
from January 29, 1999 (inception) to December 31, 1999,
the period from January 29, 1999 to March 31, 1999
(unaudited) and the three months ended March 31, 2000
(unaudited)............................................... F-4
Statements of Stockholders' Equity (Deficit) of the
Predecessor for the year ended December 31, 1998 and for
the period from January 1, 1999 to January 28, 1999, and
the Company for the period from January 29, 1999
(inception) to December 31, 1999 and the three months
ended March 31, 2000 (unaudited).......................... F-5
Statements of Cash Flows of the Predecessor for the year
ended December 31, 1998 and for the period from
January 1, 1999 to January 28, 1999, and the Company for
the period from January 29, 1999 (inception) to
December 31, 1999, the period from January 29, 1999 to
March 31, 1999 (unaudited) and the three months ended
March 31, 2000 (unaudited)................................ F-6
Notes to Financial Statements............................... F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Kinzan, Inc.
We have audited the balance sheet of Kinzan, Inc. as of December 31,
1999, and the related statements of operations, stockholders' equity and cash
flows for the period from January 29, 1999 (inception) to December 31, 1999; and
the balance sheet as of December 31, 1998, and the statements of operations,
equity, and cash flows of the Company's predecessor for the year ended
December 31, 1998 and for the period from January 1, 1999 to January 28, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kinzan, Inc., at
December 31, 1999, and the results of its operations and its cash flows for the
period from January 29, 1999 (inception) to December 31, 1999; and the financial
position of the Company's predecessor at December 31, 1998, and the results of
its operations and its cash flows for the year ended December 31, 1998 and for
the period from January 1, 1999 to January 28, 1999 in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
April 6, 2000, except
Note 9, as to which the date
is April 26, 2000.
F-2
KINZAN, INC. AND PREDECESSOR
BALANCE SHEETS
COMPANY
PREDECESSOR -------------------------- PRO FORMA
DECEMBER 31, DECEMBER 31, MARCH 31, STOCKHOLDERS'
1998 1999 2000 EQUITY
------------ ------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
(NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents...................... $ -- $13,802,332 $12,707,272
Accounts receivable, net of allowance of
$28,109 and $31,162 at December 31, 1999 and
March 31, 2000 (unaudited), respectively..... 223,539 990,345 1,297,929
Prepaid and other assets....................... -- -- 91,310
-------- ----------- -----------
Total current assets............................. 223,539 14,792,677 14,096,511
-------- ----------- -----------
Property and equipment, net...................... 177,428 1,012,355 1,271,189
Software licenses and other intangibles, net..... -- 1,902,826 1,786,325
Deposits and other assets........................ -- 17,760 18,760
-------- ----------- -----------
Total assets..................................... $400,967 $17,725,618 $17,172,785
======== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ -- $ 713,632 $ 1,237,514
Accrued payroll and related expenses........... 26,550 136,124 258,978
Other accrued expenses......................... -- 120,551 36,203
Deferred revenue............................... -- -- 900,000
-------- ----------- -----------
Total current liabilities........................ 26,550 970,307 2,432,695
Commitments
Series A redeemable convertible preferred stock,
5,847,895 shares authorized, 5,847,895 issued
and outstanding at December 31, 1999 and March
31, 2000 (unaudited), liquidation preference of
$5,263,105..................................... -- 5,259,840 5,259,840 --
Series B redeemable convertible preferred stock,
5,000,000 shares authorized, 3,900,862 and
3,903,112 issued and outstanding at December
31, 1999 and March 31, 2000 (unaudited),
liquidation preference of $15,603,448 and
$15,612,448, respectively...................... -- 15,569,136 15,578,136 --
Stockholders' equity (deficit):
Common stock, no par value, 30,000,000 shares
authorized at December 31, 1999, 70,000,000 at
March 31, 2000 (unaudited), 4,650,004 and
6,489,754 shares issued and outstanding and
December 31, 1999 and March 31, 2000
(unaudited).................................... -- 1,170,950 2,370,826 23,208,802
Equity (Predecessor)............................. 374,417 -- -- --
Note receivable from related parties............. -- -- (511,545) (511,545)
Deferred compensation............................ -- (912,717) (1,348,672) (1,348,672)
Accumulated deficit.............................. -- (4,331,898) (6,608,495) (6,608,495)
-------- ----------- ----------- -----------
Stockholders' equity (deficit)................... 374,417 (4,073,665) (6,097,886) $14,740,090
-------- ----------- ----------- ===========
Total liabilities and stockholders' equity
(deficit)...................................... $400,967 $17,725,618 $17,172,785
======== =========== ===========
See accompanying notes.
F-3
KINZAN, INC. AND PREDECESSOR
STATEMENTS OF OPERATIONS
PREDECESSOR COMPANY
----------------------- --------------------------------------
JANUARY 29 THREE
(INCEPTION) MONTHS
YEAR ENDED JANUARY 1 TO JANUARY 29 ENDED
DECEMBER TO DECEMBER TO MARCH 31,
JANUARY MARCH 31,
31, 28, 31, 1999 2000
1998 1999 1999
----------- --------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
Revenues........................... $1,566,149 $123,207 $1,972,564 $ 254,094 $ 828,528
Cost of revenues................... 1,106,331 152,562 1,745,417 189,200 797,591
----------- --------- ----------- ---------- -----------
Gross profit....................... 459,818 (29,355) 227,147 64,894 30,937
Operating Expenses:
Selling and marketing............ 613,365 36,068 2,261,951 112,793 1,544,270
Research and development......... 764,036 10,845 1,353,749 90,672 349,802
General and administrative....... 439,811 41,700 461,988 45,716 401,224
Amortization of intangibles...... -- -- 427,174 77,668 116,501
Amortization of deferred
compensation................... -- -- 37,233 849 74,570
----------- --------- ----------- ---------- -----------
Total operating expenses........... 1,817,212 88,613 4,542,095 327,698 2,486,367
----------- --------- ----------- ---------- -----------
Operating loss..................... (1,357,394) (117,968) (4,314,948) (262,804) (2,455,430)
----------- --------- ----------- ---------- -----------
Interest income (expense), net..... -- -- (16,950) (23,364) 178,833
----------- --------- ----------- ---------- -----------
Net loss........................... $(1,357,394) $(117,968) $(4,331,898) $(286,168) $(2,276,597)
=========== ========= =========== ========== ===========
Basic and diluted net loss per
share............................ $ -- $ -- $ (1.50) $ (0.13) $ (0.67)
=========== ========= =========== ========== ===========
Shares used in computing basic and
diluted net loss per share....... -- -- 2,896,145 2,213,714 3,418,664
=========== ========= =========== ========== ===========
Pro forma basic and diluted net
loss per share (unaudited)....... $ (0.59) $ (0.13) $ (0.17)
=========== ========== ===========
Pro forma shares used in computing
basic and diluted net loss per
share (unaudited)................ 7,382,055 2,213,714 13,168,599
=========== ========== ===========
See accompanying notes.
F-4
KINZAN, INC. AND PREDECESSOR
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NOTE TOTAL
COMMON STOCK RECEIVABLE STOCKHOLDERS'
---------------------- FROM RELATED DEFERRED ACCUMULATED EQUITY
EQUITY SHARES AMOUNT PARTIES COMPENSATION DEFICIT (DEFICIT)
---------- --------- ---------- ------------ ------------- ------------ -------------
PREDECESSOR:
Balance at January 1, 1998.... $ -- $ -- $ -- $ $ -- $ --
Net increase in amounts due
to parent................. 1,731,811 -- -- -- -- -- 1,731,811
Net loss.................... (1,357,394) -- -- -- -- -- (1,357,394)
---------- --------- ---------- --------- ----------- ----------- -----------
Balance at December 31,
1998........................ $ 374,417 -- -- $ -- -- -- $ 374,417
========== ========= ========== ========= =========== =========== ===========
Net decrease in amounts due
to parent................. (256,449) -- -- -- -- -- (256,449)
Net loss.................... (117,968) -- -- -- -- -- (117,968)
---------- --------- ---------- --------- ----------- ----------- -----------
Balance at January 28, 1999... $ -- -- $ -- $ -- $ -- $ -- $ --
========== ========= ========== ========= =========== =========== ===========
COMPANY:
Initial capitalization
January 29, 1999.......... $ -- 4 $ -- $ -- $ -- $ -- --
Issuance of common stock.... -- 3,050,000 61,000 -- -- -- 61,000
Net loss.................... -- -- -- -- -- (4,331,898) (4,331,898)
Deferred compensation
related to stock
options................... -- -- 949,950 -- (949,950) -- --
Amortization of stock-based
compensation................ -- -- -- -- 37,233 -- 37,233
Exercise of common stock
options..................... -- 1,600,000 160,000 -- -- -- 160,000
---------- --------- ---------- --------- ----------- ----------- -----------
Balance at December 31,
1999........................ $ -- 4,650,004 $1,170,950 $ -- $ (912,717) $(4,331,898) $(4,073,665)
========== ========= ========== ========= =========== =========== ===========
Net loss (unaudited)........ -- -- -- -- -- (2,276,597) (2,276,597)
Issuance of common stock for
services.................. -- 1,750 3,500 -- -- -- 3,500
Deferred Compensation
related to stock options
(unaudited)............... -- -- 510,525 -- (510,525) -- --
Amortization of stock-based
compensation
(unaudited)............... -- -- 74,570 -- 74,570
Exercise of common stock
options (unaudited)....... -- 1,838,000 685,851 -- -- -- 685,851
Notes receivable from
related parties for
exercise of options....... -- -- -- (511,545) -- -- (511,545)
---------- --------- ---------- --------- ----------- ----------- -----------
Balance at March 31, 2000
(unaudited)................. $ -- 6,489,754 $2,370,826 $(511,545) $(1,348,672) $(6,608,495) $(6,097,886)
========== ========= ========== ========= =========== =========== ===========
See accompanying notes.
F-5
KINZAN, INC. AND PREDECESSOR
STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY
--------------------------- --------------------------------------------
JANUARY 29 THREE MONTHS
(INCEPTION)
YEAR ENDED JANUARY 1 TO JANUARY 29 ENDED
DECEMBER 31, TO DECEMBER 31, TO MARCH 31,
JANUARY 28, MARCH 31,
1998 1999 1999 1999 2000
------------- ----------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Reconciliation of net loss to net cash (used
in) provided by operating activities:
Net loss.................................. $(1,357,394) $ (117,968) $(4,331,898) $ (286,168) $(2,276,597)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization........... -- -- 609,672 87,415 218,068
Amortization of deferred compensation... -- -- 37,233 849 74,570
Non-cash interest expense............... -- -- 41,571 -- --
Changes in operating assets and
liabilities:
Accounts receivable..................... (223,539) 150,064 (990,345) (99,844) (307,584)
Deposits and other assets............... -- -- (17,760) (8,855) (92,310)
Accounts payable........................ -- -- 713,632 136,761 523,882
Accrued payroll and related expenses.... 26,550 -- 136,124 -- 122,854
Other accrued expenses.................. -- 224,353 120,551 30,978 (84,348)
Deferred Revenue........................ -- -- -- -- 900,000
----------- ----------- ----------- ---------- -----------
Net cash used in operating activities....... $(1,554,383) $ 256,449 $(3,681,220) $ (138,864) $ (921,465)
INVESTING ACTIVITIES:
Purchases of property and equipment......... (177,428) -- (1,024,851) (38,258) (360,400)
Cash paid for business acquired............. -- -- (2,000,000) (2,000,000) --
----------- ----------- ----------- ---------- -----------
Net cash used in investing activities....... (177,428) -- (3,024,851) (2,038,258) (360,400)
FINANCING ACTIVITIES:
Common stock options exercised.............. -- -- 160,000 -- 685,850
Issuance of common stock.................... -- -- 61,000 -- 3,500
Issuance of Series A Preferred, net......... -- -- 4,731,731 2,200,000 --
Issuance of Series B Preferred, net......... -- -- 15,555,672 23,488 9,000
Change in predecessor equity................ 1,731,811 (256,449)
Note receivable from related parties........ -- -- -- -- (511,545)
----------- ----------- ----------- ---------- -----------
Net cash provided by financing activities... 1,731,811 (256,449) 20,508,403 2,223,488 186,805
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents............................... -- -- 13,802,332 46,366 (1,095,060)
Cash and cash equivalents at beginning of
period.................................... -- -- -- -- 13,802,332
----------- ----------- ----------- ---------- -----------
Cash and cash equivalents at end of
period.................................... $ -- $ -- $13,802,332 $ 46,366 $12,707,272
=========== =========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest.... $ -- $ -- $ -- $ -- $ --
=========== =========== =========== ========== ===========
Preferred stock issued in lieu of interest
payment................................... $ -- $ -- $ 41,571 $ -- $ --
=========== =========== =========== ========== ===========
Convertible note issued for business
acquired.................................. $ $ $ 500,000 $ 500,000 $ --
=========== =========== =========== ========== ===========
See accompanying notes.
F-6
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Kinzan.com incorporated as a California corporation on November 30, 1998
and commenced operations in January 1999. In early 2000, Kinzan.com
reincorporated as a Delaware corporation and changed its name to Kinzan, Inc.
(the "Company"). The Company provides a platform for extending and managing
business relationship networks on the Internet. The Company's outsourced
platform offers a brandable suite of Web applications, configurable hardware,
scalable hosting services, sophisticated development and deployment capabilities
and customer care programs.
BASIS OF PRESENTATION
The Company commenced operations when it acquired the Siteman business
unit from iXL Enterprises, Inc. ("iXL") (See Note 2). Therefore, the basis of
presentation for the Company is effective as of that date. Additionally, the
Company is required to present financial statements for the Siteman business as
it existed under the ownership of iXL. Therefore, predecessor company financial
statements are presented for the year ended December 31, 1998 and the period
from January 1 to January 28, 1999.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 2000 and for the period
from January 29, 1999 (inception) to March 31, 1999, and for the three months
ended March 31, 2000 are unaudited, but include all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for fair
presentation of the financial position as of such date and the operating results
and cash flows for such periods. Results for interim periods are not necessarily
indicative of results to be expected for the entire year or any future period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and all highly liquid
investments with maturities of less than three months from the date of purchase.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents.
The Company limits its exposure by placing its cash and investments with high
credit quality financial institutions.
During the period ending December 31, 1999, the Company had an agreement
with a related party and agreements with two major customers, which accounted
for 38% and 42% of total revenue, respectively.
F-7
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (generally three to five years), using the
straight-line method. Amortization of leasehold improvements is amortized over
the shorter of the lease term or the estimated useful life of the related
assets.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standard ("SFAS")
No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, the Company regularly evaluates its long-lived assets
for indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. The Company has not identified any such
impairment to date.
REVENUE RECOGNITION
The Company earns revenues from (i) hosting and access fees charged to
customers who use its Web applications; (ii) services rendered to implement a
customer's branded version of the Company's hosted applications onto their
systems (iii) engineering and related services for applications development and
(iv) customer support and maintenance.
The Company recognizes revenues for hosting services on a straight-line
basis over the term of the hosting agreement for customers who sign one to two
year agreements and pay upfront fees. The Company recognizes revenues from
customers who do not pay an upfront fee based on the number of affiliate Web
sites as and when such Web sites are deployed, pursuant to the hosting
agreement. Services rendered for integration of hosted applications to a
customer's computer system are recorded as revenue when services are rendered.
In general, such services are one-time fees, are separately priced and are
incremental to hosting fees and ongoing customer support and maintenance
charges. Engineering and related services for application development are
recorded as revenue when the services are rendered. Customer support and
maintenance fees are recorded as revenue based on a per Web site charge as Web
sites are deployed. Certain agreements contain minimum fees for customer support
unrelated to the number of Web sites deployed. The Company records amounts
billed to customers in excess of recognized revenue as deferred revenue.
SOFTWARE LICENSES AND OTHER INTANGIBLES
Software licenses and other intangibles were acquired as part of the
acquisition of the Siteman business unit. These costs are being amortized over a
five-year period. As of December 31, 1999 and March 31, 2000, accumulated
amortization of software licenses and other intangibles was $427,174 and
$116,501, respectively.
F-8
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
PRODUCT DEVELOPMENT COSTS
Product development costs related to research, design and development of
Web applications are charged to research and development expenses as incurred
until technological feasibility has been established. To date, completing a
working model of the Company's applications and the general release of the
product have substantially coincided. As a result, the Company has not
capitalized any application development costs since such costs have been
insignificant.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION,
the Company has elected to follow Accounting Principles Board Opinion, or APB,
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations in
accounting for stock-based compensation. Under APB No. 25, if the exercise price
of the Company's employee and director stock options equals or exceeds the fair
value of the underlying stock on the date of grant, no compensation expense is
recognized. When the exercise price of the employee or director stock option is
less than the fair value of the underlying stock on the grant date, the Company
records deferred stock compensation for the difference and amortizes this amount
to expense over the vesting period of the options. Options or stock awards
issued to non-employees are recorded at their fair value as determined in
accordance with SFAS No. 123 and EITF 96-18, and recognized over the related
service period.
COMPREHENSIVE LOSS
In accordance with SFAS No. 130, REPORTING COMPREHENSIVE INCOME, all
components of comprehensive loss including net loss, are reported in the
financial statements in the period in which they are recognized. Comprehensive
loss, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Net loss and other comprehensive loss, including foreign
currency translation adjustments, and unrealized gains and losses on investments
shall be reported, net of their current tax effect, to arrive at comprehensive
loss. To date, there have been no differences between the Company's net loss and
its total comprehensive loss.
NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Company computes net loss per share in accordance with SFAS
No. 128, EARNINGS PER SHARE, and SEC Staff Accounting Bulletin (or SAB) No. 98.
Under the provisions of SFAS No. 128, basic net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares
outstanding during the period. Potentially dilutive securities composed of
incremental common shares issuable upon the exercise of stock options and
warrants, and common shares issuable on conversion of preferred stock, were
excluded from historical diluted loss per share because of their anti-dilutive
effect.
F-9
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
Under provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------------
(UNAUDITED)
Numerator:
Net loss.................................... $(4,331,898) $(2,276,597)
----------- -----------
Denominator for historical basic and diluted
calculations:
Weighted average common shares
outstanding............................... 2,896,145 3,418,664
----------- -----------
Historical net loss per share:
Basic and diluted........................... $ (1.50) $ (0.67)
----------- -----------
Pro forma net loss per share has been computed as described above and
also gives effect to common equivalent shares arising from preferred stock that
will automatically convert upon the closing of an initial public offering (using
the as-if converted method from the original date of issuance).
Unaudited pro forma stockholders' equity at March 31, 2000, as adjusted
for the conversion of the convertible preferred stock into 9,751,007 shares of
common stock, is disclosed on the balance sheet.
SEGMENT REPORTING
The Company has determined that it operates in only one segment as
defined by SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
will be effective for fiscal year beginning after June 15, 2000. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company believes the adoption of SFAS No. 133
will not have a material effect on the financial statements because it does not
currently hold any derivative instruments and does not engage in any hedging
activities.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, deferred income tax assets and
liabilities reflect the future tax
F-10
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
consequences of the temporary differences between the financial reporting and
tax basis of assets and liabilities and are measured using current enacted tax
rates and laws. A valuation allowance is provided against deferred income tax
assets when realization is uncertain.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, other current assets and accounts payable and
other current liabilities are carried at cost which management believes
approximates fair value because of the short-term maturity of these instruments.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $68,702 for the
period from January 29, 1999 (inception) to December 31, 1999, and $97,341 for
the three months ended March 31, 2000 (unaudited), respectively.
2. ACQUISITION OF SITEMAN BUSINESS UNIT
On January 29, 1999, the Company entered into an Asset Purchase
Agreement with iXL to purchase their Siteman business unit (the "Acquired
Business"). The Company acquired a patent, licenses, equipment, certain
customers and other items relating to the Acquired Business. In exchange, the
Company paid $2.0 million in cash and issued a $500,000 convertible promissory
note with interest at five percent per annum. The promissory note was
subsequently converted to 561,339 shares of Series A redeemable convertible
preferred stock in April 1999. The Company recorded the purchase price as
follows:
Purchase price of Acquired Business......................... $2,500,000
Less: estimated fair market value of tangible assets
acquired.................................................. (170,000)
----------
Software licenses and other intangibles..................... $2,330,000
==========
Intangibles consist of intellectual property as follows: customer
accounts, a patent and licenses. Intangibles are being amortized on a
straight-line basis over a period of five years.
In connection with the purchase, the Company and iXL entered into a
Service Agreement in which Kinzan, directly or through its customers or
contractors, will purchase $1.5 million of services within 30 months from the
purchase date. If iXL has not been engaged to perform services totaling this
amount by July 29, 2001, the Company will pay iXL a lump sum payment for the
difference between the $1.5 million and the aggregate fees received by iXL
during the term of the agreement. Such amount, if any, would be recorded as
additional intangibles. At December 31, 1999 and March 31, 2000 (unaudited),
$1,161,143 and $984,990, respectively, remains committed under this agreement.
F-11
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the following:
Computer equipment.......................................... $1,080,591
Office furniture and equipment.............................. 114,260
----------
1,194,851
Less accumulated depreciation............................... (182,496)
----------
$1,012,355
==========
4. COMMITMENTS
LEASES
The Company leases various office space under non-cancelable operating
leases. Future minimum lease payments for all leases with initial terms of one
year or more are as follows for each year ending December 31:
OPERATING LEASES
----------------
2000 $262,752
2001 136,462
2002 132,944
2003 91,669
--------
Total minimum lease payments................................ $623,827
========
Rent expense for the period from January 29 (inception) to December 31,
1999, and for the three month period ended March 31, 2000 totaled $144,104 and
$69,122, respectively.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company issued 5,847,895 shares of Series A Redeemable Preferred
Stock ("Series A") at $0.90 per share for net proceeds of $4.7 million and
3,900,862 shares of Series B Redeemable Preferred Stock ("Series B") at $4.00
per share for net proceeds of $15.6 million during 1999. Both the Series A and
Series B holders ("the holders") shall be entitled to receive non-cumulative
dividends at the rate of 8% in preference to any dividend on the common stock.
The holders shall also be entitled to participate pro rata in any dividends paid
on the common stock on an as-if-converted basis. The holders have a liquidation
preference to receive, pro rata in preference to the holders of the common
stock, a per share amount equal to their original issue price plus any declared
but unpaid dividends. The holders have the same voting rights as holders of
common stock.
All series of redeemable preferred stock are convertible on a
one-for-one basis into shares of common stock, subject to adjustment. The
Series A and B shall automatically convert into common stock in the event that
the holders of at least two-thirds of the outstanding Series A and B consent to
such
F-12
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
- --(CONTINUED)
conversion, or upon the closing of the initial public offering contemplated by
this prospectus as long as the initial public offering price and aggregate
proceeds meet minimum requirements, as defined by the agreements.
At any time after December 31, 2004, the Series A and B is redeemable at
the election of the holders of at least two-thirds, at a purchase price equal to
the original purchase price plus declared and unpaid dividends.
STOCK PURCHASE WARRANTS
In connection with the issuance of convertible promissory notes, the
Company issued warrants to purchase 10,500 shares of Series B Redeemable
Convertible Preferred Stock at $4.00 per share. As of December 31, 1999, no
warrants have been exercised and all remain outstanding. These warrants expire
on the earlier of September 30, 2001 or the closing of an initial public
offering.
STOCK OPTION PLAN
The Company has granted options to its employees and consultants
pursuant to its 1999 Stock Option/Stock Issuance Plan (the "Plan"). The Company
adopted the Plan in March 1999. Under the plan, the Board of Directors may grant
incentive stock options and nonstatutory options to employees, directors and
consultants of the Company. Options issued under the Plan generally vest over
four years. No options granted under the Plan have a term in excess of ten years
from the date of grant. The exercise price of an incentive stock option may not
be less than 100% of the fair market value of the common stock on the date of
grant. The exercise price of a nonstatutory option may not be less than 85% of
the fair market value of the common stock on the date of grant.
Under the Plan, the Company has the right to grant options which are
exercisable for unvested shares of common stock. Should the optionee cease
service while holding such unvested shares, the Company has the right to
repurchase, at the exercise price paid per share, all or part of any of those
unvested shares.
At December 31, 1999, 6,300,000 common shares have been reserved for
issuance and 918,000 options were available for future grant.
F-13
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
- --(CONTINUED)
The following table summarizes stock option plan activity for the year
ended December 31, 1999:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Outstanding--beginning of year...................... -- --
Granted........................................... 5,422,000 $0.19
Exercised......................................... (1,600,000) 0.10
Forfeited......................................... (25,000) 0.20
----------
Outstanding--end of year............................ 3,797,000 0.23
==========
Exercisable at end of year.......................... 3,797,000
==========
Weighted average fair value of options granted
during the year................................... $ (0.13)
==========
The following table summarizes information about stock options
outstanding as of December 31, 1999:
WEIGHTED
AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
- -------------- --------- ---------------- ----------------
0.10$..... 2,710,000 9.3 $0.10
0.20$..... 610,000 9.8 $0.20
1.00$..... 477,000 10 $1.00
--------- ----- -----
3,797,000 9.4 $0.23
Pro forma information regarding net loss is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using the minimum value option
pricing model with the following weighted average assumptions for the period
from January 29 (inception) to December 31, 1999; risk-free interest rate of
6.0%; dividend yield of 0%; volatility of 70%; and a weighted-average expected
life of the options of four to five years.
The minimum value option pricing method is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
F-14
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
- --(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
Company's pro forma information is as follows:
DECEMBER 31,
1999
------------
Pro forma net loss.......................................... $(4,290,914)
===========
Pro forma historical net loss per share, basic and
diluted................................................... $ (1.47)
===========
STOCK BASED COMPENSATION
The Company has recorded deferred compensation of $949,950 and $510,525
for the period from January 29 (inception) to December 31, 1999 and for the
three months ended March 31, 2000 (unaudited), respectively, in connection with
the grants of certain stock options to employees and consultants. Amortization
of deferred stock compensation was $37,233 and $74,570 during the period ended
December 31, 1999 and the three months ended March 31, 2000 (unaudited),
respectively.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
The following table summarizes common shares reserved for future
issuance:
DECEMBER 31,
1999
------------
Convertible preferred stock................................. 9,748,757
Convertible preferred stock warrants........................ 10,500
Common stock options........................................ 3,797,000
----------
Total common shares reserved for issuance................... 13,556,257
==========
6. RELATED PARTY TRANSACTIONS
During 1999, the Company earned revenues for services rendered in
connection with software application and hosting services for electronic
commerce and a license provided to Encanto Networks, Inc. ("Encanto") in
exchange for $750,000 and 300,000 shares of Encanto common stock. The Company
did not record a value for the Encanto common stock as it was not significant.
Encanto is a shareholder of the Company and its President and Chief Executive
Officer is a founder and Chairman of the Board of Kinzan, Inc.
In January 1999, the Company purchased the Acquired Business from iXL.
In connection with this purchase, the Company issued a convertible promissory
note to iXL that was converted into 561,339 shares of Series A redeemable
convertible preferred stock. In addition, the Company subleased certain office
and hosting space from iXL, incurring expenses of $188,857.
In April 1999, the Company entered into a three-year consulting services
agreement with Dextra Technologies, Inc. ("Dextra"), a shareholder of the
Company, under which Dextra is to provide engineering
F-15
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
6. RELATED PARTY TRANSACTIONS --(CONTINUED)
consulting services to the Company on various negotiated projects. In addition,
the former president and current board member of Dextra also serves as a board
member of the Company. The Company paid Dextra $229,920 and $49,014 for services
performed at December 31, 1999 and March 31, 2000, respectively.
During January 2000, the Company entered into an agreement with Ares
International Corporation ("Ares"), a shareholder of the Company, to provide
training and certain technology to Ares for evaluation over a six-month term. In
connection with this agreement, the Company received cash of $600,000 of which
$300,000 was recorded as revenue for the quarter ended March 31, 2000.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Significant components
of deferred tax assets are shown below:
DECEMBER 31,
1999
------------
Deferred tax assets:
Net operating loss carryforwards.......................... $1,652,000
Other..................................................... 24,000
----------
Total deferred tax assets................................... 1,676,000
Valuation allowance for deferred tax assets............... (1,676,000)
----------
Net deferred tax assets..................................... $ --
==========
A valuation allowance of $1,676,000 has been recognized to offset the
deferred tax assets because management cannot conclude that it is more likely
than not that the deferred tax assets will be realized. At December 31, 1999,
the Company had federal and California net operating loss carryforwards of
approximately $4,053,000 and $4,052,000, respectively. The tax loss
carryforwards will begin expiring in 2019 and 2007, respectively, unless
previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, the use of the
Company's net operating loss and credit carryforwards could be limited in the
event of a cumulative change in ownership of more than 50%.
8. RETIREMENT PLAN
The Company maintains a voluntary deferred compensation savings and
investment plan (the "Plan") in accordance with the provisions of the Internal
Revenue Code Section 401(k) for all employees of the Company. The Plan allows
participants to contribute up to 15% of their annual salary, subject to certain
limitations, as provided by federal law. Each year, the Company's Board of
Directors determines the amount of the Company's matching contributions, if any.
There were no Company matching contributions for the period ended December 31,
1999.
F-16
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
9. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING OF COMMON STOCK
In April 2000, the Board of Directors authorized the Company to proceed
with an initial public offering ("IPO") of its common stock. If the offering is
consummated as presently anticipated, and subject to the occurrence of certain
events, all of the outstanding preferred stock will automatically convert into
common stock. The unaudited pro forma stockholders' equity at March 31, 2000
(unaudited) gives effect to the conversion of all outstanding shares of
convertible preferred stock into 9,751,007 shares of common stock upon the
completion of the offering.
ISSUANCE OF SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK
On April 19 and April 26, 2000, the Company issued an aggregate of
1,392,438 shares of Series C Redeemable Convertible Preferred Stock ("Series C")
at $12.30 per share for proceeds of $17.1 million. The Series C holders shall be
entitled to receive non-cumulative dividends at the rate of 8% in preference to
any dividend on the common stock. The holders of the Series C shall also be
entitled to participate pro rata in any dividends paid on the common stock on an
as-if-converted basis. The holders have a liquidation preference, to receive pro
rata in preference to the holders of the common stock, a per share amount equal
to their original issue price plus any declared but unpaid dividends. The
Series C holders have the same voting rights as holders of common stock. In
connection with the issuance, the number of common shares authorized was
increased to 70,000,000.
All series of redeemable preferred stock are convertible on a
one-for-one basis into shares of common stock, subject to adjustment. The
Series C shall automatically convert into common stock in the event that the
holders of at least two-thirds of the outstanding Series A, B and C consent to
such conversion, or upon the closing of the initial public offering contemplated
by this prospectus as long as the initial public offering price and aggregate
proceeds meet minimum requirements, as defined by the agreements.
Beginning on the fifth anniversary of the closing, the Series C is
redeemable at the election of the holders of at least two-thirds of the
Series C at a purchase price equal to the original purchase price plus declared
and unpaid dividends.
LEASE FINANCING ARRANGEMENT
On March 31, 2000, the Company entered into a financing arrangement with
a leasing company providing up to $3 million to finance computer and office
equipment and leasehold improvements. The lease is secured by the equipment
financed and will be repaid over 42 months. Borrowings under the lease bear an
annual interest rate of 7.75 percent. The Company has drawn down $290,000 of
this lease line as of April 2000.
The lessor also received warrants to purchase 26,250 shares of Series B
Preferred Stock at $4.00 per share. The warrants are exercisable for five years
after the Company's initial public offering. Additionally, the lessor has the
right to invest up to $250,000 in the Company's Series C Redeemable Convertible
Preferred Stock offering. During April 2000, the leasing company exercised this
right and purchased 20,325 shares of Series C redeemable convertible preferred
stock.
F-17
KINZAN, INC.
AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
9. SUBSEQUENT EVENTS --(CONTINUED)
STOCK PURCHASE PLAN
In April 2000, the Company adopted an Employee Stock Purchase Plan (the
"ESPP") whereby employees, at their option, can purchase shares of the Company's
common stock through payroll deductions at the lower of 85% of fair market value
on the ESPP offering date or on certain other predetermined exercise dates. The
Company has reserved 500,000 shares of common stock for issuance under the ESPP.
In April 2000, the Company adopted the 2000 Stock Option/Stock Issuance
Plan. The Company has reserved 1,500,000 shares of common stock for issuance
under the plan.
NOTES RECEIVABLE FROM RELATED PARTIES
In February and March 2000, three executive officers of the Company
signed promissory notes totaling $510,000 in order to pay for the exercise of
their stock options. The outstanding principal balance accrued interest at 6.8%
per year. The notes are due and payable on the fifth anniversary of the
respective issuance dates of the notes. Each note is full recourse to the
executive officer and entitled to the benefits of a pledge agreement entered
into with the Company. As such, various amount of common shares have been
pledged by each of the officers in order to secure their notes. The Company has
the right to accelerate payment of performance of all obligations under the note
and the pledge agreement in the event of a default.
F-18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO]
COMMON STOCK
-----------
PROSPECTUS
--------------
CHASE H&Q
THOMAS WEISEL PARTNERS LLC
WILLIAM BLAIR & COMPANY
---------
, 2000
--------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States
to permit a public offering of the common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade in our 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities being registered. All amounts shown are estimates except for
the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID
-----------------
SEC registration fee........................................ $ 15,180
NASD filing fee............................................. 6,250
Nasdaq National Market fees.................................
Blue Sky qualification fees and expenses....................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Premiums for director and officer insurance.................
Transfer agent fees.........................................
Miscellaneous...............................................
--------
Total..................................................... $
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the General Corporation Law of the State of Delaware, as
amended ("DGCL"), allows a corporation to eliminate the personal liability of
its directors to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
impersonal benefit.
Section 145 of the DGCL provides, among other things, that the corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than an action by or in the right of the corporation) by reason of the fact that
the person is or was a director, officer, agent or employee of the corporation
or is or was serving at the corporation's request as a director, officer, agent
or employee of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding. The power to indemnify applies
if (a) such person is successful on the merits or otherwise in defense of any
action, suit or proceeding, or (b) if such person acted in good faith in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense expenses (including
attorneys' fees but excluding amounts paid in settlement) actually and
reasonably incurred and not to any satisfaction of judgment or satisfaction of
the claim itself, and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication of negligence or
misconduct in the performance of his duties to the corporation, unless the court
believes that in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved
II-1
or dissented at the time, may avoid liability by causing his or her dissent to
such actions to be entered in the books containing the minutes of the meetings
of the board of directors at the time such action occurred or immediately after
such absent director receives notice of the unlawful acts.
The Amended and Restated Certificate of Incorporation of the Registrant will
contain a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by the DGCL. The Amended and Restated Certificate of
Incorporation will also contain a provision that requires the Registrant to
indemnify its officers and directors to the fullest extent permitted by the
DGCL.
The Bylaws of the Registrant will provide that:
- the Registrant shall indemnify its officers and directors to the fullest
extent permitted by the DGCL;
- the Registrant has the power to indemnify its other employees and agents
to the fullest extent permitted by the DGCL; and
- the Registrant must advance expenses as incurred in connection with a
legal proceeding upon an undertaking on behalf of the indemnified party to
repay such amount if it is ultimately determined that the party is not
entitled to indemnification.
The indemnification provisions contained in the Registrant's Amended and
Restated Certificate of Incorporation and Bylaws will not be exclusive of any
other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, the
Registrant maintains insurance on behalf of its directors and executive officers
insuring them against any liability asserted against them in their capacities as
directors or officers or arising out of such status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has issued and sold the following unregistered securities
since its inception:
1. On December 4, 1998, the Registrant issued four shares of its common
stock to three investors for an aggregate purchase price of $0.04.
2. On February 15, 1999, the Registrant issued 3,050,000 shares of its
common stock to four investors for an aggregate purchase price of $61,000.
3. Between April and July 1999, the Registrant issued an aggregate of
5,847,895 shares of its Series A Redeemable Convertible Preferred Stock to a
group of investors for an aggregate purchase price of $5,263,105.
4. Between December 1999 and January 2000, the Registrant issued an
aggregate of 3,903,112 shares of its Series B Redeemable Convertible Preferred
Stock to a group of investors for an aggregate purchase price of $15,612,448.
5. On April 19 and 26, 2000, the Registrant issued an aggregate of
1,392,438 shares of its Series C Redeemable Convertible Preferred Stock to a
group of investors for an aggregate purchase price of $17,126,987.
6. Between October 1999 and March 2000, the Registrant granted and issued
options to purchase an aggregate of 6,141,000 shares of its common stock to
employees and directors pursuant to the Registrant's 1999 Stock Option/Stock
Issuance Plan with a weighted average exercise price per share of $0.68.
7. In October and November 1999, the Registrant issued warrants to purchase
an aggregate of 34,500 shares of its common stock with an exercise price of
$4.00 per share.
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8. In March 2000, the Registrant issued warrants to purchase an aggregate
of 26,250 shares of its common stock with an exercise price of $4.00 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
1.1 Form of Underwriting Agreement.+
2.1 Asset Purchase Agreement between Siteman, Inc. and iXL.,
Inc. and iXL-San Diego, Inc.+
3.1 Amended and Restated Certificate of Incorporation of
Registrant.+
3.2 Amended and Restated Bylaws of Registrant.+
4.1 Specimen Common Stock Certificate.+
4.2 Second Amended and Restated Investors' Rights Agreement
between Kinzan.com and the Investors set forth in the
Agreement, dated April 19, 2000.*
4.3 Form of Warrant.+
5.1 Opinion of Weil, Gotshal & Manges LLP.+
10.1 1999 Stock Option/Stock Issuance Plan.*
10.2 2000 Stock Option Plan.*
10.3 2000 Employee Stock Purchase Plan.*
10.4 Employment Agreement between the Registrant and Gari L.
Cheever, dated June 1, 1999.*
10.5 Form of Indemnification Agreement between the Registrant and
certain of its Directors and Officers.+
10.6 Form of Promissory Note executed by certain officers in
favor of the Registrant.*
10.7 Development and License Agreement, dated as of August 22,
1997, by and between CommerceWave and Encanto Networks,
Inc., as amended as of January 29, 1999.*
10.8 Services Agreement between Siteman, Inc. and iXL, Inc.,
dated January 29, 1999.*
10.9 License Agreement between Siteman, Inc. and iXL, Inc., dated
January 30, 1999.*
10.10 Hosting/Co-Location Services Agreement, dated October 25,
1999, by and between iXL Memphis Inc. and the Registrant.*
10.11 Lease between CB Graham International, Inc. and iXL-San
Diego, Inc., dated August 27, 1998.*
10.12 Sublease between iXL-San Diego, Inc. and Kinzan.com, dated
April 5, 1999.*
10.13 First Amendment to Lease between iXL-San Diego, Inc. and the
Registrant, dated March 19, 1999.*
10.14 Second Amendment to Lease between iXL-San Diego, Inc. and
the Registrant, dated September 1, 1999.*
10.15 Temporary Use License Agreement, dated March 20, 2000, by
and between CB Graham International, Inc. and the
Registrant.*
10.16 Temporary Use License Agreement, dated March 30, 2000, by
and between CB Graham International, Inc. and the
Registrant.*
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Weil, Gotshal & Manges LLP (included in Exhibit
5.1).+
24.1 Powers of Attorney (included on the signature pages
hereto).*
27.1 Financial Data Schedule.*
- ------------------------
* Filed herewith.
+ To be filed by amendment.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the date specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions 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 of
1933 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 of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining liability under the securities Act of 1933,
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 a 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 of
1933, 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 of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto, duly authorized, in Carlsbad, California on the
28th day of April, 2000.
KINZAN.COM
By: /s/ GARI L. CHEEVER
-----------------------------------------
Gari L. Cheever
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gari L. Cheever and Dana S. McGowan, and each of
them his attorney-in-fact, with the power of substitution, for him in any and
all capacities, to sign any amendment or post-effective amendment to this
Registration on Form S-1 or abbreviated registration statement (including,
without limitation, any additional registration filed pursuant to Rule 462 under
the Securities Act of 1933) with respect thereto and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GARI L. CHEEVER
------------------------------------------- President, Chief Executive April 28, 2000
Gari L. Cheever Officer and Director
/s/ DANA S. MCGOWAN
------------------------------------------- Chief Financial Officer April 28, 2000
Dana S. McGowan
/s/ ROBERT J. FRANKENBERG
------------------------------------------- Chairman and Director April 28, 2000
Robert J. Frankenberg
/s/ H. DUBOSE MONTGOMERY
------------------------------------------- Director April 28, 2000
H. Dubose Montgomery
/s/ ALEJANDRO PEREZ ELIZONDO
------------------------------------------- Director April 28, 2000
Alejandro Perez Elizondo
/s/ PETER S. SEALEY
------------------------------------------- Director April 28, 2000
Peter S. Sealey
------------------------------------------- Director April 28, 2000
Kenneth Tai
II-5