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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 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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CONNECTED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 04-3292312
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
24 PRIME PARKWAY
NATICK, MASSACHUSETTS 01760
(508) 652-7300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DAVID A. CANE
CONNECTED CORPORATION
24 PRIME PARKWAY
NATICK, MASSACHUSETTS 01760
(508) 652-7300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
ABIGAIL R. HECHTMAN, ESQUIRE JAMES T. BARRETT, ESQUIRE
BROWN, RUDNICK, FREED & GESMER PALMER & DODGE LLP
ONE FINANCIAL CENTER ONE BEACON STREET
BOSTON, MASSACHUSETTS 02111 BOSTON, MASSACHUSETTS 02108-3190
(617) 856-8200 (617) 573-0100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: as soon as practicable after this registration statement becomes
effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, $.001 par value per share.............. $57,500,000 $15,180
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(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
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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. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES NOR DOES IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 31, 2000
LOGO
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SHARES
COMMON STOCK
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This is the initial public offering of Connected Corporation and we are
offering shares of our common stock. We have applied to list
our common stock on The Nasdaq National Market under the symbol "CNTD."
The stockholders listed on page 61 under the caption "Certain
Transactions -- Preemptive Rights" have the right to purchase up to a total
of shares in our offering.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
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.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS CONNECTED
Per share $ $ $
Total $ $ $
We have granted the underwriters the right to purchase up to
additional shares to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN
BEAR, STEARNS & CO. INC.
WIT SOUNDVIEW
THE DATE OF THIS PROSPECTUS IS , 2000.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND
INDUSTRY DATA............................................. 17
USE OF PROCEEDS............................................. 18
DIVIDEND POLICY............................................. 18
CAPITALIZATION.............................................. 19
DILUTION.................................................... 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 23
BUSINESS.................................................... 32
MANAGEMENT.................................................. 48
CERTAIN TRANSACTIONS........................................ 59
PRINCIPAL STOCKHOLDERS...................................... 62
DESCRIPTION OF CAPITAL STOCK................................ 65
SHARES ELIGIBLE FOR FUTURE SALE............................. 71
UNDERWRITING................................................ 73
LEGAL MATTERS............................................... 76
EXPERTS..................................................... 76
WHERE YOU CAN FIND MORE INFORMATION......................... 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements before
making an investment decision.
OUR BUSINESS
We are a leading provider of application services and software that support
personal computers, or PCs, over the Internet and corporate intranets. With our
eSupport solution, users can solve their PC problems themselves online,
virtually anywhere, 24 hours a day. Our solution automates diagnosis and
self-repair, supports upgrades, and restores data and applications lost due to
such problems as virus damage, lost or stolen PCs, and hard drive crashes. We
believe that our solution is applicable worldwide to companies of all sizes in
all industries. We deliver our eSupport solutions as an application service, in
which we or our partners provide the operational infrastructure, and as a
licensed software application to enterprises seeking to deploy their own
internal eSupport system. We have developed critical technologies that we
believe enable our solution to efficiently support the demands of the largest
enterprises as well as millions of small companies and individual users.
International Data Corporation, an independent market research firm,
estimates that over 112 million PCs were purchased worldwide in 1998, and
expects that annual sales of PCs will grow to 190 million by 2003. This
represents a compound annual growth rate of 14%. Advances in PC hard drive
capacity, distributed software applications, and trends toward remote usage of
laptops have created environments in which the majority of information and
applications resides on personal computers. While businesses have invested in
storage management systems to provide high availability for their servers and
mainframes, they have been unable to provide similar availability for PCs. In
attempting to manage and support large and growing deployments of PCs,
information technology, or IT, staffs are faced with many unique challenges
presented by:
- the sheer volume, complexity, and diversity of applications and data;
- uncooperative, non-technical user communities;
- frequent application changes, amended files, and hardware upgrades;
- frequently lost or damaged systems in uncontrolled environments; and
- increasing remote PC usage.
As a result, we believe most attempts to provide application and data
availability have failed due to the high costs and inefficacy of
manually-intensive PC support processes. The Internet provides a new vehicle for
automating the support of millions of PC users 24 hours a day from any Internet
connection. This provision of online PC support, known as eSupport, is estimated
by International Data Corporation to reach a $14 billion market opportunity in
2003.
We use the Internet and our proprietary technologies to overcome the
challenges of PC support. Using the power of the Internet, our eSupport solution
automatically captures and centrally stores a PC's profile, including data,
applications, and settings, without user involvement. Through a combination of
proprietary data reduction techniques, hierarchical storage management methods,
and computationally efficient software design, we can support millions of
individual users, or the largest enterprise. We plan to leverage these core
technologies to provide a broader range of eSupport capabilities as well as
support additional networked devices.
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Our worldwide strategy is to focus direct sales efforts on larger
enterprises while expanding our partnerships to address small and medium size
businesses. Our current partners include PeoplePC, Inc., and GTE Internetworking
Incorporated. We are seeking to establish additional partnerships with
application service providers, Internet service providers, PC manufacturers, and
IT service outsourcers who address the growing demand for outsourced PC support
services.
Along with our strategic partners, we currently provide eSupport
application services to approximately 12,000 PCs, and our eSupport solution is
currently licensed by over 50 customers for over 85,000 PCs. Our customers range
from small companies and individuals to large multi-national enterprises,
including Amgen, Inc., Ariba, Inc., General Electric Company, Koch Industries,
Inc., Lucent Technologies, Inc., and Unisys Corporation.
THE OFFERING
Common stock offered by Connected................. shares
Common stock to be outstanding after this shares
offering........................................
Use of proceeds................................... General corporate purposes, including
working capital. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol............ CNTD
The number of shares to be outstanding upon completion of this offering is
based on shares outstanding as of March 27, 2000. This number assumes the
conversion into common stock of all of our preferred stock outstanding on that
date and certain warrants upon the closing of this offering, and excludes:
- 8,225,001 shares of common stock issuable upon exercise of stock options
and warrants outstanding at March 27, 2000, at a weighted average
exercise price of $1.74 per share;
- 500,000 shares of common stock reserved for issuance pursuant to our
employee stock purchase plan; and
- 3,553,141 shares of common stock reserved for issuance pursuant to stock
options not yet granted under all of our stock option plans.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
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1995(1) 1996 1997 1998 1999
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................... $ -- $ 13 $ 112 $ 1,166 $ 3,157
Subscription............................... -- 9 210 975 2,586
Other...................................... -- 10 230 899 196
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Total revenues...................... -- 32 552 3,040 5,939
Gross profit................................. -- -- 0 2,438 5,011
Loss from operations......................... (128) (3,330) (4,550) (2,878) (4,458)
Net loss..................................... (126) (3,231) (4,381) (2,794) (4,910)
Net loss available to common stockholders.... (126) (3,231) (4,381) (2,794) (6,140)
Net loss per share -- basic and diluted...... $ -- $ (4.43) $ (1.51) $ (0.77) $ (1.31)
Weighted average common shares
outstanding -- basic and diluted........... -- 729 2,909 3,634 4,679
Pro forma net loss per share -- basic and
diluted.................................... $ (0.37)
Pro forma weighted average common shares
outstanding -- basic and diluted........... 16,573
DECEMBER 31, 1999
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PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $20,357 $20,357 $
Current assets...................................... 22,530 22,530
Total assets........................................ 23,639 23,639
Current liabilities................................. 3,514 3,514
Redeemable convertible preferred stock.............. 23,582 --
Total stockholders' equity.......................... (3,457) 20,125
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(1) Data presented for the period from our inception, October 31, 1995, through
December 31, 1995.
The pro forma information in the tables above gives effect to the
conversion into common stock of all outstanding shares of preferred stock and of
certain warrants upon the closing of this offering. The pro forma as adjusted
balance sheet data as of December 31, 1999 also gives effect to the sale of
shares of common stock that we are offering under this
prospectus, assuming an initial public offering price of $ per share and
after deducting underwriting discounts and commissions and estimated offering
expenses.
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We are a Delaware corporation. We were formed in October 1995. We have
incurred net losses since we were formed. For the year ended December 31, 1999,
we recognized total revenue of approximately $5.9 million and incurred a net
loss of approximately $4.9 million. We have not yet achieved profitability, and
as of December 31, 1999, we have accumulated losses of approximately $15.4
million. Our principal offices are located at 24 Prime Parkway, Natick,
Massachusetts 01760 and our telephone number is (508) 652-7300. Our website is
located at www.connected.com. The information contained on our website does not
constitute part of this prospectus.
The names "Connected," "SendOnce," "eWare," "Connected TLM," "Delta Block,"
"eConnect," "Powered by Connected," "Transparent, Effortless and Certain," and
our logo are names and service marks that belong to us. We claim rights in other
names and marks. This prospectus also contains the trademarks and trade names of
other entities which are the property of their respective owners.
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Except where we note otherwise, all information in this prospectus:
- assumes the completion of a 3-for-1 split effected prior to the
completion of this offering;
- assumes the over-allotment option granted by us to the underwriters has
not been exercised; and
- assumes the conversion of all shares of our outstanding convertible
preferred stock and of certain warrants into 20,212,665 shares of common
stock occurs immediately prior to completion of this offering.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information in this
prospectus before deciding to participate in this offering. While these are the
risks and uncertainties we believe are most important for you to consider, you
should know that they are not the only risks or uncertainties facing us or which
may harm our business. If any of the following risks or uncertainties actually
occur, our business, financial condition and operating results would likely
suffer. In that event, the market price of our common stock could decline and
you could lose all or part of the money you paid to buy our common stock. Please
see also "Special Note Regarding Forward-Looking Statements and Industry Data."
RISKS RELATED TO OUR BUSINESS
OUR OPERATING HISTORY IS LIMITED, SO IT WILL BE DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS IN MAKING AN INVESTMENT DECISION.
We were formed in October 1995 and have a limited operating history. We are
still in the early stages of our development, which makes the evaluation of our
business and prospects difficult. We first offered our application services in
1996 and we first licensed our application in 1997. Since that time, we have
derived substantially all of our revenues from our eSupport solution. Before
buying our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose businesses depend on the Internet.
These risks and difficulties, as they apply to us in particular, include:
- limited market acceptance of our products;
- concentration of our revenues in a single product;
- our dependence on a small number of orders for most of our revenues;
- our need to expand our direct sales forces and indirect sales channels;
- our need to manage rapidly expanding operations; and
- our need to retain, attract, and train qualified personnel.
We cannot be certain that our business strategy will be successful or that
we will successfully manage these risks. If we fail to address adequately any of
these risks or difficulties, our business will likely suffer.
BECAUSE THE MARKET FOR OUR ESUPPORT SOLUTION IS RELATIVELY NEW, WE DO NOT KNOW
WHETHER EXISTING AND POTENTIAL CUSTOMERS WILL PURCHASE OUR SOLUTION IN
SUFFICIENT QUANTITY FOR US TO ACHIEVE PROFITABILITY.
The market for our eSupport solution is new and rapidly evolving. We expect
that we will continue to need intensive marketing and sales efforts to educate
prospective clients about the uses and benefits of our eSupport solution.
Various factors could inhibit the growth of the market, and market acceptance of
our solution. In particular, potential customers that have invested substantial
resources on internal solutions for PC backup and other aspects of eSupport may
be reluctant to adopt a new approach that may replace, limit, or compete with
their existing systems. We cannot be certain that a viable market for our
solution will emerge, or if it does emerge, that it will be sustainable.
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WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND EXPECT THIS TO CONTINUE
FOR THE FORESEEABLE FUTURE.
We have incurred net losses in each quarter since our inception, and we
expect our net losses to increase. We incurred net losses of approximately $4.9
million in 1999, $2.8 million in 1998, and $4.4 million in 1997. We cannot
predict when we will become profitable, if at all.
We anticipate that our expenses will increase substantially in the
foreseeable future as we:
- increase our direct sales and marketing activities by expanding our North
American and international direct sales forces and extending our
telesales efforts;
- develop our technology and expand the functionality of our eSupport
solution;
- expand our indirect sales channels;
- expand our infrastructure; and
- pursue strategic relationships and acquisitions.
Because we expect to continue to invest in our business ahead of
anticipated future revenues, we expect that we will continue to incur operating
losses for the foreseeable future. We cannot guarantee that our expenditures
will significantly increase our revenues, if at all. If we fail to significantly
increase our revenues as we implement our strategies, our losses will increase
and our business will suffer.
WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR SUBSCRIPTION
REVENUES.
Sales to a small number of customers generate a disproportionate amount of
our subscription revenues. In 1999, five customers accounted for 41.3% of
subscription revenues and 18.0% of total revenues. Our contracts with our
customers are generally terminable by them at any time without penalty.
Accordingly, revenues from any of these or other customers could decline at any
time due to competition, alternative technologies, or other factors discussed in
these Risk Factors. Therefore, we cannot be sure that our significant or other
customers will continue to purchase our eSupport solution at current levels. A
reduction of subscription revenues from these or other significant customers
would harm our business. In addition, eSupport subscription customers may
terminate that service at any time and purchase a license for our eSupport
solution for deployment on their own servers. The licenses for our eSupport
solution typically require a one time payment because they have a perpetual
term. Although the reduction in our subscription revenues may be offset by an
increase in our license revenues in the quarter in which the customer makes such
a decision, our future subscription revenues and total revenues may suffer from
such a customer transition.
WE DEPEND ON LARGE ORDERS FOR A SIGNIFICANT PORTION OF OUR LICENSE REVENUES,
WHICH CAN LEAD TO SIGNIFICANT FLUCTUATIONS IN OUR REVENUES AND OPERATING
RESULTS.
Our license revenues and operating results for a quarter could fluctuate
significantly based on whether a large order is closed near the end of the
quarter or delayed. Customer orders can range in value from less than one
hundred to several hundred thousand dollars. Therefore, our revenues for a
period are likely to be affected by the timing of larger orders, which makes
those revenues difficult to predict. Our revenues for a quarter could be reduced
if large orders forecasted for a certain quarter are delayed or are not
realized. The factors that could delay or defer an order, include:
- time needed for technical evaluations of our solutions by prospects;
- customer budget restrictions and internal approval procedures; and
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- timing of customer hardware purchases and engineering work needed for the
customer to integrate our software with the customer's systems.
OUR REVENUES AND OPERATING RESULTS FLUCTUATE WIDELY AND ARE DIFFICULT TO PREDICT
BECAUSE OF THE DELIVERY OPTIONS WE OFFER OUR CUSTOMERS.
Our revenues and operating results have fluctuated significantly in the
past, and we expect them to continue to fluctuate unpredictably in the future.
The delivery options for our eSupport solution contribute to this
unpredictability. We frequently are unable to predict which delivery option our
customers will choose and the choices have different effects on our revenue. If
a customer chooses to license our eSupport solution, we generally recognize the
software license revenues in the quarter in which the sale occurred. By
contrast, if a customer chooses our eSupport service, we recognize comparatively
smaller increments of revenues on a monthly basis as services are provided.
IF WE DO NOT DEVELOP OUR INDIRECT SALES CHANNELS, WE WILL HAVE DIFFICULTY
INCREASING OUR SUBSCRIPTION REVENUES.
Our indirect sales channels, including partnerships with application
service providers, Internet service providers, PC manufacturers, and IT service
outsourcers, target the sale of our application services to small and medium
size businesses. To date, subscription revenues generated by our indirect sales
channels have been insignificant. If we do not expand and effectively manage our
indirect sales channels, we will miss opportunities to increase our subscription
revenues. We believe these channels can more effectively reach the targeted
businesses and generate subscription revenues than our direct sales force. We
face intense competition for the distribution of our eSupport solution through
these channels. Our channel partners have no obligation to purchase or
distribute our application services. In addition, our channel partners could
internally develop products and services that compete with us. Our failure to
establish new channel partners, manage and maintain our existing relationships
with channel partners, or the unwillingness of our partners to effectively
market and sell all of our application services could harm our ability to expand
our business.
TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE
UNABLE TO OBTAIN ON FAVORABLE TERMS, IF AT ALL.
Over time, we may require additional financing for our operations or
potential acquisitions. This additional financing may not be available to us on
a timely basis if at all, or, if available, on terms acceptable to us. We have
never been profitable. Our growth strategy involves significant increases in our
expenditures for a variety of sales and marketing activities and product
development and infrastructure improvements. If we fail to obtain acceptable
additional financing, we may be required to reduce our planned expenditures or
forego acquisition opportunities, which could reduce our revenues, increase our
losses, and harm our business. Moreover, additional financing may cause dilution
to existing stockholders.
WE RELY HEAVILY ON SALES OF OUR ESUPPORT SOLUTION, SO IF IT DOES NOT ACHIEVE
MARKET ACCEPTANCE WE ARE LIKELY TO EXPERIENCE LARGER LOSSES.
Since our inception, we have generated substantially all of our revenues
from software licenses and subscriptions for our eSupport solution. We believe
that revenues generated from our solution will continue to account for
substantially all of our revenues for the foreseeable future. A decline in the
price of our solution, or our inability to increase sales of our solution would
harm our business and operating results more seriously than it would if we had
several different products and services to sell. In addition, our future
financial performance will depend upon successfully developing and selling
enhanced versions of our eSupport solution. If we fail
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to deliver product enhancements or new products that customers want it will be
more difficult for us to prevent price erosion and it will be more difficult for
us to succeed.
WE DEPEND ON OUR SALES FORCE TO SELL OUR ESUPPORT SOLUTION, SO FUTURE GROWTH
WILL BE CONSTRAINED BY OUR ABILITY TO RETAIN, HIRE, AND TRAIN SALES PERSONNEL.
We sell our eSupport solution to large and medium size businesses primarily
through our direct sales force, and we expect to continue to do so in the
future. Our ability to sell more licenses and subscriptions for our eSupport
solution and increase our revenues is limited by our ability to retain, hire,
and train sales personnel. We believe that there is significant competition for
sales personnel with the advanced sales skills and technical knowledge that we
need. Some of our competitors may have greater resources to hire personnel with
that skill and knowledge. If we are not able to hire experienced and competent
sales personnel, our business will be harmed. Further, because we depend on our
sales force, any turnover in our sales force can significantly harm our
operating results. Sales force turnover tends to slow sales efforts until
replacement personnel are recruited, trained, and become productive.
ALTHOUGH OUR STRATEGY TO INCREASE OUR REVENUES DEPENDS IN PART ON OUR ABILITY TO
EXPAND INTERNATIONALLY, OUR LIMITED EXPERIENCE CONDUCTING OPERATIONS
INTERNATIONALLY MAY MAKE IT MORE DIFFICULT THAN WE EXPECT TO EXPAND OVERSEAS AND
MAY INCREASE THE COSTS OF DOING SO.
To date, we have derived substantially all of our revenues from North
American customers. As part of our strategy to increase revenues, we plan to
expand our international operations. Our international expansion will require
significant management attention and financial resources. We have limited
experience with international markets and we may not adequately address all of
the factors necessary to succeed. International expansion may require us to
develop and deploy expensive, duplicative infrastructures to establish a local
presence and gain credibility with foreign customers and foreign indirect sales
channels. For example, we believe we will be required to maintain local sales
forces in each of our customers' countries. In addition, customers from one
country may be reluctant to permit their data to be stored on servers hosted in
another country. There are many additional barriers to competing successfully in
the international arena, including:
- costs of localizing products for the language, culture, and other
requirements of foreign countries;
- restrictions on the export and use of software encryption technology;
- difficulties associated with hiring, training, and integrating
international personnel;
- dependence on local vendors;
- compliance with conflicting and changing governmental laws and
regulations;
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- import and export restrictions;
- adverse tax consequences;
- fluctuations in exchange rates;
- limitations on cash withdrawal from particular countries; and
- tariffs.
As a result of these competitive barriers, we cannot assure you that we
will be able to increase our revenues by marketing, selling, and delivering our
solution in international markets. If we do not succeed in our international
efforts, our business may be harmed.
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WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS, AND ANY FAILURE
TO DO SO WILL HARM OUR BUSINESS.
We are undergoing rapid growth in the number of our employees and the scope
of our operations, and anticipate that further expansion will be required to
achieve growth in our customer base and to develop and seize market
opportunities. Our rapid expansion could place a significant strain on our
senior management team and operational and financial resources. To manage the
expected growth of our operations and personnel, we will need to improve
existing, and implement new, operational and financial systems, procedures, and
controls. We also will need to expand, train, and manage our growing employee
base as well as expand and maintain close coordination among our sales and
marketing, finance, administrative, and operations staff. Further, we may be
required to enter into additional relationships with various service providers
and other third parties necessary to our business. A successful continued
expansion will also require us to further develop expertise in complex contract
negotiations. We cannot guarantee that our current and planned systems,
procedures, and controls will be adequate to support our future operations, that
we will be able to hire, train, retain, motivate, and manage the required
personnel or that we will be able to identify, manage, and benefit from existing
and potential strategic relationships and market opportunities. If we do not
effectively manage the budgeting, forecasting, and other process control issues
presented by such a rapid expansion, our business will suffer. If we are unable
to undertake new business due to a shortage of staff or technology resources,
our growth will be impeded. Therefore, there may be times when our opportunities
for revenue growth may be limited by the capacity of our internal resources
rather than by the absence of market demand.
Several members of our senior management joined us in 1999, including James
Priest, our Vice President, Sales and Craig Randall, our Vice President,
Marketing. Glenn Bolduc, our Vice President, Finance joined us in March 2000 and
will become our Chief Financial Officer immediately following this offering.
Although we believe that these individuals are currently integrated with the
other members of our management team, we cannot assure you that our management
team will be able to continue to work together effectively or manage our growth
successfully. We believe that the successful integration of our management team
is critical to our ability to manage our operations effectively and support our
anticipated future growth.
WE DEPEND ON DAVID CANE.
Our growth and development to date have depended on the efforts of our
Chief Executive Officer, David Cane. The unexpected loss of services of Mr. Cane
could harm our operations.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL, WHICH IS PARTICULARLY DIFFICULT
FOR US BECAUSE WE COMPETE WITH OTHER HIGH TECHNOLOGY COMPANIES AND ARE LOCATED
IN THE NEW ENGLAND AREA WHERE COMPETITION FOR PERSONNEL IS EXTREMELY INTENSE.
Qualified personnel are in great demand throughout the computer software,
hardware, and networking industries. The demand for qualified personnel is
particularly acute in the New England area due to the large number of Internet,
software, and other high technology companies and low unemployment in the
region. Our success depends in large part upon our ability to attract, train,
motivate, and retain highly-skilled employees, particularly sales and marketing
personnel, software engineers, and technical support personnel. We have had
difficulty hiring and retaining these highly-skilled employees in the past. If
we are unable to attract and retain the highly-skilled technical personnel that
are integral to our sales, marketing, product development, and customer support
teams, the rate at which we can generate sales and develop new products or
product enhancements may be limited.
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WE FACE COMPETITION, WHICH COULD REDUCE OUR REVENUES AND OUR MARKET SHARE.
The market for our eSupport solution is new, highly fragmented, and rapidly
evolving. Increased competition may result in price reductions, reduced
revenues, and loss of market share, any of which could harm our business. A
number of private and public companies offer products that compete with specific
aspects of our eSupport solution. Our competitors that license backup software
include Veritas Software Corporation, Legato Systems, Inc., Stac Software Inc.,
and Computer Associates International, Inc. Competitors that provide backup
service include SkyDesk, Inc. We also may face competition from resellers of
these products and services.
We believe the primary factors upon which we compete are the functionality
of our solution, including performance and scalability, customer references, and
flexibility in solution delivery.
We expect to face increased competition in the future from our current
competitors. In addition, new competitors, or alliances among existing and
future competitors, may emerge and rapidly gain significant market share. We may
also face increased competition in the future from major software vendors such
as Microsoft or IBM to the extent that they enhance their product offerings with
competitive applications. To the extent these vendors are able to offer systems
that are functionally comparable or superior to our products, their significant
installed customer bases, ability to offer a broad solution, and ability to
price their products as incremental add-ons to existing systems can provide them
with a significant competitive advantage.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. Many of our competitors also have well-established
relationships with our current and potential customers. As a result, they may
begin to undertake extensive marketing efforts, offer more attractive pricing
and purchase terms, or bundle their products in a manner that would put us at a
competitive disadvantage.
WE MAY BE UNABLE TO SAFEGUARD OUR INTELLECTUAL PROPERTY.
Our ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and contractual arrangements to
protect our intellectual property. The steps we have taken to protect our
technology may be inadequate. Existing trade secret, trademark, and copyright
laws offer only limited protection. Our patents could be invalidated or
circumvented. The laws of certain foreign countries in which our products are,
or may be, developed or sold may not fully protect our products or our
intellectual property rights. This may make the possibility of piracy of our
technology and products more likely. We cannot guarantee that the steps we have
taken to protect our intellectual property will be adequate to prevent
infringement or misappropriation of our technology. In addition, detection of
infringement or misappropriation is difficult. Even if we do detect infringement
or misappropriation of our technology, we may be unable to enforce our
proprietary rights, which could result in harm to our business. Recently, there
has been increased litigation regarding patent and other intellectual property
rights in Internet-related industries. We may engage in litigation to attempt
to:
- enforce our patents;
- protect our trade secrets or know-how;
- defend ourselves against claims that we infringe the rights of others; or
- determine the scope and validity of the patents or intellectual property
rights of others.
Any litigation could be unsuccessful, result in substantial cost to us, and
divert our management's attention, which could harm our business.
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OUR OPERATIONS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to engage in litigation, pay damages, seek licenses, or alter
our products so that they no longer infringe the rights of others. Litigation
could result in substantial costs to us and divert our management's attention,
which could harm our business. If we do not prevail in any such litigation we
could be forced to pay significant damages or amounts in settlement. We cannot
guarantee that the terms of any licenses we may be required to seek will be
reasonable or available at all. Similarly, changing our products or processes to
avoid infringing the rights of others may be costly or impractical or could
detract from the value of our eSupport solution. In addition, we indemnify our
partners and customers from liability they may incur as a consequence of
infringement by our technology. Our indemnity obligations could cause us to
incur substantial expense if any of our partners or customers incur losses as a
result of infringement by our technology.
OUR BUSINESS MAY BE HARMED BY INFRINGEMENT CLAIMS OF STAC AND JOHN SHANNON AND
ADVERTISING CLAIMS OF STAC.
We have received notice from Stac Software, Inc. alleging that our eSupport
solution infringes one of its patents. Our intellectual property counsel,
Weingarten, Schurgin, Gagnebin & Hayes LLP, has investigated the allegations
made by Stac and, based upon their advice, we do not believe that our solutions
have ever infringed the Stac patent. In addition, we received a notice dated
March 23, 2000 from John P. Shannon alleging that our eSupport solution
infringes two of his patents. Based on our preliminary investigation of Mr.
Shannon's allegations, we do not believe we are infringing any claims of his
patents. We have asked our intellectual property counsel to investigate further
Mr. Shannon's allegations. Because patent litigation can be extremely expensive,
time-consuming, and its outcome uncertain, we may seek to obtain licenses to the
disputed patents. We cannot guarantee that licenses will be available to us on
reasonable terms, if at all. If a license from either Stac or Mr. Shannon is not
available we could be forced to incur substantial costs to reengineer our
eSupport solution which could diminish its value. In any case, we may face
litigation with Stac and Mr. Shannon. Such litigation could be costly and would
divert our management's attention and resources. In addition, if we do not
prevail in such litigation, we could be forced to pay significant damages or
amounts in settlement.
In addition to alleging patent infringement, Stac's notice alleged that we
have been advertising and marketing our eSupport solution feature previously
known as SaveOnce in a misleading manner. Stac's allegations stem from the fact
that our solution stores applications and files unique to a particular user only
once, but stores applications and files common to multiple users twice, once
when the application or file is first encountered and then, when next
encountered, a second time to a common application and file pool. After
consulting with Weingarten, Schurgin, Gagnebin & Hayes LLP we do not believe
that our past advertising and marketing have been misleading or have diluted or
tarnished any rights of Stac. Nonetheless, we have modified our advertising and
marketing materials to clarify the operation of this feature and have renamed
the feature SendOnce. Despite these clarifications, we cannot guarantee that we
will not become involved in litigation involving our past advertising and
marketing of the SaveOnce feature. If we do become involved in such litigation,
we would incur substantial costs, we may be required to pay significant damages
or amounts in settlement, and our management's attention and resources would be
diverted.
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IF WE ARE UNABLE TO ENHANCE THE FUNCTIONALITY OF OUR ESUPPORT SOLUTION AS THE
MARKET FOR ESUPPORT EVOLVES, OUR SALES COULD DECLINE.
Because the market for our solutions is emerging and subject to rapid
technological change, the lifecycles of our solutions are difficult to predict.
Competitors may introduce new applications or enhancements to existing products
employing new technologies, which could render our existing eSupport solution
obsolete and unmarketable.
To be successful, our solutions must keep pace with technological
developments, address the ever-changing and increasingly sophisticated needs of
our customers, and achieve market acceptance. Our business will suffer if we are
unable to develop, release, and market new software product enhancements on a
timely and cost-effective basis, or if new products or enhancements do not
achieve market acceptance, or fail to respond to evolving industry or technology
standards.
IF OUR SOLUTION CONTAINS MATERIAL ERRORS, THEY MAY BE COSTLY TO CORRECT,
REVENUES MAY DECLINE, WE MAY FACE LITIGATION, AND OUR REPUTATION COULD BE
HARMED.
Our eSupport solution is complex and may contain material errors or defects
that are not discovered until after shipment and installation. If we discover
any such defects, we may be unable to successfully correct them in a timely
manner, if at all. In addition, we may be required to dedicate significant
resources to remedy these problems. Defects in our software may also harm our
reputation, reduce our market acceptance, and cause our revenues to decline.
Defects may also leave us susceptible to costly warranty claims and litigation.
IF OUR SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. Although we have
implemented network security measures and our customers' information is stored
on our servers in an encrypted format, our servers are vulnerable to computer
viruses, physical or electronic break-ins, and similar disruptions, which could
lead to interruptions, delays, or loss of data. Third parties may attempt to
breach our security or that of our partners and service customers. If they are
successful, they could corrupt or obtain our customers' confidential
information. We may be liable to our partners and customers for any breach in
our security and any breach could harm our reputation and the market acceptance
of our solutions. We also may be required to expend significant capital and
other resources to license encryption technology and additional technologies to
protect against security breaches or to alleviate problems caused by any breach.
OUR ABILITY TO SUCCESSFULLY RECEIVE AND SEND INFORMATION AND PROVIDE ACCEPTABLE
LEVELS OF CUSTOMER SERVICE LARGELY DEPENDS ON THE EFFICIENT AND UNINTERRUPTED
OPERATION OF OUR COMPUTER AND COMMUNICATIONS HARDWARE AND NETWORK SYSTEMS.
The provision of our application services requires efficient and
uninterrupted operation of our servers and communications infrastructure.
Although we have adopted several measures to protect the integrity of our
infrastructure, our systems and operations are vulnerable to damage or
interruption from fire, flood, earthquake, power loss, break-ins,
telecommunications failure, improper operation by employees, and similar events.
The occurrence of any of the foregoing risks could harm our business and damage
our reputation.
OUR BUSINESS MAY BE HARMED BY ACQUISITIONS WE MAY COMPLETE IN THE FUTURE.
We may pursue acquisitions of related businesses, technologies, product
lines, or products. Our identification of suitable acquisition candidates
involves risks inherent in assessing the values, strengths, weaknesses, risks,
and profitability of acquisition candidates, including the effects of the
possible acquisition on our business, diversion of our management's attention,
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and risks associated with unanticipated problems or latent liabilities. If we
are successful in pursuing future acquisitions, we expect to expend significant
funds, incur additional debt or issue additional securities, which may harm our
revenues and business and be dilutive to our stockholders. If we spend
significant funds or incur additional debt, our ability to obtain financing for
working capital or other purposes could decline and we may be more vulnerable to
economic downturns and competitive pressures. We cannot guarantee that we will
be able to finance additional acquisitions or that we will realize any
anticipated benefits from acquisitions that we complete. Should we successfully
acquire another business, the process of integrating acquired operations into
our existing operations may result in unforeseen operating difficulties and may
require significant financial resources that would otherwise be available for
the ongoing development or expansion of our existing business. Acquisitions
could also result in goodwill and other intangible assets which could create
substantial ongoing amortization charges against our earnings over the useful
lives of the assets acquired. We have no current plans, agreements, or
commitments with respect to any acquisitions.
WE MAY SUFFER SERVICE INTERRUPTIONS OR TECHNICAL FAILURES DUE TO THE YEAR 2000
COMPUTER PROBLEM.
The failure of our internal systems to be year 2000 compliant could
temporarily prevent us from providing service to our customers and could require
us to devote significant resources to correct such problems. Problems associated
with the year 2000 may not become apparent until some time after January 2000.
Due to the general uncertainty inherent in the year 2000 computer problem, which
includes our uncertainty as to the year 2000 readiness of our partners and
third-party suppliers, vendors, and customers, we are unable to determine at
this time whether the consequences of year 2000 failures will harm our business.
RISKS RELATING TO OUR INDUSTRY
IF THE TREND OF MAINTAINING CRITICAL INFORMATION AND APPLICATIONS ON PCS CEASES,
OUR BUSINESS WILL BE HARMED.
We developed our eSupport solution as a reaction to the current business
trend of maintaining business-critical applications and data on PCs rather than
on widely accessible central network servers. Our current solution is designed
only to capture information resident on PCs. If the current trend changes, and
businesses choose to locate important applications and data elsewhere, such as
on networks or removable media, our solution will not capture critical data and
will not be effective, and the market for our solution will decline.
OUR SUCCESS DEPENDS ON THE RELIABILITY OF THE INTERNET FOR THE TRANSMISSION OF
INFORMATION.
Our services depend on the Internet for the transmission of information and
the operation of our applications. We cannot be sure that the Internet will
continue to be a reliable and convenient medium in the future. From time to
time, the Internet has experienced a variety of outages and other delays as a
result of excessive congestion or damage to portions of its infrastructure, and
could face such outages and delays in the future. Changes in, or insufficient
availability of, telecommunications services, or the failure of Internet service
providers to support the Internet or other online services also could result in
slower response times. These developments would adversely affect usage of the
Internet and other online services generally, and our service in particular. If
the infrastructure of the Internet and other online services becomes unreliable
or does not effectively support growth that may occur, our business will suffer.
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LAWS WHICH APPLY TO COMMUNICATIONS AND COMMERCE OVER THE INTERNET COULD HARM OUR
BUSINESS.
Laws and regulations which apply to communications and commerce over the
Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation, and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations, and is currently
considering copyright legislation that may extend the right of reproduction held
by copyright holders to include the right to make temporary copies for any
reason. We manage and store sensitive customer information that may be subject
to privacy laws and regulations. As a result, in the future we may be subject to
claims associated with invasion of privacy or inappropriate disclosure, use, or
loss of this information. Any imposition of liability, particularly liability
that is not covered by insurance or is in excess of insurance coverage, could
harm our reputation and our business.
The law of the Internet remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
content, libel, and taxation apply to the Internet. The adoption or modification
of laws or regulations relating to the Internet, or interpretations of existing
law, could harm our business.
WE MAY BE SUBJECT TO REGULATION, TAXATION, ENFORCEMENT, OR OTHER LIABILITIES IN
UNEXPECTED JURISDICTIONS.
We provide our eSupport solution to customers located throughout the United
States and plan to expand our distribution to several foreign countries. As a
result, we may be required to qualify to do business, or be subject to tax or
other laws and regulations, in these jurisdictions even if we do not have a
physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain, but we
could find we are subject to regulation, taxation, enforcement, or other
liability in unexpected ways, which could harm our business.
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY EXISTING SECURITY HOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK.
If our existing stockholders sell a large number of shares of our common
stock, or the public market perceives that existing stockholders might sell
shares of common stock, the market price of our common stock could significantly
decline. All of the shares offered under this prospectus, other than the shares
purchased by our existing stockholders pursuant to preemptive rights described
under "Certain Transactions -- Preemptive Rights," will be freely tradable in
the open market, and
- 2,321,643 additional shares may be sold immediately after this offering;
- 889,460 additional shares may be sold 90 days after the date of this
prospectus, including 212,043 shares issuable pursuant to options and
warrants; and
- 23,877,873 additional shares may be sold upon the expiration of lock-up
agreements 180 days after the date of this prospectus, including
1,330,740 shares issuable pursuant to options and warrants.
Deutsche Bank Securities Inc., as representative of the underwriters, may
release any or all shares from the lock-up agreements at any time and without
notice.
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Commencing 180 days after the date of this prospectus, existing
stockholders holding an aggregate of 22,086,663 shares of common stock plus up
to 624,459 shares of our common stock issued upon conversion of certain warrants
have the right to require us to register their shares of common stock with the
Securities and Exchange Commission. If we register their shares of common stock,
they can sell those shares in the public market.
After this offering, we intend to register approximately 12,750,000 shares
of our common stock that we have issued or may issue under our stock plans. Of
these shares, 653,259 shares are issuable pursuant to immediately exercisable
options. Once we register these shares, they can be freely sold in the public
market upon issuance, subject to the lock-up agreements described above.
NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE
BOOK VALUE OF THEIR SHARES.
The initial public offering price is substantially higher than the net
tangible book value per share of our common stock. The net tangible book value
of a share of common stock purchased at the initial public offering price of
$ per share is only $ . Additional dilution may be incurred if
holders of stock options, whether currently outstanding or subsequently granted,
exercise their options or if warrantholders exercise their warrants to purchase
common stock.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL CONTROL ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL.
After this offering, our executive officers and directors and their
affiliates will together control approximately % of the outstanding common
stock. As a result, these stockholders, if they act together, will control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying, preventing or deterring a change in control,
could deprive our stockholders of an opportunity to receive a premium for their
common stock in such a change of control, and might lower the market price of
our common stock.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Often these fluctuations are unrelated or disproportionate
to the operating performance of the companies. The market prices of securities
of technology companies, in particular, have been extremely volatile. Many
factors could cause the market price for our common stock to decline, perhaps
substantially, following this offering, including:
- failure to successfully implement aspects of our growth strategy;
- failure to meet research and development goals related to our products
and services;
- technological innovations by our competitors or in competing
technologies;
- investor perception of our industry or our prospects; and
- general technology or technology trends.
Occasionally, when the market price of a stock has been volatile, holders
of that stock have instituted securities class action litigation against the
company that issued the stock. If any of our stockholders brought such a lawsuit
against us, even if the lawsuit were without merit, we could incur substantial
costs defending the lawsuit. The lawsuit would also divert the time and
attention of our management.
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A MARKET FOR OUR COMMON STOCK MAY NEVER DEVELOP AND THE PRICE OF OUR COMMON
STOCK MAY BE LOWER THAN THE PRICE YOU PAY IN THIS OFFERING.
Prior to this offering, there has been no public market for our common
stock. After this offering, an active trading market in our common stock might
not develop or continue. If you purchase shares of our common stock in the
offering, you will pay a price that was not established in a competitive market.
Rather, you will pay a price that we negotiated with the representatives of the
underwriters based upon several factors. See "Underwriting." The price of our
common stock that will prevail in the market after the offering may be higher or
lower than the price you pay.
OUR MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER THE USE OF THE PROCEEDS OF
THIS OFFERING.
We have not designated specific uses for the net proceeds of this offering.
Accordingly, you must rely upon the judgment of our management who will have
significant flexibility with respect to applying the net proceeds. Our failure
to apply the funds effectively could prevent us from successfully implementing
our strategy and would harm our business.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS THAT MIGHT
TEND TO SUPPRESS OUR STOCK PRICE.
Provisions of our certificate of incorporation and bylaws that may
discourage, delay, or prevent a change in control include:
- we are authorized to issue "blank check" preferred stock, which could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- we provide for the election of only one-third of our directors at each
annual meeting of stockholders which slows turnover on the board of
directors;
- we limit who may call special meetings of stockholders;
- we require all stockholder actions be taken at a meeting of our
stockholders; and
- we require advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon by stockholders
at stockholder meetings.
Our outstanding options to acquire common stock typically vest as to 25% of
the underlying shares 12 months from the date of grant and as to the remaining
75% in equal monthly increments until the fourth anniversary of the date of
grant. In the event of a change in control the vesting of our options generally
accelerates by one year, except for options held by certain executive officers
which vest in full. In addition, our executive officers are entitled to lump sum
payments equal to one year's salary in the event of a change in control.
Stockholders sometimes realize a significant premium in their stock price
when an offer is made to purchase a company. Because we have adopted the
arrangements described above, such offers will likely be discouraged, and our
stockholders may lose the benefit of any potential acquisition premium.
In addition, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control of us. See "Description of
Capital Stock -- Antitakeover Effects of Provisions of Our Certificate of
Incorporation, Bylaws and Delaware Law" and "-- Statutory Business Combination
Provision."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
We make many statements in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," and elsewhere that constitute
forward-looking statements. These statements relate to our future plans,
objectives, expectations, and intentions. Forward-looking statements include,
but are not limited to, statements regarding:
- market acceptance of new products;
- competition in the industry;
- the ability to satisfy demand for our products;
- the development of new competitive technologies;
- future acquisitions;
- the availability of qualified personnel;
- international, national, regional, and local economic and political
changes;
- general economic conditions; and
- trends affecting the eSupport industry, our financial condition or
results of operations.
In some cases, you can identify these statements from terms such as
"believe," "expect," "will," "anticipate," "intend," "plan," and similar
expressions in the prospectus. These forward-looking statements involve a number
of risks and uncertainties. These statements reflect our current views with
respect to future events and are based on assumptions and are subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors and risks. We discuss many of these risks in greater
detail under the heading "Risk Factors." Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
This prospectus contains estimates of market growth and other data related
to PCs, including laptops, and eSupport. These estimates have been included in
studies published by market research and other firms including International
Data Corporation and Gartner Group. These estimates have been produced by
industry analysts based on trends to date, their knowledge of technologies and
markets, and customer research, but these are forecasts only and are subject to
inherent uncertainty.
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USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered by
us at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $ million, or approximately
$ million if the underwriters' over-allotment option is exercised in full.
The principal purposes of this offering are to:
- obtain additional working capital and increase financial flexibility;
- create a public market for our common stock;
- facilitate our future access to public capital markets; and
- provide liquidity for our common stock to facilitate future acquisitions
with our stock.
We believe that our enhanced financial position will provide us with needed
flexibility to respond to technological and market developments and
opportunities and improves our ability to attract and retain customers and
employees.
We have not designated specific uses for the net proceeds of this offering.
We expect to use the net proceeds for general corporate purposes, including
working capital, increased spending on sales and marketing, customer support,
research and development, expansion of our operational and administrative
infrastructure, and the leasing of additional facilities. We may use a portion
of the net proceeds to acquire or invest in complementary businesses,
technologies, or product lines or products. However, we have no current plans,
agreements, or commitments with respect to any such acquisition or investment,
and we are not currently engaged in any negotiations with respect to any such
transaction.
We will retain broad discretion in the allocation of the net proceeds of
this offering. The amounts we actually spend may vary significantly and will
depend on a number of factors, including our future revenue and cash generated
by operations and the other factors described in "Risk Factors." Until allocated
for specific use, we will invest the net proceeds of the offering in government
securities and other short-term investments. We cannot predict whether the
invested proceeds will yield a favorable return.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our capital stock and
do not plan to pay any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance future growth. Our lending
arrangement prohibits the payment of dividends without the prior approval of our
lender.
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CAPITALIZATION
The following table presents our capitalization:
- on an actual basis as of December 31, 1999;
- on a pro forma basis as of December 31, 1999 giving effect to the
conversion of all outstanding shares of convertible preferred stock and
certain warrants into 20,212,665 shares of common stock upon completion
of this offering; and
- on a pro forma as adjusted basis to reflect the preceding pro forma
adjustments and the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share,
after deduction of estimated underwriting discounts and commissions and
our estimated offering expenses, and the use of the net proceeds as
described in "Use of Proceeds."
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
Current portion of long-term obligations.................... $ 127 $ 127 $ 127
======== ======== ========
Series D redeemable convertible preferred stock, at
redemption value.......................................... 23,582 --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized and no shares issued or outstanding pro
forma, and pro forma as adjusted........................ -- --
Convertible preferred stock, $0.001 par value; 13,387,086
shares authorized, 3,474,710 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding pro forma, and pro forma as adjusted........ 3 --
Common stock, $0.001 par value, 12,000,000 shares
authorized, 6,638,544 shares issued, 5,268,096 shares
outstanding, actual; 100,000,000 shares authorized,
26,851,209 shares issued, 25,480,731 shares outstanding,
pro forma; 100,000,000 shares authorized, shares
issued, shares outstanding pro forma as
adjusted................................................ 7 26
Additional paid-in capital................................ 14,801 38,367
Accumulated deficit....................................... (16,672) (16,672)
Deferred compensation..................................... (1,544) (1,544)
Treasury stock, at cost, 1,370,448 shares, actual, pro
forma, and pro forma as adjusted........................ (52) (52)
-------- --------
Total stockholders' equity (deficit).................. (3,457) 20,125
-------- --------
Total capitalization............................... $ 20,125 $ 20,125
======== ========
The pro forma as adjusted number of shares of our common stock that will be
outstanding after this offering is based on the number of shares outstanding on
December 31, 1999. It excludes 3,124,305 shares subject to outstanding options
and warrants at a weighted-average exercise price of $0.23 per share and
additional shares available for issuance under our stock option plans. It also
excludes options to purchase 5,297,100 shares of common stock at a
weighted-average exercise price of $2.58 per share, which were granted after
December 31, 1999.
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DILUTION
Our pro forma net tangible book value as of December 31, 1999, after giving
effect to the automatic conversion of our preferred stock into 19,588,206 shares
of common stock and the issuance of 624,459 shares of common stock upon the
conversion of certain warrants upon the completion of this offering, was $20.1
million, or $0.79 per share of common stock. Pro forma net tangible book value
per share is determined by dividing our tangible book value (total tangible
assets less total liabilities) by the pro forma number of outstanding shares of
common stock at that date. After giving effect to the sale of the
shares of our common stock offered hereby at an assumed initial public offering
price of $ per share, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses, our pro forma net tangible book
value at December 31, 1999 would have been $ million, or $ per share. This
represents an immediate increase in net tangible book value to existing
stockholders of $ per share and an immediate dilution to new investors of
$ per share. The following table illustrates the per share dilution:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999............................................... $0.79
Increase per share attributable to sale of common stock in
this offering..........................................
-----
Pro forma net tangible book value per share after this
offering..................................................
--------
Net tangible book value dilution per share to new
investors................................................. $
========
The following table summarizes, on a pro forma basis as of December 31,
1999, the differences between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
the existing stockholders and by the new public investors (based upon an assumed
initial public offering price of $ per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
Existing stockholders...... 25,480,761 $34,804,491 $1.37
New public investors.......
Total.................
The discussion and table exclude:
- 3,124,305 shares of common stock issuable upon exercise of stock options
and warrants outstanding at December 31, 1999 at a weighted average
exercise price of $0.23 per share;
- 5,297,100 shares of common stock issuable upon exercise of stock options
granted after December 31, 1999 at a weighted average exercise price of
$2.58 per share; and
- an aggregate of 4,053,141 shares reserved for future grant under our
stock plans.
If the underwriters' over-allotment option is exercised in full, the shares
held by existing stockholders will decrease to % of the total number of
shares of common stock outstanding after the offering, and the number of shares
held by new investors will increase to , or % of the total number
of shares of common stock outstanding after the offering. To the extent the
warrants and outstanding options are exercised and the underlying shares are
issued, there will be further dilution to new investors. If all of these options
and warrants had been exercised as of December 31, 1999, net tangible book value
per share after this offering would be $ and total dilution per share
to new investors would be $ .
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data set forth below as of December 31,
1998 and 1999, and for the three years ended December 31, 1999, have been
derived from our consolidated financial statements and notes thereto, which have
been audited by Arthur Andersen LLP, independent public accountants, and are
included elsewhere in this prospectus. Our selected consolidated financial data
as of December 31, 1995, 1996, and 1997, and for the period from inception to
December 31, 1995, and for the year ended December 31, 1996 are derived from our
consolidated financial statements and notes thereto, which have been audited by
Arthur Andersen LLP, independent public accountants, not included herein.
You should read the selected historical consolidated financial data set
forth below together with our "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and notes thereto included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995(1) 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
License.................................. $ -- $ 13 $ 112 $ 1,166 $ 3,157
Subscription............................. -- 9 210 975 2,586
Other.................................... -- 10 230 899 196
----- ------- ------- ------- -------
Total revenues......................... -- 32 552 3,040 5,939
Cost of revenues........................... -- -- 552 602 928
----- ------- ------- ------- -------
Gross profit............................... -- 32 -- 2,438 5,011
----- ------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing...................... 43 524 2,504 2,839 5,165
Research and development................. 69 851 943 1,418 1,979
General and administrative............... 16 1,987 1,103 1,059 1,731
Stock-based compensation................. -- -- -- -- 594
----- ------- ------- ------- -------
Total operating expenses............... 128 3,362 4,550 5,316 9,469
----- ------- ------- ------- -------
Loss from operations................... (128) (3,330) (4,550) (2,878) (4,458)
Interest income (expense), net............. 2 99 169 84 (452)
----- ------- ------- ------- -------
Net loss............................... (126) (3,231) (4,381) (2,794) (4,910)
Accretion of preferred stock............... -- -- -- -- (1,230)
----- ------- ------- ------- -------
Net loss available to common stockholders.. $(126) $(3,231) $(4,381) $(2,794) $(6,140)
===== ======= ======= ======= =======
Net loss per share -- basic and diluted.... $ -- $ (4.43) $ (1.51) $ (0.77) $ (1.31)
===== ======= ======= ======= =======
Weighted average common shares
outstanding -- basic and diluted......... -- 729 2,909 3,634 4,679
Pro forma net loss per share -- basic and
diluted.................................. $ (0.37)
=======
Pro forma weighted average common shares
outstanding -- basic and diluted......... 16,573
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DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
------- ------ ------------ ------ -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $924 $1,906 $3,793 $1,823 $20,357
Current assets......................... 939 1,937 3,999 2,422 22,530
Total assets........................... 951 2,321 4,313 2,814 23,639
Current liabilities.................... 22 450 787 2,159 3,514
Redeemable convertible preferred
stock................................ -- -- -- -- 23,582
Total stockholders' equity (deficit)... 929 1,857 3,364 545 (3,457)
- -------------------------
(1) From inception (October 31, 1995) to December 31, 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Historical
Consolidated Financial Data" and our consolidated financial statements and
related notes included elsewhere in this prospectus. In addition to historical
information, the discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated by these forward-looking statements due to
several factors including those factors set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We are a leading provider of eSupport services and applications. Our
eSupport solution uses the Internet and our proprietary technologies to help
preserve the availability of data, applications, and settings residing on
desktop PCs, remote laptops, and other network devices throughout an
organization. With our eSupport solution, users can solve their PC problems
themselves online, virtually anywhere, 24 hours a day. Our solution automates
diagnosis and self-repair, supports upgrades, and restores data and applications
lost due to such problems as virus damage, lost or stolen PCs, and hard drive
crashes. We deliver our eSupport solutions as an application service, in which
we or our partners provide the operational infrastructure, and as a licensed
software application to enterprises seeking to deploy their own internal
eSupport system.
We were formed as a Delaware corporation and began operations in October
1995. We initially focused on data protection. In 1996, we provided our first
Internet-based PC backup service targeted at small businesses. In 1997, we
expanded our market focus to include large enterprises and launched our first
licensed application. In 1998, we released our first eSupport licensed
application designed specifically for large enterprises. In 1999, we added
application protection to our solution. We have and intend to seek additional
partnerships with service providers and other resellers that target small to
medium size businesses.
We generate revenues from two principal sources:
- license revenues from our eSupport software application; and
- subscription revenues from: (1) customers using our eSupport application
service; (2) support and maintenance service fees related to our licensed
applications; and (3) royalty payments from our reseller partners.
When licensing our eSupport software application for internal use,
customers typically pay an up-front, one-time fee for a perpetual, non-exclusive
license of our software. Generally, the amount of the license fee is based on
the number of PCs supported. We generally recognize license revenues upon
delivery of the application. If the application is subject to acceptance and/or
return and refund, we defer recording revenue until acceptance has occurred or
the refund period has expired. Delivery lead times for our applications are
short and consequently, most of our license revenues in each quarter result from
orders received in that quarter. Accordingly, we generally maintain a backlog
only for our subscription and support activities, and we believe that our
backlog at any point in time is not a reliable indicator of future revenues and
earnings.
Subscription revenues consist primarily of application service arrangements
with customers. Under these arrangements, for a monthly, quarterly, or annual
fee, the customer can access our eSupport service over the Internet. These
revenues are based on the contracted number of users. We recognize revenues from
application services over the term of the arrangement,
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typically one year. Support service revenues relate to support and maintenance
agreements for our licensed applications. Under these agreements, we typically
provide product enhancements and technical support to customers for an annual
fee of 15% of the software license fee. We bill annually in advance for these
services and record revenues ratably over the term of the support agreement.
Support agreements are renewable at the discretion of the customer. Through
December 31, 1999, we have experienced favorable renewable rates on our eSupport
subscription services, although we have only offered these services for a short
period of time and many agreements have not yet reached the renewal date.
Other revenues in 1997 and 1998 consisted primarily of payments received
under a software development and license agreement. The remaining components of
other revenue are training and custom engineering revenues. We do not expect
other revenues to comprise a material portion of total revenues in future
periods.
Cost of revenues consists primarily of salaries and related personnel
costs, hardware and networking costs, and other operating costs associated with
our service and customer support organization. The costs associated with
software licenses and other revenues have not been significant in any period
presented, nor are they expected to be significant in the foreseeable future.
Sales and marketing expenses consist primarily of salaries, commissions and
other related costs for sales and marketing personnel, travel expenses, public
relations, and marketing materials and events. We license our eSupport
applications primarily through our direct sales force. Subscription revenues are
generated from our direct sales force, our telesales organization, and our
indirect sales channels.
Research and development expenses consist primarily of salaries and related
costs to support product development. We maintain a product development staff to
enhance our existing applications and to develop new products. To date, all
software development costs have been expensed as incurred.
General and administrative expenses consist primarily of salaries and
related costs for operations and finance employees, legal and accounting fees,
and facilities-related expenses.
Since our inception, we have incurred substantial costs to develop our
technology and applications, to hire, train and develop a sales and marketing
organization, and to establish an administrative organization. These costs have
exceeded the revenues generated by our licensed application and application
service and as a result, we have incurred losses in each year since inception
and have accumulated losses of $15.4 million at December 31, 1999. We anticipate
that our operating expenses will increase substantially in future periods as we
increase our sales and marketing organization, fund greater levels of research
and development, and improve operational and financial systems. Because we
expect to continue to invest in our business ahead of anticipated future
revenues, we expect that we will continue to incur losses for the foreseeable
future.
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RESULTS OF OPERATIONS
The following table sets forth consolidated statements of operations data
expressed as a percentage of total revenues for each period indicated. The
historical results are not necessarily indicative of results to be expected for
any future period.
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
---- ---- ----
REVENUES:
License................................................. 20% 38% 53%
Subscription............................................ 38 32 44
Other................................................... 42 30 3
---- ---- ----
Total revenues....................................... 100 100 100
COST OF REVENUES.......................................... 100 20 16
---- ---- ----
Gross profit.............................................. -- 80 84
---- ---- ----
OPERATING EXPENSES:
Sales and marketing..................................... 454 93 87
Research and development................................ 171 47 33
General and administrative.............................. 200 35 29
Stock-based compensation................................ -- -- 10
---- ---- ----
Total operating expenses............................. 825 175 159
---- ---- ----
Operating loss............................................ (825) (95) (75)
---- ---- ----
Interest income expense, net.............................. 31 3 (8)
---- ---- ----
Net loss.................................................. (794)% (92)% (83)%
==== ==== ====
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenues. Total revenues increased 451% from $552,000 in 1997 to $3.0
million in 1998 and 95% to $5.9 million in 1999. The increase was due to growth
in the number of customers licensing our eSupport application for internal use,
growth in subscribers to our eSupport application services, and growth in
support and maintenance services related to our licensed application.
License Revenues. License revenues increased 941% from $112,000 in 1997 to
$1.2 million in 1998 and 171% to $3.2 million in 1999. The increase was
primarily due to expanding market acceptance of our eSupport licensed
application, which was introduced in the second half of 1997, and increases in
our direct sales force. License revenues as a percentage of total revenues was
20% in 1997, 38% in 1998, and 53% in 1999. This increase was a result of our
strategy to focus our direct sales force on the largest corporate accounts,
which generally prefer to license applications for internal deployment.
Subscription Revenues. Subscription revenues increased 364% from $210,000
in 1997 to $975,000 in 1998, and 165% to $2.6 million in 1999. The increase
represents the impact of a growing base of customers who have subscribed to our
eSupport application service, which we believe is caused by increasing market
acceptance of that service. In addition, maintenance and support revenues
derived from customers who have licensed our eSupport software application,
increased due to the rise in the number of licensees.
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Cost of Revenues. Cost of revenues increased 9% from $552,000 in 1997 to
$602,000 in 1998 and 54% to $928,000 in 1999. The increase in cost of revenues
was primarily due to costs incurred to support the growing installed base of
customers subscribing to our eSupport application services and, to a lesser
extent, growth in the numbers of customers for our maintenance and support
services. The increase consisted of growth in personnel and related expenses, as
well as growth in equipment and networking expenses. Cost of license revenues
are not significant. Cost of revenues as a percentage of subscription revenues
was 62% in 1998, and 36% in 1999. This decrease was due to subscription revenues
rising at a greater rate than the related costs. In the short-term, we expect
that our cost of revenues as a percentage of revenues will increase as we add
operational capacity in advance of the related revenues. In the long-term, we
expect cost of revenues as a percentage of revenues to decline as we acquire
additional customers to fill such capacity.
Gross Profit. Gross profit increased 106% from $2.4 million in 1998 to
$5.0 million in 1999. We did not generate a gross profit in 1997. The increase
in gross profit was primarily due to the increase in total revenues. The gross
margin increased from 80% in 1998 to 84% in 1999. The gross margin improvement
was primarily due to the increase in license revenues as a percentage of total
revenues as well as the improved gross margin on subscription revenues in 1999
as compared to 1998. We expect gross margin to fluctuate in future periods due
to changes in the mix of license and subscription revenues.
Sales and Marketing Expenses. Sales and marketing expenses increased 13%
from $2.5 million in 1997 to $2.8 million in 1998 and increased 82% to $5.2
million in 1999. The increase was primarily due to increased sales and sales
support personnel as we established our direct sales force, increased costs
associated with marketing programs, and costs associated with opening sales
offices outside Massachusetts. We expect sales and marketing expenses to
increase in absolute dollars as we expand our direct sales force, including
telesales personnel, establish indirect sales channels, and develop new
marketing programs.
Research and Development Expenses. Research and development expenses
increased 50% from $943,000 in 1997 to $1.4 million in 1998 and increased 40% to
$2.0 million in 1999. The increase was primarily due to growth in personnel and
related costs. To date, all software development costs have been expensed in the
period incurred. We expect research and development expenses to continue to
increase in absolute dollars, but to decrease as a percentage of total revenues
in future periods.
General and Administrative Expenses. General and administrative expenses
were $1.1 million in both 1997 and 1998, and increased 63% to $1.7 million in
1999. The increase in general and administrative expenses in 1999 was primarily
due to growth in personnel and related costs and increased professional fees all
related to supporting our growth. We expect general and administrative expenses
to increase in absolute dollars as we continue to build our administrative
infrastructure to manage anticipated growth but to decrease as a percentage of
total revenues in future periods.
Interest Income. Interest income decreased from $169,000 in 1997 to
$118,000 in 1998, and increased to $223,000 in 1999. The decrease in 1998 was
due to lower cash balances available for investment as the proceeds of our 1997
preferred stock financing were expended in 1998. The increase in 1999 was due to
greater cash balances available for investment as a result of proceeds received
from our preferred stock financing in 1999.
Interest Expense. Interest expense increased from $34,000 in 1998 to
$675,000 in 1999. The increase in 1999 was primarily due to interest incurred on
a $3,000,000 bridge loan from investors. Approximately $537,000 of interest
expense in 1999 was noncash interest expense associated with the value of
warrants issued to the bridge noteholders.
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Stock-Based Compensation. In connection with our grant of stock options
during the year ended December 31, 1999, we recorded deferred stock-based
compensation of $2.1 million, of which we amortized $594,000 in 1999.
Stock-based compensation expense represents the amortization of stock
compensation charges resulting from the granting of stock options to employees
with exercise prices that may be deemed, for accounting purposes, to be below
the fair value of our common stock on the date of the grant. These amounts are
being amortized over the vesting periods of the applicable options, which are
typically four years. See note 9(c) to our consolidated financial statements. We
expect to record an additional $21.0 million deferred compensation in the first
half of 2000.
Net Operating Loss Carryforwards. As of December 31, 1999, we had
approximately $14.2 million of state and federal net operating loss
carryforwards available to offset future taxable income. These net operating
loss carryforwards expire at various dates through 2019, to the extent that they
are not used. We have not recognized any benefit for the future use of the net
operating loss carryforwards for any period since inception. Use of the net
operating loss carryforwards may be limited in future years if there is a
significant change in our ownership. We believe that our proposed initial public
offering will result in an ownership change. However, we do not believe that
this ownership change will place a significant limitation on our ability to use
the net operating loss carryforwards.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents our consolidated operating results for each of
the four quarters in 1999. The information for each of these quarters is
unaudited and has been prepared on the same basis as our audited consolidated
financial statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results when read in conjunction with our audited consolidated financial
statements and related notes appearing elsewhere in this prospectus.
THREE MONTHS ENDED
------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- --------- --------- ---------
(IN THOUSANDS, UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
License................................... $ 329 $ 661 $ 740 $ 1,427
Subscription.............................. 543 604 669 770
Other..................................... 117 24 40 15
------- ------- ------- -------
Total revenues......................... 989 1,289 1,449 2,212
COST OF REVENUES............................ 195 241 222 270
------- ------- ------- -------
Gross Profit................................ 794 1,048 1,227 1,942
------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing....................... 914 1,200 1,469 1,582
Research and development.................. 390 478 476 635
General and administrative................ 328 385 440 578
Stock-based compensation.................. 30 101 203 260
------- ------- ------- -------
Total operating expenses............... 1,662 2,164 2,588 3,055
------- ------- ------- -------
Operating loss.............................. (868) (1,116) (1,361) (1,113)
Interest income (expense), net.............. (24) (56) (389) 17
------- ------- ------- -------
Net loss.................................... $ (892) $(1,172) $(1,750) $(1,096)
======= ======= ======= =======
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As a percentage of total revenues:
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- -------- --------- --------
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
License....................................... 33% 51% 51% 64%
Subscription.................................. 55 47 46 35
Other......................................... 12 2 3 1
--- --- ---- ----
Total revenues............................. 100 100 100 100
COST OF REVENUES................................ 20 19 15 12
Gross profit.................................... 80 81 85 88
OPERATING EXPENSES:
Sales and marketing........................... 93 93 102 71
Research and development...................... 39 37 33 29
General and administrative.................... 33 30 30 26
Stock-based compensation...................... 3 8 14 12
--- --- ---- ----
Total operating expenses................... 168 168 179 138
--- --- ---- ----
Operating loss.................................. (88) (87) (94) (50)
Interest income, net............................ (2) (4) (27) 1
--- --- ---- ----
Net loss........................................ (90)% (91)% (121)% (49)%
=== === ==== ====
Revenues increased steadily over the last four quarters as a result of
expansion of our direct sales force, growing acceptance of our eSupport licensed
application, and growth in the number of companies licensing our software for
internal use. Subscription revenues have increased each quarter due to the
increasing installed base of subscribers of our eSupport application service and
support and maintenance on our eSupport application. Our direct sales force
targets large enterprises. Because large enterprises typically prefer our
licensed application, license revenues have grown at a faster rate than
subscription revenues.
Operating expenses increased during each of the last four quarters
primarily as a result of growth in the number of employees, including growth in
sales and marketing personnel, reflecting the continued expansion of our
operations.
Our operating results have varied on a quarterly basis during our operating
history and we expect them to fluctuate significantly in the future. A variety
of important factors, many of which are outside of our control, may affect our
quarterly operating results. See "Risk Factors," including in particular, "-- We
rely on a small number of customers for a large portion of our subscription
revenues," "-- We depend on large orders for a significant portion of our
license revenues, which can lead to significant fluctuations in our revenues and
operating results," and "-- Our revenues and operating results fluctuate widely
and are difficult to predict because of the delivery options we offer our
customers."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of preferred stock and through bank credit facilities. Through December
31, 1999, we raised total net cash proceeds of $34.4 million through these
preferred stock financings, including $23.5
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million in November 1999. Upon the closing of this offering, all of our
outstanding preferred stock will convert into 19,588,206 shares of common stock.
Net cash used in operating activities was $3.0 million in 1999 and $2.3
million in 1998. Net cash used in operating activities reflects increasing net
losses and growth in accounts receivable, partially offset by increases in
accounts payable, accrued expenses, deferred revenue and, in 1999, the
recognition of certain non-cash expenses.
Net cash used in investing activities was $1.0 million in 1999 and $300,000
in 1998. Investing activities relate primarily to purchases of computer hardware
and software and, to a lesser extent, leasehold improvements made to our
headquarters. While we do not currently have any significant commitments to
purchase equipment or make other capital expenditures, we expect that we will
accelerate such spending in the near term. Also, while we do not currently have
agreements or commitments to acquire other businesses or technologies, we may do
so in the future.
Net cash provided by financing activities was $22.5 million in 1999 and
$632,000 in 1998. In 1999, most of the activity relates to proceeds received
from the issuance of preferred stock and convertible notes payable, partially
offset by the repayment of our line of credit facility and payments made on an
equipment note. The bank line of credit facility expired in 1999. In 1998, our
financing activities consisted primarily of borrowings under the then-existing
bank line of credit facility and an equipment note and repayment of amounts due
under the equipment note.
At December 31, 1999, our principal source of liquidity was $20.4 million
in cash and cash equivalents. We believe that the net proceeds of this offering,
together with our cash and cash equivalents, will be sufficient to meet our
working capital needs for at least the next 12 months, although we could elect
to seek additional funding prior to that time. From then on, we may require
funds to support our working capital requirements or for other purposes and may
seek to raise additional funds through public or private equity financing or
from other sources. Additional financing may not be available at all or, if
available, may not be obtainable on terms favorable to us. In addition, any
additional financing may be dilutive and new equity securities could have rights
senior to those of existing holders of our common stock. If we need to raise
funds and cannot do so on acceptable terms, we may not be able to respond to
competitive pressures or anticipated requirements or take advantage of future
opportunities.
YEAR 2000 READINESS DISCLOSURE
To date we have not experienced, nor are we are aware of, any material
problems with any of our internal systems or eSupport products related to the
year 2000 issue. However, because a year 2000 problem could materially disrupt
the operations of our customers and harm our operations and financial condition,
we will continue to monitor the problem and test our products and internal
systems as we deem necessary. Because we do not make any changes to the data we
support for our customers, any information which is transmitted to us in a
non-year 2000 compliant state will be stored in that state and could result in
future problems for our customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, as amended by SFAS No. 137, will be effective for our financial reporting
beginning in the third quarter of fiscal 2000. SFAS No. 133 will require us to
recognize all derivatives as either assets or liabilities in the
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consolidated balance sheet and measure those instruments at fair value. The
accounting for gains and losses from changes in the fair value of a particular
derivative will depend on the intended use of the derivative. We do not expect
the adoption of SFAS No. 133 to have a material effect on our results of
operations or financial position.
FOREIGN CURRENCY EXCHANGE RATE RISK
To date, all of our recognized revenues have been denominated in U.S.
dollars and have come primarily from customers in the United States, so our
exposure to foreign currency exchange rate changes has been immaterial. We
expect, however, that future license and subscription services revenues may also
be derived from international markets and may be denominated in the currency of
the applicable market. As a result, our operating results may become subject to
fluctuations based upon changes in the exchange rates of foreign currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that the exchange rate fluctuations will not harm our
financial results in the future.
INTEREST RATE EXPOSURE
We have an investment portfolio of money market funds and fixed income
certificates of deposit. The fixed income certificates of deposit, like all
fixed income securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. In view of the nature and mix of
our total portfolio, a 10% movement in market interest rates would not have a
significant impact on the total value of our portfolio as of December 31, 1999.
As of December 31, 1999, we had short-term debt of $127,000 which carries
an interest rate tied to the prime rate. Therefore, we are subject to exposure
to interest rate risk for this borrowing based on fluctuations in the prime
rate. Based upon the outstanding indebtedness under this arrangement, an
increase in the prime rate of 0.5% would cause a corresponding increase in our
annual interest expense of approximately $1,000.
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BUSINESS
OVERVIEW
We are a leading provider of application services and software that support
PCs over the Internet and corporate intranets. With our eSupport solution, users
can solve their PC problems themselves online, virtually anywhere, 24 hours a
day. Our solution automates diagnosis and self-repair, supports upgrades, and
restores data and applications lost due to such problems as virus damage, lost
or stolen PCs, and hard drive crashes. We believe that our solution is
applicable worldwide to companies of all sizes in all industries. We deliver our
eSupport solution as an application service, in which we or our partners provide
the operational infrastructure, and as a licensed software application to
enterprises seeking to deploy their own internal eSupport system. We have
developed critical technologies that enable our solution to efficiently support
the demands of the largest enterprises as well as millions of small companies
and individual users.
Along with our strategic partners, we currently provide eSupport
application service to approximately 12,000 PCs, and our eSupport solution is
currently licensed by over 50 customers to manage over 85,000 PCs. Our customers
range from small companies and individuals to large multi-national enterprises,
including Amgen Inc., Ariba, Inc., Cisco Systems, Inc., General Electric
Company, Koch Industries, Inc., Lucent Technologies Inc., and Unisys
Corporation.
INDUSTRY BACKGROUND
PCs are essential to the information infrastructure of most businesses and
organizations today. International Data Corporation estimates that over 112
million PCs were purchased in 1998, and expects that number to grow to 190
million by 2003. This represents a compound annual growth rate of 14%. Advances
in both hardware and software development have driven business-critical
applications and data to PCs. According to IDC, 60% of corporate data is now
stored on PCs. As computing becomes more mobile, and the autonomy of users
grows, corporate IT departments face greater challenges controlling and
supporting these computing assets and the critical data that they hold. This
presents a significant and growing problem for senior management.
As the corporate computing infrastructure becomes more decentralized and
dependent on PCs, it becomes more difficult to monitor and maintain. IT
departments must support a growing number of users with varying levels of
sophistication and demands, each with a PC unique in its configurations,
applications, files and settings. Controlling important information spread
across vast numbers of PC hard drives is becoming increasingly important and
expensive.
Many factors are contributing to the rising costs of supporting PC users
including:
- Increased complexity of PCs. The number, size, and functionality of
software applications installed on the typical PC have grown
substantially over the last several years. These advances, coupled with
the complications presented by the interactions between these installed
programs, have led to more complex and fragile PCs.
- Initial customization. The customization of a PC for a particular user
begins with deployment. Variations in equipment, hardware and software
configurations, personal settings, and individual user data make each PC
system unique to its user.
- Continuous changes to PCs. Users add and delete software and data, alter
settings, and make modifications. Because these changes are generally
made without the knowledge
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of the IT staff, they impact the IT staff's ability to effectively
provide ongoing support and maintenance.
- Frequent loss of data and application availability. Most PC users are
familiar with hard drive crashes, system failures, and user mistakes,
such as inadvertent deletions and overwrites. Computer viruses also
damage data and applications. Because so much business-critical
information is stored only on PCs, the loss of important data can cause
costly delays and loss of revenue.
According to International Data Corporation, laptop computers are the
fastest growing segment of PC sales. Laptops exacerbate the difficulties of
systems maintenance. According to the Gartner Group, an independent research
firm, laptops typically have up to 53% higher total cost of ownership than
desktop PCs. One of the significant factors contributing to this increased cost
is the need to provide complex support while the user is mobile. We believe
companies are generally willing to spend money to support them because they are
important productivity tools for key employees, including salespeople and
executives.
As personal digital assistants, Internet appliances, and other devices
become part of the networked computing environment, we believe they will require
the same level of support demanded by today's PC users.
CURRENT APPROACHES ARE INADEQUATE
Historically, senior management has demanded high levels of system
stability, availability, and protection of company data assets. For example,
acceptable availability for mainframe computers has been measured in minutes of
total downtime per year. With the development of server-centric computing
models, businesses began to demand the same level of availability from their
servers as they had from their centralized systems. We believe spending on
system management has followed this computer platform migration.
With the IT focus increasingly on the PC, spending on system management is
shifting again. While PC management spending has accelerated, we believe
inadequate solutions have resulted. Even as the PC has become one of the most
important IT assets, the primary management demands for IT support
infrastructure remain consistent: availability, corporate data protection, and
low total cost of ownership. Solution attempts fall generally into three
categories:
- More IT or help desk staffing. Businesses typically deliver PC support
to users via a help desk or on-site visits. When a user reports a
problem, the help desk response is usually manually intensive, involving
reinstallation of applications, or attempts at file-by-file diagnosis of
the problem. This approach generally is not scalable, does not
effectively provide availability or data protection, and is complicated
by the growing shortage and turnover of qualified technical personnel.
- Policies for users to follow. In an attempt to push responsibility for
the PC to the users, many IT departments outline policies for users to
follow, such as PC lockdowns or central data storage mandates. Such
procedures, which attempt to restrict user behavior or rely on regular
user actions such as use of external disk drives, limit PC usefulness and
are not typically successful.
- Software Point Products. In general, we believe existing PC support
products are each designed for single PCs or servers, address one limited
issue, and are unable to scale to support the vast numbers of PCs in
place. They are impersonal solutions which do not adequately address
growing PC complexity, the distributed nature of user data, remoteness of
users, or the unique and constantly changing nature of each PC.
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THE ESUPPORT OPPORTUNITY
eSupport combines automated data management applications with the
connectivity of the Internet to solve the complex issues of the PC lifecycle.
Using the Internet, eSupport provides the opportunity for a complete support
infrastructure which can automatically deliver highly personalized services to
PC users effectively and efficiently. A successful eSupport infrastructure must
be able to intelligently diagnose and treat user problems without burdening IT
staffs. eSupport must be simple to use and require limited interaction with the
user. According to International Data Corporation, eSupport will represent a
$14.1 billion opportunity in 2003, growing at a compound annual growth rate of
49% from $1.9 billion dollars in 1998.
[Circular diagram illustrating the cyclical nature of PC support and
management with descriptive captions enumerating different phases including:
Initial Deployment, Asset Discovery and Management, Software Upgrades, Software
Distribution, Lost System Replace, Crash & Replace, Hardware Upgrades, Virus
Repair, PC Retirement, PC Refresh, System and Application Failures, Help Desk
Support and others.]
THE CONNECTED SOLUTION
We are a leading provider of eSupport solutions and can deliver our
solutions to customers as an application service or a licensed application. Our
eSupport solution manages data, applications, configurations, and settings
either over the Internet or an intranet and is designed to ensure PC
availability. The basic components of our eSupport solution offer PC system
self-repair, automated capture of data, applications, settings and
configurations, data migration for PC upgrades, storage management, and other
capabilities. These components comprise an application that addresses the
different phases of a PC's lifecycle. With our solution, we believe users can
solve most PC problems themselves online, virtually anywhere, 24 hours a day.
Our eSupport solution acknowledges that each PC is unique and constantly
changing, and provides IT staffs with a method to deal with that individuality.
The key features of our eSupport solution include:
Preservation of Business Critical Information
Our eSupport solution captures on a central server all user data, software
applications, configurations, and personal settings. Files, including any past
versions, which are lost, overwritten, deleted, or damaged can be restored
online in real time. The design helps preserve critical information from
destructive influences.
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Improvement of Worker Productivity
With our eSupport products and services, users can repair broken
applications or retrieve lost data quickly, minimizing disruptions. For PCs that
are lost or stolen, or damaged beyond repair, a replacement, identical down to
the user's personal screen saver, can be generated quickly using the information
stored on the server. This reduces user time and productivity lost waiting for
repairs or preparation of new equipment.
Reduction of IT Staff and Help Desk Burden
With our eSupport solution, we believe users can repair the majority of
problems encountered on PCs, without the need for help desk support. Our
solution also automates the ongoing asset maintenance and storage functions of
PCs, allowing the reallocation of IT staff resources. As PCs become obsolete and
are replaced, our eSupport solution automates their upgrade by locating and
transferring all user data from the old machines to the new machines. These
capabilities allow IT departments to support a greater number of users with
fewer personnel.
We believe our eSupport solution is unique because it offers the following
benefits over existing products:
Scalability
We have designed our eSupport architecture to be highly scalable. We can
support many thousands of PCs on a single Windows NT system. Furthermore, our
clustering software allows many servers to function in concert. High scalability
has been achieved through a combination of data reduction techniques,
hierarchical storage management methods, computationally efficient software, and
refinements due to extensive field experience.
Reliability, Performance and Efficiency
Our eSupport service provides mirrored backup servers at different
locations. If one server goes down, our eSupport solution will automatically
switch to the other server. Our SendOnce, Delta Block(TM), and file compression
technologies significantly reduce the amount of user data that must be sent to
the server for storage. The user's backup transmission can typically be
completed in the background during the time it takes that user to check e-mail,
without a noticeable reduction in performance.
Transparent, Effortless, and Certain(TM)
Our eSupport solution allows for a system capture to proceed automatically
and with minimal interference to the user. Our Hands-Free Backup(TM) runs
automatically in the background according to a preset schedule or during any
detected network connection without any effort on the part of the user. If the
backup session is interrupted, the next session will begin where the previous
left off. Our open file management technology captures files that the user has
open during the backup session, such as Microsoft Word documents.
Flexible Delivery Options
We have designed our eSupport solution to be delivered as an Internet-based
application service or as a licensed application. For those customers who
purchase our eSupport service directly from us, we are an application service
provider, and store client data on our mirrored, secure servers. We also have
strategic partnerships with Internet service providers, application
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service providers, and other channel partners that provide our eSupport service
to their customers. For companies that prefer to support their users internally,
we license our eSupport solution software for deployment and operation by the
customer. Our solution is available for Windows operating platforms and can be
installed quickly and easily across an enterprise without user intervention.
STRATEGY
Our objective is to be the leading provider of eSupport technologies and
services for PCs and other networked devices. We intend to achieve this
objective through the following strategies:
- EXPAND OUR MARKET PRESENCE. We believe the market for eSupport spans
many geographic markets. We intend to access these markets by continuing
to expand our direct sales presence and support infrastructure worldwide.
During the next two years, we plan to establish a direct presence in
Europe and Asia and add several additional regional sales offices in the
U.S. We also plan to expand our ability to provide our eSupport
application services more efficiently by establishing additional service
facilities in Europe and Asia.
- PENETRATE THE MID-MARKET THROUGH PARTNERS. We intend to seek additional
partnerships with service providers that target small to medium size
companies to further penetrate this market segment. We currently have
over 35 partners, ranging from companies focusing on eSupport, such as
Centerbeam and Everdream, to large, diversified services companies that
are building eSupport practices, such as Compaq, GTE Internetworking, and
Concentric.
- INCREASED PENETRATION OF OUR EXISTING CUSTOMER BASE. Many of our large,
corporate customers initially implement our eSupport solution in a
particular division or geographic region of their PC population. Most of
these customers have expanded their use of our solution after the initial
deployment. Our strategy is to penetrate the entire PC population of this
customer base and establish our technology as the corporate standard.
- EXPAND THE BREADTH OF OUR SOLUTIONS. We currently offer what we believe
is one of the broadest eSupport solutions for PCs. We plan to build
additional capabilities onto our core eSupport solution to further
address the essential PC management functions performed by PC users and
their respective IT support staffs.
- EXTEND OUR ESUPPORT CAPABILITIES TO OTHER NETWORKED DEVICES. We intend
to further extend the application of our core technologies to support the
availability requirements of other end user computing devices, such as
personal digital assistants and other networked appliances.
OUR PRODUCTS AND SERVICES
We sell our eSupport solution as both an application service and as a
licensed application. As an application service provider, we operate the
application from our data centers and charge our customers a monthly fee based
on the number of PCs serviced. Our partners use our solution to provide eSupport
services to their customers in return for royalty payments to us. For
organizations that prefer to purchase the application and support their own
users, we sell a perpetual product license. License pricing depends upon the
number of PCs intended to be
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supported. No matter how our application is used or purchased, we believe our
eSupport solution enables PC users and IT staffs to:
- Perform convenient online, PC system and software self-repair;
- Automatically recover lost files, or previous versions of a file, through
self-service restore;
- Protect a company's ownership of and access to its corporate data;
- Replicate user data, applications, and settings for lost or stolen PCs or
PCs that have experienced a hard drive crash or system failure;
- Repair virus damaged PCs or corrupted files promptly; and
- Migrate user data from the old to the new machine as part of a PC upgrade
program.
We also target smaller business and home users with data-only backup
solutions. This Internet service is charged per PC, per month.
Our eSupport solution regularly captures essential information on each PC's
hard drive and transmits this information over Internet protocol, IP,
connections to our server. With a few mouse clicks, a user can invoke any of our
eSupport functions. The server automatically responds and reassembles the
required files and delivers them online to the PC. Our software then
automatically handles the final decoding and re-imaging for the user.
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CAPABILITIES OF OUR ESUPPORT SOLUTIONS
The following tables depict the capabilities of the various components of
our software:
PC SOFTWARE AGENT
- -------------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- -------------------------------------------------------------------------------------------------------
HANDS-FREE BACKUP(TM) - PC HARD DRIVE CAPTURE OCCURS - ENSURES THAT THE PC CAPTURE
AUTOMATICALLY EITHER ON OCCURS
SCHEDULE OR WHEN A NETWORK
CONNECTION IS DETECTED - REQUIRES NO USER INTERVENTION
- OCCURS TRANSPARENTLY IN THE
BACKGROUND DURING E-MAIL OR
OTHER INTERNET CONNECTION
- -------------------------------------------------------------------------------------------------------
DELTA BLOCK(TM) - AN ALGORITHM THAT REDUCES THE - SUBSTANTIALLY REDUCES
DATA TRANSFERRED BY SENDING TRANSMISSION TIME AND STORAGE
ONLY THOSE PORTIONS OF EACH NEEDS
FILE WHICH CONTAIN DIFFERENCES
FROM THE LAST CAPTURE
- -------------------------------------------------------------------------------------------------------
ENCRYPTION - ALL DATA IS SENT, STORED, AND - PROVIDES HIGH SECURITY FOR THE
RETURNED TO THE PC FULLY CUSTOMER
ENCRYPTED
- -------------------------------------------------------------------------------------------------------
COMPRESSION - PRIOR TO TRANSMISSION, ALL DATA - REDUCES TRANSMISSION TIME AND
IS COMPRESSED STORAGE NEEDS
- -------------------------------------------------------------------------------------------------------
OPEN FILE MANAGEMENT - FILES OPEN DURING DATA CAPTURE - ELIMINATES THE NEED TO EXIT
CAN BE PROCESSED APPLICATION IN ORDER TO CAPTURE
DATA
- -------------------------------------------------------------------------------------------------------
USER INTERFACE - PROVIDES A SIMPLE USER - USERS CAN TAKE CARE OF MOST PC
INTERFACE FOR REPAIR OR PROBLEMS WITH A FEW CLICKS OF
RECOVERY OF FILES, OR THE PC THEIR MOUSE
SYSTEM
- -------------------------------------------------------------------------------------------------------
POINT-IN-TIME REPAIR(TM) - AUTOMATICALLY ROLLS AN ENTIRE - EASILY FIXES PC PROBLEMS WHILE
PC SYSTEM, APPLICATION, OR FILE KEEPING THE MOST RECENT USER
BACK TO A PRIOR POINT WHEN IT DATA FILES INTACT
OPERATED CORRECTLY
- -------------------------------------------------------------------------------------------------------
HANDS-FREE INSTALL(TM) - THE PC AGENT SELF-INSTALLS WITH - AUTOMATES A ROLLOUT WITH
NO USER INTERVENTION REQUIRED MINIMAL IT STAFF OVERHEAD AND
NO USER INTERVENTION
- -------------------------------------------------------------------------------------------------------
AUTOMATIC FILE SELECTION(TM) - AUTOMATICALLY LOCATES, EXTRACTS - QUICKLY MIGRATES DATA FILES TO
AND REPLICATES USER DATA FILES THE NEW PC WITH MINIMAL
DURING PC UPGRADES PRODUCTIVITY LOSS
- -------------------------------------------------------------------------------------------------------
CONNECTION MANAGEMENT - IF ONE SERVER IS UNREACHABLE OR - HIGH ESUPPORT SYSTEM
BUSY, THE AGENT ROUTES THE DATA AVAILABILITY
TO THE OTHER SERVER
- -------------------------------------------------------------------------------------------------------
AUTOMATIC RESTART - IF A TRANSMISSION SESSION IS - SOLUTION EFFECTIVE EVEN WITH
INTERRUPTED, THE AGENT RESTARTS POOR QUALITY TRANSMISSION LINES
WHERE THE TRANSMISSION WAS
TERMINATED
- -------------------------------------------------------------------------------------------------------
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SERVER
- -------------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- -------------------------------------------------------------------------------------------------------
SENDONCE - EACH FILE SENT TO THE SERVER IS - REDUCED TRANSMISSION TIME AND
GIVEN A UNIQUE DIGITAL STORAGE SPACE
SIGNATURE; FROM THEN ON, ANY
FILE WITH THE SAME SIGNATURE IS - MAKES THE FULL BACKUP OF A PC'S
NOT SENT AGAIN; DUPLICATE APPLICATIONS AND DATA PRACTICAL
COPIES ARE MAINTAINED ON THE
SERVER - SPEEDS BACKUPS AMONG USERS
BECAUSE COMMON, SHARED FILES
ARE ONLY TRANSMITTED ONCE
- FAST RECOVERY OF COMMON FILES
FROM AUTOMATED TAPE LIBRARIES
- REDUNDANCY ENHANCES DATA
PROTECTION
- -------------------------------------------------------------------------------------------------------
HSM & COMPACTION - PROPRIETARY HIERARCHICAL - LOW COST STORAGE, INEXPENSIVE
STORAGE MANAGEMENT SYSTEM SCALABILITY
DESIGNED TO TAKE DATA CAPTURED
FROM A PC OVER AN ENTIRE YEAR - FAST RECOVERY DUE TO MINIMAL
AND CONCENTRATE DATA UNIQUE TO TAPE HANDLING
THAT PC ON A SMALL NUMBER OF
TAPES
- -------------------------------------------------------------------------------------------------------
MIRROR TECHNOLOGY - ALL USER DATA IS DUPLICATED ON - HIGH AVAILABILITY FOR ANY PC
TWO SERVERS ESUPPORT FUNCTION
- PREVENTS DATA LOSS
- -------------------------------------------------------------------------------------------------------
WINDOWS NT SERVER AND CLUSTERING - WE USE WINDOWS NT SERVERS AND - INEXPENSIVE, FAST DEPLOYMENTS
CAN JOIN MULTIPLE SERVERS IN A
SINGLE SYSTEM - EXTENSIVE SCALABILITY
- -------------------------------------------------------------------------------------------------------
CD MAKER - CAN AUTOMATICALLY GATHER USER - FACILITATES LARGE SCALE FILE
FILES ON A SET OF CDS FOR ANY RECOVERY FOR USERS WITH LOW
USER SPEED NETWORK CONNECTIONS
- ENABLES USER TO HAVE ON-SITE
ARCHIVAL COPIES OF FILES
- -------------------------------------------------------------------------------------------------------
REPORTS, MANAGEMENT, AND PROVISIONING
- -------------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- -------------------------------------------------------------------------------------------------------
CUSTOMER DEPLOYMENT KIT - ALLOWS IT STAFF TO DEFINE - CUSTOM DEPLOYMENT OF AGENTS TO
OPTIONS AND SETTINGS FOR THE PC USER COMMUNITIES
AGENT
- -------------------------------------------------------------------------------------------------------
SYSTEM MANAGEMENT WITH AOK - WEB-BASED MANAGEMENT CONSOLE - ENTERPRISE CUSTOMERS CAN MANAGE
THEIR EMPLOYEES' USE OF THE
APPLICATION SERVICE
- -------------------------------------------------------------------------------------------------------
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Our current development initiatives include the following enhancements to
our eSupport solution which we expect to deliver in 2000:
- iRoam. Our universal web access module, iRoam, is being designed to
allow customers to access directly any file on their system from any
machine which runs a web browser that can access the server, including
public Internet kiosks and personal digital assistants.
- Expanded asset management. Currently, our eSupport solution conducts
regular inspections of our customers' PCs and maintains a database of all
software files on each PC managed across the enterprise. We are working
to expand this technology to generate comprehensive reports on demand to
allow IT organizations to analyze their inventory data and better meet
their software and hardware asset management demands.
- Extended configuration repair. We intend to expand our solution to allow
remote controlled system repair combined with the capability to make
changes in individual system settings and configurations.
- Product localization. We are currently translating our product line into
French and German versions as part of our planned expansion to the larger
European markets.
CUSTOMERS
Our eSupport solution is flexible and scalable. Our customers span many
industries and range from individual users to some of the world's largest
corporations.
APPLICATION SERVICE CUSTOMERS
Andataco Hitachi Data Systems Corporation
Hewlett-Packard Company Koch Industries, Inc.
SOFTWARE LICENSE CUSTOMERS
Agilent Technologies, Inc. General Electric Investment Corporation
Amgen, Inc. Grant Thornton
Ariba, Inc. GTE Internetworking
Babson College Honeywell, Inc.
The Boston Consulting Group Interstate National Corporation
Candle Corporation Kemper Insurance Companies
Cerner Corporation Micromuse Inc.
Compuware Corporation RSA Security Inc.
East Kentucky Power Cooperative, Inc. Symantec Corporation
The Gap, Inc. The Presidio Corporation/Red River Army Depot
General Dynamics University of Michigan
Visa International Service Association
Sales to a small number of customers generate a disproportionate amount of
our subscription revenue. In 1999, five customers accounted for 41% of
subscription revenue, which constituted 18% of total revenue. Hewlett-Packard
Company accounted for 13% of our total revenues in 1999. Revenues from any of
these or other customers could decline at any time due to competition,
alternative technologies, or other factors discussed under the caption "Risk
Factors." A reduction of revenues from these or other significant customers
would harm our business.
The following case studies illustrate how our eSupport solution provides
benefits across many industries. In addition, because the application solves
problems at many points of the PC
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lifecycle, customers may initially purchase it in order to solve particular
issues, with later realization of the benefits of its full features. We continue
to provide services to all of these customers, none of whom represents more than
2% of our revenues.
GTE INTERNETWORKING, a division of GTE Corporation that includes the
acquired operations of BBN Corporation, offers business customers a full range
of integrated Internet services. Historically, GTE International's IT staff gave
employees removable disks to backup data on over 1,400 PCs, 70% of which were
laptops. The company decided that this approach was not working because users
were not using the devices and regularly lost significant data and productivity
when PC hard drives failed. Because a large amount of business-critical
information is kept on user laptops, GTE needed a secure and convenient method
to capture data. After a pilot study, GTE deployed our eSupport solution. We
believe that the ease of use and scalability of our solution was critical to
GTE's decision to deploy our solution. GTE currently supports approximately
4,500 PCs with our eSupport solution.
GE INVESTMENTS, a division of General Electric Corporation which manages
over $70 billion in stock and retirement fund investments, has hundreds of
desktop and laptop PCs. Unless GE can restore a failed PC to its full working
state in a few hours, its users may lose productivity at a significant cost.
Because of these concerns, the IT department replaced its tape technology with
our solution. Our eSupport solution was deployed to protect a wide variety of
desktop and laptop PCs across the organization.
PEOPLESOFT is a leader in eBusiness and analytic applications for human
resource management. Laptop users are critical to PeopleSoft. PeopleSoft's
LAN-based backup solution did not address data loss problems faced by traveling
employees. After the initial deployment to laptops was completed, PeopleSoft
realized our eSupport solution provided many benefits not provided by its
previous approach and decided to replace its existing LAN-based solution. As a
result, our solution is used on over 5,000 PCs across the company.
BABSON COLLEGE in Wellesley, Massachusetts supports approximately 800
faculty and staff PCs. To help lower support costs, the college decided to
replace them all in 1999. Due to the value of the data scattered over these PCs,
it was imperative to ensure that all the users' data was migrated to their new
PCs. Using traditional methods of copying data to a server drive and then
downloading to the new PC was labor intensive and provided no assurance that all
user data would be transferred to the new machines. By leveraging our Automatic
File Selection(TM) technology, Babson was able to migrate the data files
automatically from one PC to another. Automatic File Selection(TM) uses powerful
algorithms to automatically identify data files versus other files such as
drivers that are unwanted on a new PC. Once deployed as the method for PC
upgrade programs, our solution became the college-wide eSupport solution.
TECHNOLOGY
Our solution's use of IP allows IT administrators and end users to ensure
data and PC system availability. Our technology-based solution has been
recognized in the industry with numerous awards, including the following:
- PC Magazine's Editors' Choice Award and Best of 1999;
- InfoWorld Magazine's "Hot Product;" and
- PC Computing Magazine's "4 Star Award."
We overcame significant technical challenges to provide our capabilities,
including:
- Reduction in the amount of data that needs to be transferred to and
stored on the server;
- Management of large amounts of data on low cost servers;
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- Provision of highly reliable and fast PC/server synchronization and
recovery over low speed, unreliable connections; and
- Provision of effective and consistent operation.
Our solution supports remote users who can establish an IP connection. We
install a software agent on every PC we support. The agent communicates with our
highly specialized server using IP. This allows our solution to be easily
configured for operation as an application service by us or our partners, or as
a network application by corporations to support their own users. The following
diagram illustrates how the solution can be configured for either delivery
method.
[IP Network GRAPHIC]
[Diagram showing delivery of eSupport services to different types of users by
ASP operation centers and enterprise operation centers via internet and
corporate IP networks. Diagram shows arrows leading from the two types of
operation centers into a central circle representing networks with additional
arrows leading to the different types of users, including local desktop PCs,
mobile users, consumers, home offices, field offices and small to medium
enterprises.]Our proprietary server software runs on the Windows NT operating
system. Data sent over the Internet from PCs is initially stored on high
availability disk systems. As the data ages, our hierarchical storage management
software transfers the data to cost-effective, automated tape libraries.
Currently, our software agents support PCs running Windows 95, 98, NT, and
Windows 2000 operating systems.
PARTNERS AND STRATEGIC RELATIONSHIPS
We have and intend to seek additional partnerships with service providers
and other resellers that target small to medium size companies. We believe these
channels can reach targeted businesses and generate subscription revenues more
effectively than our direct sales force. Many companies with a significant
portion of their business based on Internet revenue, or a strategy to grow their
online presence, are adding services to their overall web offerings.
We offer our eSupport application and services through a growing variety of
strategic partnerships that include:
- Internet service providers, who sell the service to their customers as a
value-added offering to their Internet access service;
- Application service providers, who often bundle our service as part of
their overall solution sale, or offer it as part of a suite of services;
- PC manufacturers, who are interested in expanding their customer service
capability and recurring revenues;
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- IT service and support companies who can use our solution to cut costs
and provide better customer service; and
- Other companies such as PC service vendors, telecommunications companies,
and Internet portals that offer our service as a value-added offering.
Although to date, revenues from our partners have not been significant, we
believe that these alliances significantly enhance our sales efforts and
represent a valuable opportunity to increase our presence in the small to medium
size business market. We intend to aggressively pursue additional relationships
in the future.
Described below are some of our current strategic partnerships:
Compaq Computer Corporation. Compaq has selected us as a technology and
service provider in order to provide online backup, restore and repair
capabilities to its customers. Compaq plans to offer these capabilities on a web
site associated with the sale of Compaq PCs.
In March 2000, Compaq signed a binding commitment to purchase 74,101 shares
of our series E preferred stock for an aggregate purchase price of $2.0 million.
The Company's obligation to close the transaction is subject to certain
conditions, including a vote of the Company's stockholders and the filing of our
amended and restated certificate of incorporation. These shares will be
converted into an aggregate of 222,303 shares of our common stock upon the
closing of this offering. As a holder of our series E preferred stock, Compaq
will be entitled to a liquidation preference senior to all of our other
stockholders, and will vote with the holders of our common stock on all matters
submitted to our stockholders. Under the terms of the commitment, Compaq will
also receive a warrant to purchase 40,002 shares of our common stock at the
initial public offering price. This warrant may be exercised at any time
beginning upon the close of this offering and expiring on the earlier of five
years from the date of its grant or one year following the close of this
offering. Compaq will also receive the right to request that its shares be
included in registrations of shares of our common stock following this offering.
These registration rights will expire one year after the close of this offering.
Compaq has agreed that it will not sell or otherwise dispose of any of our
securities until 180 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc.
GTE Internetworking. GTE partnered with us as a means to increase
value-added revenue from their base of Internet service customers. GTE plans to
offer data-only file backup and restore to their corporate customer base as part
of a range of hosted solutions beginning in the first quarter of 2000.
Concentric. Concentric, a nationwide Internet service provider, has been
selling our eSupport service to its digital subscriber line-based small to
medium size customers since the fourth quarter of 1999. Concentric's goal is to
increase revenues by offering additional Internet-based services to their
customers.
Everdream. Everdream offers a bundled package of PCs, Internet service,
and full system support to small and medium size companies. Everdream bundles
our eSupport solution with every computer they ship to their small business
customers.
Centerbeam. Centerbeam is an application service provider for small
business customers providing a full set of IT services as well as PCs. Every
Centerbeam PC is equipped with our eSupport solution. Our solution is strategic
to Centerbeam's ability to support its customers' PC systems without expensive
on-site visits.
Ontrack. Ontrack is the market leader in post-crash data recovery from
damaged disks and file systems. In July 1999, Ontrack became one of our original
equipment manufacturer partners. Ontrack sells our eSupport technologies under
its brand name, Rapid Recall.
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US West. US West markets our eSupport service to its Internet service
subscribers under the brand name E-backup. Also, starting in the second quarter
of 2000, it intends to sell our eSupport solution to its largest customers
through its direct sales force.
PeoplePC. PeoplePC provides a PC and Internet access service for one low
price. They sell our eSupport solution to their customers as a value-added
service.
Netstore. Netstore is a UK-based application service provider which uses
our technology to provide eSupport services throughout Europe.
SALES AND MARKETING
Sales. We sell our eSupport products and services to our medium size and
large customers primarily through a direct sales force. As of March 1, 2000, we
had 26 sales employees working across the United States. Typically, a sales team
includes a senior account executive and a field systems engineer. Our telesales
force initiates, contacts, and qualifies sales leads. Our telesales force refers
larger leads to our direct sales force and handles smaller leads themselves. It
also provides assistance and support to our strategic partners. We intend to
expand our sales force by adding several more regional sales offices in the
U.S., increasing the telesales force, and establishing a direct presence in
Europe and Asia.
Marketing. We focus our marketing efforts on increasing market awareness
and generating high quality leads for our sales force. We promote our eSupport
solutions through a variety of advertising media, public relations, direct
marketing, technical seminars, and trade shows. We also meet regularly with many
industry analysts and maintain relationships with a number of market research
firms. In addition, we engage in cooperative marketing programs with our
strategic partners to reach prospective customers of all sizes.
OPERATIONS AND SUPPORT
We consider our systems operations and customer service and support
departments to be critical to our success. We conduct our eSupport operations
from two independent facilities. Currently, our staff is responsible for the
operation, maintenance, and monitoring of our mirrored operations centers. In
1999, our Internet application had a 99.99% availability.
Our support staff provides assistance to our application service and
licensed application customers. Support agreements generally have terms of at
least 12 months and are priced according to the level of service required. We
provide telephone, facsimile, e-mail, and Internet assistance during extended
business hours, and 24 hour telephone support to those customers who request it.
We also offer our customers support in a wide range of areas including:
- Implementation. We assist our customers with the implementation,
configuration, and integration of our eSupport solution.
- Education. We offer our customers training in the design and operation
of our eSupport solution.
Our customer support department is located at our headquarters, although
our sales force also delivers local support as needed. We plan to expand our
service operations to Europe and Asia in the future.
PRODUCT DEVELOPMENT
To keep pace with the rapidly changing eSupport market, we have
historically devoted significant resources to research and development. Our
research and development expenditures were approximately $2.0 million in 1999,
$1.4 million in 1998, and $0.9 million in 1997. We believe that our future
success will depend in large part on our ability to quickly identify and respond
to the needs of our customers and to ensure that our products and services
remain on
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the leading edge of the marketplace. We intend to continue to devote substantial
resources to development for the next several years.
We employ a decentralized, small team approach to project execution. Our
development group is responsible for producing new and enhanced versions of our
eSupport solution, quality assurance testing, and integrating products into our
existing service line. We believe that this approach has resulted in high
quality and rapid product delivery.
COMPETITION
The market for our eSupport solution is new, highly fragmented, and rapidly
evolving. A number of private and public companies offer products that compete
with specific aspects of our eSupport solution. Our competitors that license
backup software include Veritas Software Corporation, Legato Systems, Inc., Stac
Software Inc., and Computer Associates International, Inc. Competitors that
provide backup service include SkyDesk, Inc. We also may face competition from
resellers of these products and services.
We believe the primary factors upon which we compete are the functionality
of our solution, including performance and scalability, customer references, and
flexibility of solution delivery.
We expect to face increased competition in the future from our current
competitors. In addition, new competitors, or alliances among existing and
future competitors, may emerge and rapidly gain significant market share. We may
also face increased competition in the future from major software vendors such
as Microsoft or IBM to the extent that they enhance their product offerings with
competitive applications. To the extent these vendors are able to offer systems
that are functionally comparable or superior to our products, their significant
installed customer bases, ability to offer a broad solution, and ability to
price their products as incremental add-ons to existing systems can provide them
with a significant competitive advantage.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing, and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. Many of our competitors also have well-established
relationships with our current and potential customers. As a result, they may
begin to undertake extensive marketing efforts, offer more attractive pricing
and purchase terms, or bundle their products in a manner that would put us at a
competitive disadvantage.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success and ability to compete effectively in our industry are
substantially dependent on our proprietary technology and systems designs. We
use a combination of patent, copyright, trademark, and trade secret laws to
protect our intellectual property. We also enter into confidentiality or license
agreements with our employees, consultants, customers and potential partners,
and strive to control access to and distribution of our documentation and other
proprietary information. Although we believe that these measures are adequate to
protect our intellectual property, we can give no assurances that third parties
will not be able to misappropriate or use it.
We have been awarded two patents, one in the area of backup data reduction
and another in the area of secure file archiving. We expect a third patent
related to file comparison for data backup will be issued soon. Currently we
have three patent applications pending in the United States and may seek
additional patents in the future as we deem necessary. We cannot guarantee that
any pending or future applications will result in the issuance of valid patents
for our technology. We have filed trademark applications on the service marks
"Delta Block," "eWARE," "Connected TLM," "eCONNECT," "SendOnce," and other
marks. We claim
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common law rights in certain additional marks as well. We rely on our marks to
protect our domain and brand names.
There has been substantial litigation regarding patent and other
intellectual property rights in the software and Internet industries. We have
received notice from Stac Software, Inc. alleging that our eSupport solution
infringes one of its patents. Our intellectual property counsel, Weingarten,
Schurgin, Gagnebin & Hayes LLP, has investigated the allegations made by Stac
and, based upon their advice, we do not believe that our solutions have ever
infringed the Stac patent. In addition, we received a notice dated March 23,
2000 from John P. Shannon alleging that our eSupport solution infringes two of
his patents. Based on our preliminary investigation of Mr. Shannon's
allegations, we do not believe we are infringing any claims of his patents. We
have asked our intellectual property counsel to investigate further Mr.
Shannon's allegations. In the event of litigation with respect to either of
these notices, we are prepared to defend vigorously our position. However,
because patent litigation can be extremely expensive, time-consuming, and its
outcome uncertain, we may seek to obtain licenses to the disputed patents. We
cannot guarantee that licenses will be available to us on reasonable terms, if
at all. If a license from either Stac or Mr. Shannon is not available we could
be forced to incur substantial costs to reengineer our eSupport solution which
could diminish its value. In any case, we may face litigation with Stac and Mr.
Shannon. Such litigation could be costly and would divert our management's
attention and resources. In addition, if we do not prevail in such litigation,
we could be forced to pay significant damages or amounts in settlement.
In addition to alleging patent infringement, Stac's notice alleged that we
have been advertising and marketing our eSupport solution feature previously
known as SaveOnce in a misleading manner. Stac's allegations stem from the fact
that our solution stores applications and files unique to a particular user only
once, but stores applications and files common to multiple users twice, once
when the application or file is first encountered and then, when next
encountered, a second time to a common application and file pool. After
consulting with our intellectual property counsel, we do not believe that our
past advertising and marketing have been misleading or have diluted or tarnished
any rights of Stac. Nonetheless, we have modified our advertising and marketing
materials to clarify the operation of this feature and have renamed the feature
SendOnce. Despite these clarifications, we cannot guarantee that we will not
become involved in litigation involving our past advertising and marketing of
the SaveOnce feature. If we do become involved in such litigation we would incur
substantial costs and our management's attention and resources would be
diverted.
LAW AND GOVERNMENTAL REGULATION
We are subject to various laws and regulations affecting our business.
Congress has recently passed Internet legislation concerning children's privacy,
copyrights, taxation, and the transmission of sexually explicit material. In
addition, there are recommended uniform state laws relating to technology that
are currently under consideration in a number of state legislatures. We manage
and store sensitive customer information that may be subject to privacy laws and
regulations. As a result, in the future we may be subject to claims associated
with invasion of privacy, or inappropriate disclosure, use or loss of this
information. The European Union has recently enacted regulations relating to
online privacy protections. These laws and regulations are very recent and their
impact on us and our industry has yet to be determined. This impact could
include litigation which, whether successful or not, would likely be
time-consuming and costly and require substantial management attention and
resources. Also, while there are relatively few laws today that specifically
regulate Internet-related companies and e-commerce in general, the sizeable
growth in Internet usage and e-commerce transactions has prompted many
governmental bodies to consider legislation in such areas as pricing, content,
data protection, privacy protection, intellectual property protection, taxation,
and consumer protec-
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tion. Enactment of laws or regulations in these areas could place burdens on us,
either directly or as a burden to e-commerce in general.
FACILITIES
As of March 27, 2000, we had 85 full-time employees, including 26 in sales,
29 in development and 15 in support and operations. None of our employees is
subject to a collective bargaining agreement. We consider our relationship with
our employees to be good.
PROPERTIES
Our headquarters are located at 24 Prime Parkway in Natick, Massachusetts,
a suburb west of Boston. We lease approximately 22,350 square feet of office
space for our development, support and operations, administration and marketing
departments. The lease expires October 31, 2001. We have an option to renew the
lease for a five year period ending October 31, 2006.
We maintain sales offices in metropolitan areas of Atlanta, Boston,
Chicago, Dallas, and San Francisco, and recently opened a development office in
San Mateo, California. We believe that our existing facilities are adequate to
meet our current needs.
LEGAL PROCEEDINGS
Although, we are not currently subject to any pending legal proceedings, we
may from time to time become involved in litigation relating to claims arising
from our course of business. These claims, even if without merit, could result
in the expenditure of significant financial and managerial resources. See
"Business -- Intellectual Property and Proprietary Rights" and "Risk Factors"
for a discussion of claims alleging infringement of, or damage to, third party
intellectual property.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of our current executive officers and
directors are set forth below:
NAME AGE POSITION(S)
- ---- --- -----------
David A. Cane........................ 51 President, Chief Executive Officer and Chairman of the
Board
Wayne A. Babich...................... 47 Vice President, Engineering
Glenn D. Bolduc...................... 47 Vice President, Finance
Carl Lazarus......................... 51 Vice President, Operations
Norman Meisner....................... 53 Vice President, Business Development
James Priest......................... 41 Vice President, Sales
Craig Randall........................ 39 Vice President, Marketing
Frederick Bamber..................... 57 Director
Lawrence Bettino..................... 39 Director
Harry A. George...................... 51 Director
Robert Ketterson..................... 36 Director
Ronald D. Lachman.................... 43 Director
Ashley Leeds......................... 41 Director
- -------------------------
EXECUTIVE OFFICERS
DAVID A. CANE has served as our President, Chief Executive Officer, and
director since he founded Connected in 1995. Mr. Cane became our chairman of the
board in March 2000. Prior to founding our company, Mr. Cane served as Vice
President and General Manager for Phoenix Technologies Ltd., a systems enabling
software company, from 1991 through 1994. While with Phoenix, Mr. Cane was
responsible for product development, custom engineering, and marketing for BIOS
products. From 1989 through 1991, he worked at Kendall Square Research, a
manufacturer of supercomputers, where he served as Vice President of Hardware
Engineering. Mr. Cane was the Executive Vice President for Visual Technology
from 1988 to 1989, where he was responsible for all aspects of business
operations. In 1981, Mr. Cane co-founded MASSCOMP, a UNIX system supplier. Mr.
Cane received both an SB and an SM in Electrical Engineering from the
Massachusetts Institute of Technology.
WAYNE A. BABICH has served as our Vice President, Engineering since joining
us in 1996. Before joining us, from 1994 through 1996, he served as Engineering
Manager for Atria Software, Inc., a company that creates software that manages
complex software development, enhancement, and maintenance. Prior to that, Mr.
Babich was the Senior Engineering Manager for Computervision, a vendor of
computer-aided design software, from 1991 through 1994. Mr. Babich received a BS
from Case Western Reserve University and a Ph.D. from the University of North
Carolina.
GLENN D. BOLDUC has served as our Vice President, Finance since joining us
in March 2000. Previously, Mr. Bolduc served as President and Chief Executive
Officer of Vialog Corporation, a teleconferencing service provider that he
co-founded, from 1996 to 1999. Prior to that, from 1989 to 1996, Mr. Bolduc was
the Vice President, Finance for Multilink, Incorporated, a teleconferencing
technology company. Following the completion of this offering Mr. Bolduc will
become our Chief Financial Officer.
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CARL LAZARUS has served as our Vice President, Operations since joining us
in 1996. Before joining us, Mr. Lazarus served as the Vice President of
Technology for IDX Systems Corporation, a software and application service
provider to the healthcare industry, from 1974 through 1996. While with IDX, Mr.
Lazarus directed technical and research and development efforts and was
responsible for the configuration, installation and support of healthcare
information systems. Mr. Lazarus earned a BA from Yale University and was a
Special Graduate Student at the Massachusetts Institute of Technology.
NORMAN MEISNER has served as our Vice President, Business Development since
March 1999. Before joining us in 1998 as our Vice President, Sales, Mr. Meisner
was the Vice President of Sales and Service at Net2Net Corporation, a company
that creates enabling tools for the asynchronous transfer mode, or ATM, market,
from 1996 through 1998. From 1994 to 1996, Mr. Meisner was the Eastern Regional
Manager of 3Com Corp., a data communication systems company. Before joining
3Com, Mr. Meisner was the Vice President of U.S. Sales for Synernetics, an
ethernet switch company, from 1990 through 1994. Mr. Meisner received a BS from
the City College of New York and an MS from the Rensselaer Polytechnic
Institute, followed by an MS in Engineering Management from Northeastern
University.
JAMES PRIEST has served as our Vice President, Sales since joining us in
March 1999. Prior to joining us, from 1997 to 1998 Mr. Priest served as Vice
President of Worldwide Sales and marketing for Stac Software, Inc., one of our
competitors, where he was responsible for sales, marketing communications,
product management, and strategic partners. From 1992 through 1996 he served as
the Director of International Sales/Operations for Daimler Benz Interservices, a
business continuity company. Before that, he was the Senior Customer Support and
Sales Manager for Comdisco, Inc. from 1988 through 1992. Mr. Priest received a
BS from Brigham Young University.
CRAIG RANDALL has served as our Vice President, Marketing since joining us
in March 1999. Before joining us, from 1995 to 1999 Mr. Randall served as the
Senior Vice President of Marketing and Business Development for Omtool, an
enterprise fax technology company. Prior to Omtool, from 1994 to 1995 Mr.
Randall served as Vice President of Simplex, a hardware and software company in
the security and communications industry. From 1988 to 1994, Mr. Randall served
as Division Vice President of Racal Datacom, a network and communications
equipment company. Mr. Randall received a BS from Carnegie Mellon University and
an MBA from the Harvard Business School.
DIRECTORS
FREDERICK BAMBER has been a director since 1995. He served as the chairman
of our board of directors from 1995 until March 2000. Mr. Bamber is a general
partner at Applied Technology, a high tech venture capital firm that he founded
in 1981. Prior to founding Applied Technology, he spent nine years at Data
Resources Inc., an economic forecasting and consulting company, where he was a
Vice President of Data Resources' marketing/consulting organization and its
industry market focus practices. Mr. Bamber serves as a director of Interleaf,
Inc., a provider of enterprise-wide software tools for content management. Mr.
Bamber also serves as a director of several private companies. Mr. Bamber holds
a BA from Yale University and an MBA from the Wharton School of Finance.
LAWRENCE BETTINO has been a director since 1999. Mr. Bettino was a founding
manager of Baker Capital Partners, LLC, the general partner of Baker
Communications Fund, L.P., and has served in that capacity since 1996. The Baker
Communications Fund invests private equity in companies providing communications
services, equipment and applications. From 1989 to April 1996, Mr. Bettino
worked for Dillon Read Venture Capital, focusing on communications and
technology investments. Mr. Bettino currently serves on the board of several
private companies.
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Mr. Bettino received his BS degree from Rensselaer Polytechnic Institute and his
MBA from the Harvard Business School.
HARRY A. GEORGE has been a director since 1999. Mr. George has served as
the Managing General Partner of Solstice Capital, a venture capital fund
investing in early-stage companies, since 1994. Prior to that, Mr. George was
the cofounder, Vice President of Finance, and a Director of Interleaf, Inc. Mr.
George currently serves on the board of directors of several private companies.
He received a BA from Bowdoin College.
ROBERT KETTERSON has been a director since 1999. Since 1993, Mr. Ketterson
has served as a Vice President at Fidelity Ventures Telecommunications and
Technology Group where he focuses on venture investments in the internet and
data communications fields. Before joining Fidelity Ventures Telecommunications
& Technology Group, Mr. Ketterson was a manager from 1990 to 1992 in the
high-tech practice of The Boston Consulting Group, a management consulting firm.
He was also a product marketing manager for personal computer products at VLSI
Technology, Inc. He serves on the board of directors of InterNAP Network
Services Corporation and several private companies. He received a BS from the
University of Arizona and his MBA from the MIT Sloan School of Management.
RONALD D. LACHMAN has been a director since 1997. Since 1994, Mr. Lachman
has served as the President of Kinetech, Inc. Mr. Lachman is the cofounder of
Lachman Goldman Ventures, LLC, and has been its general partner since 1995.
Lachman Goldman Ventures funds and builds management teams for networking and
software-related companies, and is actively involved in creating new technology
companies. Prior to that, Mr. Lachman served as Vice President for Open Systems
Strategy of Legent Corporation from 1994 until 1995. Mr. Lachman currently
serves on the board of directors of The Santa Cruz Operation, Inc. and Divine
Interventures, Inc.
ASHLEY LEEDS has been a director since 1999. Ms. Leeds was a founding
manager of Baker Capital Partners, LLC, the general partner of Baker
Communications Fund, L.P., and has served in that capacity since 1996. The Baker
Communications Fund invests private equity in companies providing communications
services, equipment, and applications. From 1984 through 1995 Ms. Leeds was a
senior investment banker at Lehman Brothers. Ms. Leeds currently serves on the
board of directors of several private companies. Ms. Leeds holds a BA from
Harvard University and an MBA from Stanford University's Graduate School of
Business.
BOARD OF DIRECTORS
The board of directors is currently fixed at seven members. Our fifth
amended and restated certificate of incorporation, as in effect immediately
following this offering, divides the board of directors into three classes. We
expect to classify our directors as follows:
CLASS NAME
- ----- ----
I..................... David A. Cane, Lawrence Bettino and Robert Ketterson
II.................... Frederick Bamber and Ashley Leeds
III................... Harry A. George and Ronald D. Lachman
The members of each class of directors serve for staggered three-year
terms. Class I directors will be elected to hold office until the annual
stockholders' meeting to be held in 2001; Class II directors will be elected to
hold office until the annual stockholders' meeting to be held in 2002; and Class
III directors will be elected to hold office until the annual stockholders'
meeting to be held in 2003. Directors will serve until the annual meeting of
stockholders when their class is next elected and until their respective
successors are duly elected and qualified, or until their earlier death,
resignation or removal. Our certificate of incorporation provides that directors
may be removed only for cause by the holders of at least 75% of our common
stock. There are no family relationships among any of our directors or executive
officers.
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COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors designated a Compensation Committee in 1999 and an
Audit Committee in March 2000. Prior to the appointment of the Compensation
Committee, decisions regarding the compensation of executive officers were made
by the board of directors as a whole. The Compensation Committee, which consists
of Messrs. Bamber and Lachman and Ms. Leeds, makes recommendations to the board
concerning the compensation of our officers and directors and the administration
of our 1996 Equity Incentive Plan, 2000 Combination Stock Option Plan, 2000
Nonemployee Director Stock Option Plan and 2000 Employee Stock Purchase Plan.
The Audit Committee, which consists of Messrs. Bamber, George, and Lachman,
reviews our financial controls, evaluates the scope of the annual audit, reviews
audit results, consults with management and our independent auditors prior to
the presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of our internal accounting controls and
financial affairs.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation from us for
their services as members of the board of directors, although members are
reimbursed for expenses incurred in connection with their attendance at meetings
of the board of directors and the committees on which they serve.
Nonemployee directors are eligible to participate in our 2000 Nonemployee
Director Stock Option Plan. Under the plan, each present nonemployee director
has received and each future nonemployee director will receive upon joining the
board an initial option to purchase 90,000 shares of our common stock. Three
years after the initial grant to a director, such director will be granted a
stock option to acquire an additional 90,000 shares. All of these stock options
will vest in equal monthly installments over the three years following the date
of grant. For additional information about the 2000 Nonemployee Director Stock
Option Plan see "Management -- Stock Plans -- 2000 Nonemployee Director Stock
Option Plan."
Prior to the adoption of the 2000 Nonemployee Director Stock Option Plan,
we granted options to our directors at our discretion. On August 29, 1999, Mr.
George was granted an option to purchase 129,000 shares of common stock at an
exercise price of $0.22 per share, pursuant to the 1996 Equity Incentive Plan.
This option vests in equal monthly installments over the three years following
August 29, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Bamber and Lachman
and Ms. Leeds. Prior to the formation of the Compensation Committee in 1999, the
board of directors performed the functions typically assigned to a compensation
committee and our President, Mr. Cane, participated in the board's deliberations
concerning compensation of officers other than himself. No member of the
Compensation Committee and none of our executive officers has a relationship
that would constitute an interlocking relationship with executive officers and
directors of another entity.
Funds affiliated with Applied Technology collectively have purchased from
us shares of preferred stock for an aggregate of $2,811,744, which shares of
preferred stock are convertible into 2,825,661 shares of common stock. We also
issued a warrant to a fund affiliated with Applied Technology to purchase
107,838 shares of common stock at an exercise price of $0.22. One of our
directors, Frederick Bamber, is a general partner of Applied Technology.
Baker Communications Fund, L.P. has purchased shares of preferred stock for
an aggregate of $13,000,001, which shares of preferred stock are convertible
into 5,051,814 shares of
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common stock. Two of our directors, Lawrence Bettino and Ashley Leeds, are
founding managers of Baker Capital Partners LLC, the general partner of Baker
Communications Fund, L.P.
Solstice Capital L.P. has purchased shares of preferred stock for an
aggregate of $1,007,031, which shares of preferred stock are convertible into
648,990 shares of common stock. We also issued a warrant to Solstice Capital
L.P. to purchase 48,576 shares of common stock at an exercise price of $0.22.
One of our directors, Harry A. George, is the Managing General Partner of
Solstice Capital L.P.
Entities affiliated with Fidelity Ventures have purchased shares of
preferred stock for an aggregate of $7,000,001, which shares of preferred stock
are convertible into 2,720,208 shares of common stock. One of our directors,
Robert Ketterson, is a Vice President at Fidelity Ventures Telecommunications
and Technology Group, an affiliate of Fidelity Ventures.
For more information on these investments, see "Certain
Transactions -- Sales of Securities."
The holders of our series D convertible preferred stock also have the right
to purchase up to an aggregate of 10% of the shares sold in this offering as
described in "Certain Transactions -- Preemptive Rights."
EXECUTIVE COMPENSATION
The following table summarizes information concerning the compensation we
paid during the year ended December 31, 1999 to our Chief Executive Officer and
our four other most highly compensated executive officers. These individuals are
referred to as the named executive officers in this prospectus.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ------------------ ---- -------- ------- ------------ ------------
David A. Cane...................... 1999 $125,000 $65,004 -- --
President, Chief Executive
Officer
Wayne A. Babich.................... 1999 116,058 31,637 -- 45,000
Vice President, Engineering
Carl Lazarus....................... 1999 100,000 48,700 -- --
Vice President, Operations
Norman B. Meisner.................. 1999 125,000 90,006 $2,954 --
Vice President, Business
Development
James Priest....................... 1999 96,154 63,065 3,692 300,000
Vice President, Sales
Mr. Priest joined us in March 1999 and the compensation set forth in the
table represents compensation paid to Mr. Priest for the period from March 1999
through December 31, 1999. Other annual compensation consists of lease and
insurance payments made for automobiles. The options we granted to our named
executive officers in 1999 were issued pursuant to our 1996 Equity Incentive
Plan.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to the named executive officers,
information concerning stock options we granted during the year ended December
31, 1999.
The information regarding stock options granted to named executive officers
as a percentage of total options granted to employees in the fiscal year, as
disclosed in the table, is based upon options to purchase an aggregate of
1,919,250 shares of common stock that were granted to all employees and
directors as a group, including the named executive officers, in the fiscal year
ended December 31, 1999.
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
-------------------------------------------------------------- ANNUAL RATES OF
PERCENT OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED EXERCISE OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 0% 5% 10%
- ---- ------------------ ---------------- --------- ---------- ---- ---- ----
David A Cane............ -- -- -- -- -- -- --
Wayne A. Babich......... 45,000 2.3% $0.22 3/7/09
Carl Lazarus............ -- -- -- -- -- -- --
Norman B. Meisner....... -- -- -- -- -- -- --
James Priest............ 300,000 15.6 0.22 3/15/09
The potential realizable value of the options at assumed 0%, 5% and 10%
annual rates of stock appreciation are based upon the assumed initial public
offering price of $ per share over the ten year term, compounded annually
and subtracting from that result the total option exercise price. These rates of
appreciation are mandated by the rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future stock prices.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of our common stock.
Twenty-five percent of each of these stock options becomes exercisable one
year from the date of grant. The remaining portion of the stock options becomes
exercisable in equal monthly installments over the following 36 months
commencing 13 months from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option exercises and
unexercised options for the fiscal year ended December 31, 1999 with respect to
each of our named executive officers.
The value realized represents the difference between the deemed value of
the common stock on the date of exercise used by us for accounting purposes and
the exercise price of the option. However, because the named executive officers
may keep the shares they acquired upon the exercise of the options (or sell them
at a different price), these amounts do not necessarily reflect cash realized
upon the sale of those shares.
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The value of unexercised in-the-money options was calculated by determining
the difference between $ (the assumed initial public offering price)
and the exercise price of the option.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
David A. Cane......... -- -- -- -- $-- $--
Wayne A. Babich....... 30,000 $97,500 181,250 133,750
Carl Lazarus.......... -- -- -- -- -- --
Norman A. Meisner..... -- -- 87,534 212,466
James Priest.......... -- -- -- 300,000 --
EMPLOYMENT CONTRACTS
Norman B. Meisner. We entered into an offer letter with Mr. Meisner, our
Vice President, Sales, on October 1, 1998. Under the terms of his offer letter,
in 1999 Mr. Meisner was entitled to an annual base salary of $125,000. Mr.
Meisner was also entitled in 1999 to a quarterly bonus based on a percentage of
our sales department bookings for each quarter, according to a mutually agreed
upon sales plan, and a $25,000 bonus based on whether we achieved planned
revenue goals.
Pursuant to Mr. Meisner's offer letter, he was granted an incentive stock
option to purchase 300,000 shares of common stock at an exercise price of $0.15
per share. This option vests over a four year period. As a condition of his
employment, Mr. Meisner was required to sign a proprietary information agreement
with respect to all information and technology developed during his period of
employment. Mr. Meisner is an "employee at will."
James M. Priest. We entered into an offer letter with Mr. Priest, our Vice
President, Sales, on March 9, 1999. Pursuant to this offer letter, in 1999 Mr.
Priest was entitled to an annual base salary of $125,000. Mr. Priest was also
entitled in 1999 to a $400 per month flat rate car plan, a quarterly bonus based
on a percentage of our revenues each quarter, and a $20,000 yearly bonus based
on whether we met our stated revenue goal.
Pursuant to the offer letter, Mr. Priest was also granted an incentive
stock option to purchase 300,000 shares of common stock, at an exercise price of
$0.22 per share. This option vests over a four year period. Mr. Priest was
required to sign a proprietary information agreement with respect to all
information and technology developed during his period of employment. Mr. Priest
is an "employee at will."
CHANGE IN CONTROL PROTECTION AGREEMENTS
We have entered into agreements with our officers to help assure continuity
of management in the event of a change in control of our company. If an officer
is terminated without cause within one year following a change in control, the
officer is entitled to severance payments of salary and bonus and to
continuation of benefits for the period from the date of termination until the
one year anniversary of the change in control. A change in control includes: (1)
any person, entity or group acquiring beneficial ownership of 30% or more of our
outstanding shares of common stock; (2) the current directors of our company, or
their successors who are approved by our current directors, ceasing for any
reason to constitute at least a majority of our board of directors; and (3) our
stockholders approving a reorganization, merger, or consolidation.
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STOCK PLANS
1996 EQUITY INCENTIVE PLAN
Our 1996 Equity Incentive Plan was adopted by our board of directors and
approved by our stockholders in March 1996. The purpose of the plan is to
enhance our ability to retain officers and key employees and to align the
interests of such individuals with those of our stockholders. The 1996 Equity
Incentive Plan provided for the issuance of up to 5,250,000 shares of common
stock. We have fully allocated the shares issuable under this plan. We granted
these securities to employees, directors, and consultants. Our board of
directors has broad discretion in determining the terms of the grant of these
securities. Options granted under the 1996 Equity Incentive Plan have a maximum
term of 10 years from the date of grant. Our outstanding options to acquire
common stock under this plan typically vest as to 25% of the underlying shares
12 months from the date of grant and as to the remaining 75% in equal monthly
installments until the fourth anniversary of the date of grant.
2000 COMBINATION STOCK OPTION PLAN
Under our 2000 Combination Stock Option Plan we may grant incentive stock
options to our employees and nonqualified stock options to our employees and
consultants. Incentive stock options meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended, referred to as the Code, and
nonqualified stock options do not qualify under the requirements of Section 422.
The purpose of the plan is to enhance our ability to attract and retain officers
and key employees and to align the interests of such individuals with those of
our stockholders.
A total of 6,000,000 shares of our common stock are reserved for issuance
pursuant to the 2000 Combination Stock Option Plan. However, the 2000
Combination Stock Option Plan also provides for automatic annual increases in
the number of shares reserved for issuance on December 31 of each year in an
amount equal to the lesser of: (1) 1.5% of the outstanding shares of our common
stock on such date; (2) 450,000 shares; and (3) an amount determined by our
board of directors. The number of shares of common stock available for issuance
under the 2000 Combination Stock Option Plan is subject to adjustment for stock
dividends, recapitalizations, stock splits, stock combinations and certain other
corporate reorganizations.
The 2000 Combination Stock Option Plan may be administered by the board of
directors or, if the board of directors so determines, by a committee of two or
more nonemployee directors (as applicable, the Committee). The Committee
currently consists of our Compensation Committee. The Committee has the power to
determine the terms of stock options, including the exercise price, number of
shares subject to each stock option, conditions of exercise, and the form of
consideration payable upon exercise.
Stock options granted under the 2000 Combination Stock Option Plan
generally are not transferable, and are exercisable only by the holder during
his or her lifetime. Stock options granted under the 2000 Combination Stock
Option Plan generally must be exercised within three months following
termination of employment or within twelve months if termination is by reason of
death or disability, but in no event later than ten years after the date of
grant. The exercise price of nonqualified stock options granted under the 2000
Combination Stock Option Plan is determined by the Committee. The exercise price
of incentive stock options granted under the 2000 Combination Stock Option Plan
must be at least equal to the fair market value of our common stock on the date
of grant. The exercise price of any incentive stock option granted to any
employee who holds 10% or more of our outstanding capital stock must equal at
least 110% of the fair market value of our common stock on the date of the grant
and the term of the incentive stock option must not exceed five years. The term
of all other stock options granted under the 2000 Combination Stock Option Plan
may not exceed ten years.
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The 2000 Combination Stock Option Plan provides that in the event that we
merge with or into another corporation or sell substantially all of our assets,
each stock option will be assumed by the successor corporation or exchanged for
a stock option of the successor corporation.
The Committee or our board of directors may amend, suspend or terminate the
2000 Combination Stock Option Plan in whole or in part at any time. However,
neither the Committee or our board of directors may modify the 2000 Combination
Stock Option Plan without our stockholders' approval if such approval is
required by any law, rule, or regulation. Unless terminated sooner, the 2000
Combination Stock Option Plan will terminate automatically in 2010.
2000 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Under the 2000 Nonemployee Director Stock Option Plan, we will grant
nonqualified stock options to our nonemployee directors. The 2000 Nonemployee
Director Stock Option Plan is intended to attract and retain the services of
experienced and knowledgeable nonemployee directors and to provide additional
incentives for nonemployee directors to continue to work for our best interests
through continuing ownership of our common stock.
An aggregate of 1,000,000 shares of our common stock has been reserved for
issuance under the 2000 Nonemployee Director Stock Option Plan. The number of
shares available for issuance is subject to adjustment for stock dividends,
recapitalizations, stock splits, stock combinations, and certain other corporate
reorganizations.
The 2000 Nonemployee Director Stock Option Plan provided that a stock
option to purchase 90,000 shares of our common stock was granted to each current
nonemployee director in March 2000. In addition, a stock option to acquire
90,000 shares of our common stock will be granted to each new nonemployee
director at the time they are first elected or appointed to our board of
directors. The 2000 Nonemployee Director Stock Option Plan also provides that a
stock option to acquire an additional 90,000 shares of our common stock will be
granted to each nonemployee director three years following the date of grant of
the last stock option to such nonemployee director. All stock options will vest
in equal monthly installments over a period of three years. However, in the
event of a change in control, all outstanding stock options under the 2000
Nonemployee Director Stock Option Plan will vest in full immediately.
The 2000 Nonemployee Director Stock Option Plan is administered by our
board of directors. Under the plan our board of directors will have discretion
to increase the number of shares of common stock subject to the stock options
granted to newly appointed nonemployee directors.
The exercise price of stock options granted under the 2000 Nonemployee
Director Stock Option Plan will be the fair market value of our shares of common
stock at the time the stock option is granted. Stock options granted under the
2000 Nonemployee Director Stock Option Plan generally are not transferable and
each stock option is exercisable only by the holder during his or her lifetime.
Stock options granted under the 2000 Nonemployee Director Stock Option Plan may
not be exercised after ten years from the date of grant.
If we are a party to any merger, consolidation, purchase, or acquisition of
property or stock, or any separation, reorganization, or liquidation, our board
of directors may make arrangements for the substitution of new stock options
for, or the assumption by the successor corporation of, any unexpired stock
options.
The 2000 Nonemployee Director Stock Option Plan may be amended, suspended,
or terminated at any time by our board of directors. Unless terminated sooner,
the 2000 Nonemployee Director Stock Option Plan will terminate automatically in
2010.
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2000 EMPLOYEE STOCK PURCHASE PLAN.
The purpose of our 2000 Employee Stock Purchase Plan is to provide our
employees with additional incentives by permitting them to acquire shares of our
common stock. Employees are eligible to participate in our 2000 Employee Stock
Purchase Plan if they are customarily employed by us (or any participating
subsidiary of ours) for at least 20 hours per week and for more than five months
in any calendar year. Eligible employees may elect to participate in our 2000
Employee Stock Purchase Plan by giving us notice and instructing us to withhold
a specified dollar amount from their pay during the offering periods. Our 2000
Employee Stock Purchase Plan is intended to qualify under Section 423 of the
Code.
We have reserved a total of 500,000 shares of our common stock for issuance
under our 2000 Employee Stock Purchase Plan. The number of shares reserved for
issuance is subject to adjustment for stock dividends, recapitalizations, stock
splits, stock combinations and certain other corporate reorganization actions.
The 2000 Employee Stock Purchase Plan provides for consecutive offering
periods during which we will withhold a dollar amount specified by participating
employees from their pay. Our employees may authorize payroll deductions in an
amount not to exceed 10% of their base pay and in an amount not less than the
lesser of $5 per payroll period or 1% of their base pay. The first offering
period will commence on the first trading day on or after the effective date of
this public offering and will end September 30, 2000. Thereafter, the offering
periods will start on October 1 and end on March 31 and will start on April 1
and end on September 30. On the last business day of each offering period, the
amount withheld from an employee's pay will be used to purchase shares of our
common stock at a price equal to the lesser of 85% of the fair market value of
our common stock on either the first day of the offering period or on the last
day of the offering period.
The number of shares to be purchased at the end of any offering period may
not be more than 2,000 shares per employee. Employees may not participate to the
extent that their right to purchase shares of our common stock accrues at a rate
which exceeds $25,000 of fair market value of our common stock per year.
If we merge or consolidate with another corporation, our board of directors
may either terminate the 2000 Employee Stock Purchase Plan and refund without
interest the entire balance of each participating employee's payroll deductions,
or entitle each participating employee to receive for each share of our common
stock to which they would otherwise be entitled the securities or property which
they would have received at the time of such merger or consolidation if their
payroll deductions had already been used to purchase shares of our common stock.
Our 2000 Employee Stock Purchase Plan may be amended by our board of
directors from time to time in any respect. Unless sooner terminated, the 2000
Employee Stock Purchase Plan will terminate when all of the shares of our common
stock reserved for issuance pursuant to the plan have been purchased.
401(K) PLAN
We have established a savings plan for our employees which is designed to
be qualified under Section 401(k) of the Code. Eligible employees are permitted
to contribute to the 401(k) plan through payroll deductions within statutory and
plan limits.
BONUS PLAN
We maintain an informal bonus program for certain employees, including
executive officers, under which those employees may be awarded discretionary
cash bonuses based upon an evaluation of individual performance and our
performance during the year.
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LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that a
corporation may specify in its certificate of incorporation that directors will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for any liability arising with respect to:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation further provides that we are authorized to
indemnify our directors, officers, and employees and agents to the fullest
extent permitted by Delaware law. We believe the indemnification under our
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
Our bylaws provide that directors and officers shall be, and at the
discretion of our board of directors, non-officer employees and agents may be,
indemnified by us to the fullest extent authorized by Delaware law, as it now
exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of our company.
The bylaws also provide for the advancement of expenses to directors and
officers, and, at the discretion of our board of directors, non-officer
employees and agents. In addition, our bylaws provide that the right of
directors and officers to indemnification is a contract right and is not
exclusive of any other right now possessed or hereafter acquired under any
bylaw, agreement, vote of stockholders, or otherwise. We also have directors'
and officers' insurance covering certain liabilities.
In addition to and consistent with the indemnification provided for in our
certificate of incorporation and bylaws, we have entered into agreements to
indemnify our directors and officers. These agreements, among other things,
require us to indemnify our directors and officers for certain expenses
(including attorneys' fees), judgments, fines, and settlement amounts incurred
by any such person in any action or proceeding, including any action by us or in
our right arising out of that person's services as our director or officer, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request. Under the indemnification agreements, a
director or officer will not receive indemnification if he is found to have
received any improper personal benefit or if he has not acted in good faith or
in a manner he reasonably believed to be in our best interests.
We believe that the indemnification agreements, together with the
limitation of liability and indemnification provisions of our certificate of
incorporation and bylaws and directors' and officers' insurance will assist us
in attracting and retaining qualified individuals to serve as our directors and
officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees, or agents where indemnification would be
required or permitted. We are not aware of any pending or threatened litigation
or proceeding that might result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be provided to directors, officers, or persons controlling our company as
described above, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
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CERTAIN TRANSACTIONS
SALES OF SECURITIES
Series A Preferred Stock. In November 1995, we sold shares of our series A
preferred stock at a price of $1.00 per share to raise capital to finance our
operations. These shares are convertible into an aggregate of 3,150,000 shares
of common stock.
Series B Preferred Stock. In June 1996, we sold shares of our series B
preferred stock at a price of $4.00 per share to raise capital to finance our
operations. These shares are convertible into an aggregate of 3,128,250 shares
of common stock.
Series C Preferred Stock. In May 1997, we sold shares of our series C
preferred stock at a price of $4.20 per share to raise capital to finance our
operations. These shares are convertible into an aggregate of 4,145,880 shares
of common stock.
Unsecured Subordinated Convertible Promissory Notes and Warrants. In June
1999, we sold unsecured subordinated convertible promissory notes to raise
capital to finance our operations. These notes converted into shares of our
series D preferred stock in connection with the series D financing. In
connection with the sale of unsecured subordinated convertible promissory notes,
we also sold warrants to purchase the shares of our common stock at an exercise
price of $0.22. In connection with the series D financing, the warrants were
amended to reduce the number of shares of common stock issuable upon the
exercise of the warrants to an aggregate of 582,933 shares of common stock. The
warrants are described in "Description of Capital Stock -- Warrants."
Series D Preferred Stock. In November 1999, we sold shares of our series D
preferred stock at a price of $7.72 per share to raise capital to finance our
operations. These shares are convertible into an aggregate of 7,966,323 shares
of common stock. In addition, the principal and outstanding interest due on the
unsecured subordinated convertible promissory notes mentioned above were
converted into shares of our series D preferred stock at the time of our series
D financing. The shares of series D preferred stock issued upon such conversion
are convertible into an aggregate of 1,197,753 shares of our common stock.
The following table summarizes our financing transactions involving our
officers, directors and 5% stockholders. The preferred stock numbers reflect the
number of shares of common stock into which the preferred stock will
automatically convert immediately prior to the closing of this offering. The
number of shares of series D preferred stock includes the shares acquired upon
the conversion of the notes. The exercise price of the warrants identified below
is $0.22 per share.
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NO. OF
NO. OF NO. OF NO. OF NO. OF SHARES OF
SHARES OF SHARES OF SHARES OF SHARES OF COMMON
SERIES A SERIES B SERIES C SERIES D STOCK
PREFERRED PREFERRED PREFERRED PREFERRED TOTAL COVERED BY AGGREGATE
STOCK STOCK STOCK STOCK SHARES WARRANTS CONSIDERATION
--------- --------- --------- --------- --------- ------------- -------------
Funds affiliated with Applied
Technology
Technologies for Information
and Entertainment III,
L.P.......................... 1,500,000 431,250 481,428 338,319 2,750,997 107,838 $2,619,607
The TIE Mezzanine Fund, L.P.... -- -- -- 74,664 74,664 -- 192,135
Baker Communications Fund,
L.P............................ -- -- -- 5,051,814 5,051,814 -- 13,000,001
Entities affiliated with Fidelity
Ventures
Fidelity Ventures Telecom and
Technology II Limited
Partnership.................. -- -- -- 1,360,104 1,360,104 -- 3,500,001
Fidelity Investors II Limited
Partnership.................. -- -- -- 680,052 680,052 -- 1,750,000
FTT Ventures Limited........... -- -- -- 680,052 680,052 -- 1,750,000
H&Q Connected Investors, L.P..... 1,500,000 431,250 481,428 200,790 2,613,468 97,980 2,265,698
Intel Corporation................ -- -- 2,142,858 199,764 2,342,622 97,149 3,514,060
Entities affiliated with Softbank
Softbank America, Inc.......... -- -- -- 139,836 139,836 68,004 359,845
Softbank Ventures, Inc......... -- 1,508,250 -- -- 1,508,250 -- 2,011,000
Solstice Capital, L.P............ -- 281,250 267,858 99,882 648,990 48,576 1,007,031
Our officers and directors
David A. Cane.................. -- -- -- 19,974 19,974 9,714 51,400
Carl Lazarus................... -- -- -- 19,974 19,974 9,714 51,400
Norman Meisner................. -- -- -- 9,987 9,987 4,857 25,700
James Priest................... -- -- -- 9,987 9,987 4,857 25,700
Craig Randall.................. -- -- -- 9,987 9,987 4,857 25,700
Ronald Lachman................. -- 225,000 -- 119,859 344,859 58,290 608,437
ELECTION OF DIRECTORS
The holders of our series A, B, and C preferred stock collectively have the
right to appoint two members, currently Frederick Bamber and Harry A. George, to
our board of directors in connection with their investment. This right expires
upon closing of this offering.
The holders of our series D preferred stock have the right to appoint three
members to our board of directors. Currently these directors are Lawrence
Bettino, Robert Ketterson, and Ashley Leeds. This right expires upon closing of
this offering.
Frederick Bamber is a general partner of Applied Technology Associates III,
L.P., the general partner of Technologies for Information and Entertainment III,
L.P., and The TIE Mezzanine Fund, L.P. Harry George is the managing general
partner of Solstice Capital, L.P. Lawrence Bettino and Ashley Leeds are managers
of Baker Capital Partners, LLC, the general partner of Baker Communications
Fund, L.P. Another of our directors, Robert Ketterson, is a vice president of
FTT Ventures Limited. Ronald Lachman is also a director.
REGISTRATION RIGHTS
In connection with the transactions described above, we entered into
agreements with the investors that provided for registration rights with respect
to these shares. The most recent such agreement is the Third Amended and
Restated Rights Agreement, dated November 3, 1999, which restates and
incorporates the registration rights of all investors. For more information
regarding this agreement, see "Description of Capital Stock -- Registration
Rights."
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PREEMPTIVE RIGHTS
In connection with the series D preferred stock transaction we granted a
preemptive right to the series D investors to purchase collectively up to an
aggregate of 10% of the shares of common stock to be sold in this offering.
Assuming full exercise of the preemptive rights by all persons possessing
such rights, the following persons have the right to purchase the portion
indicated in the table below of 10% of our shares of common stock to be sold in
the offering:
NO. OF SHARES
PERCENTAGE RIGHT PURCHASABLE
TO PURCHASE PURSUANT TO
NAME IN OFFERING PREEMPTIVE RIGHTS
- ---- ---------------- -----------------
Technologies for Information and
Entertainment III, L.P. ............... 3.8
The TIE Mezzanine Fund L.P. ............. 0.8
Baker Communications Fund, L.P. ......... 55.2
Fidelity Ventures Telecom and Technology
II Limited Partnership................. 14.9
Fidelity Investors II Limited
Partnership............................ 7.4
FTT Ventures Limited..................... 7.4
H&Q Connected Investors, L.P. ........... 2.2
Hambrecht & Quist Employee Venture Fund,
L.P. II................................ 0.2
Intel Corporation........................ 2.2
Softbank America, Inc. .................. 1.5
Solstice Capital, L.P. .................. 1.1
David A. Cane............................ 0.2
David Hirschman.......................... *
J3D...................................... 0.2
William Keating.......................... 0.3
Charles Kline............................ 0.3
Ronald Lachman........................... 1.3
Carl Lazarus............................. 0.2
Norman Meisner........................... 0.1
David Arthur Norman...................... 0.4
James Priest............................. 0.1
Craig Randall............................ 0.1
Charles Robbins.......................... 0.1
- ---------------
*Less than 0.05%.
To the extent that one or more persons possessing the preemptive rights
described above do not exercise such rights in this offering, the persons
exercising such rights may purchase the untaken shares on a pro rata basis.
INTEL CORPORATION SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT
In 1997, we entered into a software development and license agreement with
Intel Corporation which presently holds approximately 9.8% of our outstanding
common stock. Pursuant to this agreement we licensed our backup software to
Intel. During 1997, 1998, and 1999 we recognized approximately $225,000,
$695,000, and $134,000 in revenues from this arrangement.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 27, 2000, and as adjusted
to reflect the sale of common stock offered in this offering, for: (1) each
person whom we know to beneficially own more than 5% of our common stock; (2)
each of our directors; (3) each of the named executive officers; and (4) all
directors and executive officers as a group. Except as indicated in the table
below or the related footnotes, and pursuant to applicable community property
laws, the stockholders named in the table have sole voting and investment power
with respect to the shares set forth opposite each stockholder's name.
PERCENTAGE OF
SHARES
OUTSTANDING
NUMBER OF SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS** OWNED(1) OFFERING OFFERING(2)
- ------------------ ---------------- -------- -----------
Baker Communications Fund, L.P.(3).................... 5,051,814 19.7%
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
Funds affiliated with Applied Technology(4)........... 3,163,335 12.3
One Cranberry Hill
Lexington, MA 02421
Entities affiliated with Fidelity Ventures(5)......... 2,720,208 10.6
82 Devonshire Street
Boston, MA 02109
H&Q Connected Investors, L.P.(6)...................... 2,711,451 10.6
1 Bush Street, 15th Floor
San Francisco, CA 94104
Intel Corporation(7).................................. 2,507,781 9.8
2200 Mission College Blvd
Mail Stop RN 6-46
Santa Clara, CA 95052
Entities affiliated with Softbank(8).................. 1,614,756 6.3
10 Langley Road
Suite 403
Newton Center, MA 02159
David A. Cane(9)...................................... 1,462,689 5.7
Wayne Babich(10)...................................... 222,420 * *
Carl Lazarus(11)...................................... 487,191 1.9
Norman Meisner(12).................................... 133,626 * *
James Priest(13)...................................... 102,381 * *
Frederick Bamber(4)(14)............................... 3,163,335 12.4
Lawrence Bettino(3)(15)............................... 5,051,814 19.8
Harry A. George(16)................................... 733,434 2.9
Robert Ketterson(5)(17)............................... 2,720,208 10.6
Ronald D. Lachman(18)................................. 970,260 3.8
Ashley Leeds(19)...................................... 5,051,814 19.7
All directors and executive officers as a group (14
persons)(9)(10)(11)(12)(13)......................... 15,149,739 59.1
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of our common stock subject to options or warrants held by that
person that are currently exercisable or exercisable within 60 days of
March 27, 2000 are deemed outstanding. Such shares,
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however, are not deemed outstanding for the purposes of computing the
percentage ownership of each other person. Percentage ownership is based on
25,694,865 shares of common stock outstanding at March 27, 2000, assuming
the conversion of all outstanding shares of preferred stock and certain
warrants into common stock immediately prior to the closing of this
offering.
(2) Assumes that the underwriters do not exercise their over-allotment option
and that the current holders of our series D preferred stock fully exercise
their preemptive right, described in "Certain Transactions -- Preemptive
Rights."
(3) Lawrence Bettino and Ashley Leeds are members of our board of directors and
managers of Baker Capital Partners LLC, the general partner of Baker
Communications Fund, L.P. The following natural persons exercise voting
and/or dispositive power for the shares held by Baker Communications Fund,
L.P.: John C. Baker, Edward W. Scott, Lawrence Bettino, Henry Baker, and
Ashley Leeds.
(4) Consists of 2,969,037 shares held by Technologies for Information and
Entertainment III, L.P., including up to 107,838 issuable shares upon the
exercise of immediately exercisable warrants, and 90,000 shares issuable
pursuant to vested options, and 194,298 shares of common stock held by The
TIE Mezzanine Fund, L.P. An aggregate of 46,612 shares were purchased by
these funds from Softbank America, Inc. Frederick Bamber is a member of our
board of directors and the general partner of Applied Technology Associates
III, L.P., the general partner of these funds. The following natural
persons exercise voting and/or dispositive power for the shares held by
these funds: Frederick Bamber, David A. Boucher and Thomas H. Grant.
(5) Consists of 1,360,104 shares held by Fidelity Ventures Telecom and
Technology II Limited Partnership, and 680,052 shares held by Fidelity
Investors II Limited Partnership, each affiliates of Fidelity Ventures, and
680,052 held by FTT Ventures Limited, a unit of Fidelity Ventures. Robert
Ketterson is a member of our board of directors and a vice president at FTT
Ventures Limited. John J. Remondi and Donald Heaton, managers of Fidelity
Investors Management, LLC, the general partner of Fidelity Ventures Telecom
and Technology II, Limited Partnership and the general partner Fidelity
Investors II Limited Partnership exercise voting and/or dispositive power
for the shares held by these funds. Donald Heaton and Robert Ketterson
exercise voting and/or dispositive power for the shares held by FTT
Ventures Limited.
(6) Includes up to 97,983 shares of common stock issuable upon the exercise of
immediately exercisable warrants. Standish H. O'Grady exercises voting
and/or dispositive power for the shares held by H&Q Connected Investors,
L.P.
(7) Includes 97,152 shares issuable upon the exercise of an immediately
exercisable warrant.
(8) Consists of 1,508,250 shares held by Softbank Ventures, Inc., 38,499 shares
of common stock issuable upon the exercise of an immediately exercisable
warrant held by Softbank Holdings, Inc. and 68,007 shares held by Softbank
America, Inc. pursuant to an immediately exercisable warrant. The following
natural persons exercise voting and/or dispositive power over the shares
and warrants held by (a) Softbank Ventures: , (b) Softbank
Holdings: , and (c) Softbank America: Ronald Fisher, Francis
Jacobs, Masayoshi Son, and Yoshitaka Kitao.
(9) Includes 9,717 shares issuable pursuant to an immediately exercisable
warrant. Excludes 600,000 shares held in trusts for the benefit of Mr.
Cane's children. Mr. Cane does not have voting and/or dispositive power for
the shares held in these trusts and disclaims beneficial ownership of these
shares.
(10) Includes a total of 189,294 shares issuable upon the exercise of options
that are currently vested or vest within 60 days of March 27, 2000.
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(11) Includes 66,876 shares issuable upon the exercise of options and warrants
that are currently vested or vest within 60 days of March 27, 2000.
(12) Includes a total of 23,607 shares issuable upon the exercise of options and
warrants that are currently vested or vest within 60 days of March 27,
2000.
(13) Includes a total of 92,394 shares issuable upon the exercise of options
that are currently vested or vest within 60 days of March 27, 2000.
(14) Mr. Bamber disclaims beneficial ownership of the shares held by the fund
affiliated with Applied Technology, except to the extent of his
proportionate pecuniary interest in the funds.
(15) Mr. Bettino disclaims beneficial ownership of the shares held by Baker
Communications Fund, L.P., except to the extent of his proportionate
pecuniary interest therein.
(16) Includes 733,434 shares held by Solstice Capital L.P., including up to
48,576 shares issuable upon the exercise of immediately exercisable
warrants and 35,868 shares issuable upon the exercise options that
currently are vested or vest within 60 days of March 27, 2000. Mr. George
is the managing general partner of Solstice Capital. Mr. George disclaims
beneficial ownership of the shares held by Solstice Capital, except to the
extent of his pecuniary interest in Solstice Capital. The following natural
persons exercise voting and/or dispositive power for the shares held by
Solstice Capital: Harry George and Henry Newman.
(17) Mr. Ketterson disclaims beneficial ownership of the shares held by the
entities comprising Fidelity Ventures, except to the extent of his
pecuniary interest in the funds.
(18) Includes 325,005 shares held by Kinetech, Inc. and 645,255 shares held
Lachman Goldman Ventures, LLC. Mr. Lachman is the president of Kinetech and
general partner of Lachman Goldman Ventures.
(19) Ms. Leeds disclaims beneficial ownership of the shares held by Baker
Communications Fund, L.P., except to the extent of her proportionate
pecuniary interest therein.
* Less than 1% of the outstanding common stock.
** Unless otherwise indicated, the address of each 5% stockholder is c/o
Connected Corporation, 24 Prime Parkway, Natick, Massachusetts 01760.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock as of March 27, 2000 consisted of 12,000,000
shares of common stock, and 13,387,086 shares of preferred stock. As of March
27, 2000, there were outstanding 5,482,203 shares of common stock and 6,529,402
shares of preferred stock. Such shares were held of record by a total of 63
stockholders.
Upon the closing of this offering:
- our certificate of incorporation will be amended and restated to provide
for total authorized capital consisting of 100,000,000 shares of common
stock and 5,000,000 shares of preferred stock;
- all shares of preferred stock and certain warrants will convert into
common stock, and a total of 25,694,865 shares of common stock and no
shares of preferred stock will be outstanding, based on the number of
shares outstanding as of March 27, 2000 and assuming no exercise of the
underwriters' over-allotment option, after giving effect to the sale of
common stock we are offering; and
- there will be outstanding warrants to purchase 147,849 shares of common
stock, all of which will be then currently exercisable.
Except as otherwise indicated, the following information reflects the
filing, as of the closing of the offering, of our fifth amended and restated
certificate of incorporation and the adoption of our third amended and restated
bylaws.
COMMON STOCK
Voting Rights. The holders of our common stock have one vote per share on
all matters voted upon by our stockholders. Holders of our common stock are not
entitled to vote cumulatively for the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority, or, in
the case of the election of directors, by a plurality, of the votes cast at
meeting at which a quorum is present, voting together as a single class, subject
to any voting rights granted to holders of any then outstanding preferred stock.
Dividends. Holders of common stock will share ratably in any dividends
declared by our board of directors, subject to the preferential rights of any
preferred stock then outstanding. Dividends consisting of shares of common stock
may be paid to holders of shares of common stock.
Other Rights. Upon the liquidation, dissolution or winding up of
Connected, all holders of common stock are entitled to share ratably in any
assets available for distribution to holders of shares of common stock. No
shares of common stock are subject to redemption and none of our stockholders
have preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
As of the closing date of this offering, each outstanding share of our
existing preferred stock will automatically convert into one share of common
stock. Pursuant to our amended and restated certificate of incorporation, a
total of 5,000,000 shares of preferred stock will be authorized for future
issuance by our board of directors in one or more series. Our board of directors
may fix the voting rights, if any, designations, powers, preferences,
qualifications,
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limitations and restrictions thereof, applicable to the shares of each series of
preferred stock, including the dividend rights, dividend rates, conversion
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. Our board of directors may, without
stockholder approval, issue preferred stock with voting and other rights that
could adversely affect the voting power and other rights of the holders of the
common stock and could have anti-takeover effects, including preferred stock or
rights to acquire preferred stock in connection with implementing a shareholder
rights plan. Thus, our board of directors has the ability to quickly issue
preferred stock with terms calculated to delay, defer or prevent a change of
control of our company or to make the removal of existing management more
difficult. We have no present plans to issue any additional shares of preferred
stock.
WARRANTS
As of March 27, 2000, we had outstanding warrants to purchase an aggregate
of 730,782 shares of our common stock. The weighted average exercise price of
these warrants is $0.36 per share. These warrants consist of:
- a warrant, expiring on June 12, 2001, issued to Softbank Holdings, Inc.
to purchase up to 301,650 shares of common stock at an exercise price of
$1.33 per share, the right to purchase 38,499 shares is currently
exercisable and the right to purchase the remaining shares has expired
pursuant to the terms of the warrant;
- a warrant, expiring on June 12, 2001, issued to Carl Lazarus to purchase
up to 56,250 shares of common stock at an exercise price of $1.33 per
share, the right to purchase 52,734 shares is currently exercisable;
- a warrant, expiring on June 12, 2001, issued to Sandpiper Software
Consulting to purchase up to 53,100 shares of common stock at an exercise
price of $0.13 per share; and
- warrants, expiring on June 11, 2004, to purchase up to 582,933 shares of
common stock at an exercise price of $0.22 per share issued in connection
with the sale of the unsecured subordinated convertible promissory notes
described under "Certain Transactions." Upon the closing of this
offering, these warrants will be converted into
shares of our common stock as described below.
In connection with certain credit arrangements, we issued warrants,
expiring on June 11, 2004, to Silicon Valley Bank to purchase an aggregate of
13,842 shares of series D preferred stock. These warrants, upon conversion of
the series D preferred stock, will be exercisable for up to 41,526 shares of
common stock at an exercise price of $1.99 per share. Immediately prior to this
offering these warrants will automatically convert into shares of our
common stock.
Upon the closing of this offering, the warrants issued in connection with
the sale of the unsecured subordinated convertible promissory notes and the
warrant issued to Silicon Valley Bank will be automatically converted. The
number of shares of common stock issued upon conversion will be equal to the
number of shares issuable upon full exercise of the warrant multiplied by the
difference between the offering price and the exercise price and divided by the
offering price. Assuming an offering price of $ per share, an aggregate of
shares of common stock will be issued to holders of warrants issued in
connection with the sale of the notes and shares of common stock will be
issued to Silicon Valley Bank.
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REGISTRATION RIGHTS
Set forth below is a summary of the common stock registration rights of the
holders of our existing preferred stock and warrants, which will convert
automatically into common stock immediately prior to the consummation of this
offering. The rights described currently apply to the shares held by our
preferred stockholders and the shares underlying the warrants issued in
connection with the notes and the Silicon Valley Bank warrant. Upon the closing
of this offering these rights will apply to an aggregate of 22,711,122 shares of
our common stock.
Demand Registrations. At any time, the holders of a majority of the common
stock issued upon conversion of series D preferred stock or the holders of at
least 40% of the shares of common stock issued upon conversion of the series A,
series B, series C and series D preferred stock (referred to as registrable
securities) may request that we register shares of common stock, subject to
certain minimum offering criteria and other limitations, including our right,
upon advice of our underwriters, to reduce the number of shares proposed to be
registered ratably among the demanding holders. We are obligated to effect two
registrations pursuant to such requests by holders of shares of common stock
issued upon conversion of series D preferred stock and two registrations
pursuant to such requests by all other holders of registration rights. We are
not obligated to effect a registration for 180 days following effectiveness of
the most recent registration.
Piggyback Registration Rights. Prior to the fifth anniversary of this
offering, the holders who have registration rights have the right to request
that shares be included in any and all company-initiated registration of common
stock other than registrations relating to employee benefit plans, business
combinations subject to Rule 145 under the Securities Act, convertible debt or
certain other registrations. In our initial registration and subsequent
registrations, the underwriters may, for marketing reasons, exclude all or part
of the shares requested to be registered on behalf of all stockholders having
the right to request inclusion in such registration. In addition, we have the
right to terminate any registration we initiated prior to its effectiveness
regardless of any request for inclusion by any stockholders.
Form S-3 Registrations. After we have qualified for registration on Form
S-3, which will not be until at least 12 months after the closing of this
offering, holders of 10% or more of the registrable securities or a majority of
the then outstanding shares of common stock issued upon conversion of the series
D preferred stock may request in writing that we effect a registration of these
shares on Form S-3, provided that the gross offering price of the shares to be
so registered in each such registration exceeds $500,000. The holders may
request an unlimited number of registrations on Form S-3.
Future Grants of Registration Rights. Without the consent of the holders
of at least a majority of the shares of common stock issued upon conversion of
the series D preferred stock and a majority of the then outstanding registrable
securities, we may not grant further registration rights which would be on equal
or more favorable terms than the existing registration rights.
Transferability. The registration rights are transferable upon transfer of
registrable securities and notice by the holder to us of the transfer, provided
that the transferee or assignee (1) assumes the rights and obligations of the
transferor for such shares and (2) transferee either acquires at least 100,000
shares of registrable securities or is an affiliate or beneficial owner of the
transferor.
PREEMPTIVE RIGHTS
The holders of our series D preferred stock have the right to purchase
collectively up to 10% of our common stock to be sold in this offering.
Following the offering, none of the
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holders of our capital stock will have preemptive rights. For a list of holders
of these preemptive rights, see "Certain Transactions -- Preemptive Rights."
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
The provisions of our certificate of incorporation and bylaws described
below, as well as the ability of our board of directors to issue shares of
preferred stock and to set the voting rights, preferences and other terms
thereof, are designed to reduce our vulnerability to an unsolicited proposal for
the restructuring or sale of all or substantially all of our assets or an
unsolicited takeover attempt which is unfair to our stockholders. These
provisions may discourage takeover attempts not first approved by our board of
directors, including takeovers that particular stockholders may deem to be in
their best interests. These provisions also could have the effect of
discouraging open market purchases of our common stock because they may be
considered disadvantageous by stockholders seeking to participate in a business
combination transaction with us or to elect a new director to our board. The
following description is general, and you should read it with our certificate of
incorporation and bylaws.
Classified Board of Directors. Our board of directors is divided into
three classes serving staggered three-year terms, with approximately one-third
of the board being elected each year. Our classified board, together with
certain other provisions of our certificate of incorporation authorizing the
board of directors to fill vacant directorships or increase the size of the
board, may prevent or delay a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling vacancies
created by this removal with its own nominees.
Director Vacancies and Removal. Our certificate of incorporation provides
that vacancies in our board of directors shall be filled only by the affirmative
vote of a majority of the remaining directors. Our certificate of incorporation
provides that directors may be removed from office only with cause with the
affirmative vote of holders of at least 75% of our outstanding shares of common
stock. Our bylaws provide that the size of our board of directors may be
increased by our directors or by the affirmative vote of the holders of at least
75% of our outstanding shares of common stock.
No Stockholder Action by Written Consent. Our certificate of incorporation
and bylaws provide that any action required or permitted to be taken by our
stockholders at an annual or special meeting of stockholders must be effected at
a duly called meeting and may not be taken or effected by a written consent of
stockholders.
Special Meetings of Stockholders. Our certificate of incorporation and
bylaws provide that a special meeting of stockholders may be called only by our
president or our board of directors. Our bylaws provide that only those matters
included in the notice of the special meeting may be considered or acted upon at
that special meeting.
Advance Notice of Director Nominations and Stockholder Proposals. Our
bylaws include advance notice, informational requirements and time limitations
on any director nomination or any proposal which a stockholder wishes to make at
an annual meeting of stockholders. For the first annual meeting following the
completion of this public offering, a stockholder's notice of a director
nomination or proposal will be timely if delivered to our corporate secretary at
our principal executive offices not later than the close of business on the
later of the 75th day prior to the scheduled date of the annual meeting or the
10th day following the day on which publicly announce the date of our annual
meeting. For subsequent annual meetings, a stockholders' notice of a director
nomination or proposal must be generally delivered not later than 75 days
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and not earlier than 105 days prior to the first anniversary of the preceding
year's annual meeting.
Prohibition Against Greenmail. Our certificate of incorporation prohibits
the payment of so-called "greenmail" without the approval of the holders of 75%
of our outstanding shares of common stock other than the shares of common stock
held by the person to whom such greenmail payment is to be made. Greenmail is
the practice of purchasing shares of capital stock from a person at a price in
excess of fair market value. Our certificate of incorporation prohibits this
practice of purchasing shares from any person who holds 5% or more of our
outstanding shares of common stock and who has held such shares for less than
two years prior to the date of such proposed greenmail payment.
Stockholder Action and Amendment of our Certificate of Incorporation. Any
vote required of our stockholders under Delaware law, other than the election of
directors which requires a plurality vote, shall be effective if recommended by
a majority of our Continuing Directors, as defined in our certificate of
incorporation, and approved by the vote of the holders of a majority of our
outstanding shares of common stock. If any vote is not recommended by a majority
of our Continuing Directors, to be approved it must be voted by the holders of
at least 75% of our outstanding shares of common stock. Continuing Directors
include those individuals who are directors prior to the time that any person
becomes a holder of 5% or more of our outstanding shares of common stock after
this public offering.
As required by Delaware law, any amendment to our certificate of
incorporation must first be approved by a majority of our Continuing Directors
and, if required by law, thereafter approved by a majority of the outstanding
shares entitled to vote with respect to the amendment; and if not recommended by
a majority of Continuing Directors, then by vote of 75% of our outstanding
shares of common stock. Any amendment to the provisions relating to stockholder
action by written consent, special meetings of stockholders, directors,
greenmail, stockholder action, limitation of liability and the amendment of our
certificate of incorporation must be approved by not less than 75% of our
outstanding shares of common stock.
Amendment of Bylaws. Our certificate of incorporation and bylaws provide
that our bylaws may be amended or repealed by our board of directors or by our
stockholders. Such action by the board of directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the affirmative vote of at least 75% of our outstanding
shares of common stock at an annual meeting of stockholders or a special meeting
called for this purpose unless a majority of our Continuing Directors recommends
that the stockholders approve the amendment or repeal at such meeting, in which
case the amendment or repeal only requires the affirmative vote of a majority of
our outstanding shares of common stock.
STATUTORY BUSINESS COMBINATION PROVISION
Following this public offering, we will be subject to Section 203 of the
Delaware General Corporation Law, which prohibits a publicly-held Delaware
corporation from consummating, except under certain circumstances, a "business
combination" with an interested stockholder for a period of three years after
the date the stockholder became an "interested stockholder" unless:
- the transaction was approved by the board of directors prior to the date
on which the interested stockholder became an interested stockholder;
- upon the closing of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares held by directors who are also
officers of the corporation and shares held by employee stock plans; or
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- following the transaction in which the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
The term "business combination" includes mergers, consolidations, asset
sales involving 10% or more of a corporation's assets and other similar
transactions resulting in a financial benefit to an interested stockholder. The
term "interested stockholder" generally is defined as a person who, together
with affiliates and associates, owns, or, within the prior three years, owned,
15% or more of a corporation's outstanding voting stock. Under certain
circumstances, Section 203 makes it more difficult for an interested stockholder
to effect various business combinations with a corporation for a three-year
period. A Delaware corporation may opt out of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from an amendment
approved by holders of at least a majority of the outstanding voting stock.
Neither our certificate of incorporation nor our bylaws contain any such
exclusion. The provisions of Section 203 may encourage persons interested in
acquiring us to negotiate in advance with our board of directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approves either the business combination or the transaction which
results in any stockholder becoming an interested stockholder. These provisions
may also have the effect of preventing changes in our management. It is possible
that such provisions could make it more difficult to accomplish transactions
which our stockholders may otherwise deem to be in their bests interests.
LISTING ON THE NASDAQ NATIONAL MARKET
We have applied to have our common stock approved for quotation on The
Nasdaq National Market under the symbol "CNTD."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of
common stock outstanding. Of these shares, the shares sold in
this offering, excluding the shares purchased by our existing stockholders
pursuant to preemptive rights described under "Certain
Transactions -- Preemptive Rights," will be freely tradable without restriction
under the Securities Act, unless purchased by our "affiliates," as that term is
defined in Rule 144 under the Securities Act. Substantially all of our remaining
securities outstanding prior to this offering are subject to 180-day lock-up
agreements, and may not be sold in the public market prior to the expiration of
the lock-up agreements. Deutsche Bank Securities Inc. may release the securities
subject to the lock-up agreements in whole or in part at any time without prior
public notice. Upon the expiration of the lock-up agreements, approximately
27,088,976 additional shares will be available for sale in the public market,
subject in some cases to compliance with the volume and other limitations of
Rule 144.
DAYS AFTER DATE SHARES ELIGIBLE
OF THIS PROSPECTUS FOR SALE COMMENT
- ------------------ --------------- -------
Upon effectiveness........................... Freely tradable shares sold in this
offering and certain other shares
eligible for sale under Rule 144(k)
which are not subject to lock-up
agreements
90 days...................................... 889,460 Holders of all securities whose
holdings exceed 0.5% of our fully
diluted capital stock prior to the
offering are bound by lock-up
agreements; certain other shares are
eligible for sale under Rule 144,
144(k), or 701; includes 212,043
shares issuable pursuant to options
and warrants
180 days..................................... 23,877,873 Lock-ups released; shares eligible for
sale under Rule 144, 144(k) or 701;
includes 1,330,740 shares issuable
pursuant to options and warrants
Various dates thereafter..................... 165,999 Restricted securities held for one
year or less as of 180 days following
effectiveness
RULE 144
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of the following:
- 1% of the then outstanding shares of our common stock (approximately
shares immediately after this offering) or
- the average weekly trading volume during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to
the sale.
A person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days immediately preceding the sale
and who has beneficially
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owned his or her shares for at least two years is entitled to sell these shares
pursuant to Rule 144(k) without regard to the limitations described above.
Affiliates must always sell pursuant to Rule 144, even after the applicable
holding periods have been satisfied.
We cannot estimate the number of shares that will be sold under Rule 144,
as this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. Prior to this offering, there
has been no public market for our common stock, and there can be no assurance
that a significant public market for our common stock will develop or be
sustained after this offering. Any future sale of substantial amounts of our
common stock in the open market may depress the market price of our common
stock.
LOCK-UP AGREEMENTS
We and our directors, executive officers and substantially all of our
stockholders and holders of options and warrants to purchase our capital stock
whose holdings exceed 0.5% of our fully diluted capital stock have agreed
pursuant to the underwriting agreement and other agreements not to sell or
otherwise dispose of any of our securities without the prior consent of Deutsche
Bank Securities Inc. until 180 days from the date of this prospectus, except
that we may, without such consent, grant options and sell shares pursuant to our
1996 Equity Incentive Plan, our 2000 Combination Stock Option Plan, our 2000
Employee Stock Purchase Plan and our 2000 Nonemployee Director Stock Option
Plan.
STOCK OPTIONS
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of our common stock that are subject to outstanding
options or warrants or are reserved for issuance under our 1996 Equity Incentive
Plan, our 2000 Combination Stock Option Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Nonemployee Director Stock Option Plan within 180 days after
the date of this prospectus, thus permitting the resale of these shares by
nonaffiliates in the public market without restriction under the Securities Act.
RULE 701
Any of our employees or consultants who received his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 of the Securities Act. Under Rule 701, nonaffiliates may
resell their covered shares without compliance with the public information,
holding period, volume limitation or notice provisions of Rule 144, and
affiliates may resell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after the
date of this prospectus. As of December 6, 2000, the holders of approximately
960,036 shares of our common stock will be eligible to sell their shares in
reliance upon Rule 701 on the expiration of the 180-day lock-up period described
above.
REGISTRATION RIGHTS
Set forth in "Description of Capital Stock -- Registration Rights" is a
summary of the common stock registration rights of the holders of our
outstanding preferred stock, which will convert automatically into common stock
immediately prior to the consummation of this offering. The rights described
apply to an aggregate of 22,086,663 shares of our common stock plus up to
624,459 shares of our common stock issued upon the conversion of certain
warrants as described in "Description of Capital Stock -- Warrants."
The holders of our outstanding preferred stock have each waived their right
to have shares registered in this offering.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Bear, Stearns & Co. Inc. and Wit SoundView Corporation, have severally
agreed to purchase from us the following respective number of shares of common
stock at a public offering price less the underwriting discounts and commissions
set forth on the cover page of this prospectus:
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
Deutsche Bank Securities Inc. ..............................
Bear, Stearns & Co. Inc. ...................................
Wit SoundView Corporation ..................................
Total Underwriters ( )...................
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may reallow, a concession of not more than $ per share to other dealers.
After the initial public offering, representatives of the underwriters may
change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of the common stock offered hereby.
To the extent that the underwriters exercise this option, each of the
underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of commons stock as the
number of shares of common stock to be purchased by it in the above table bears
to the total number of shares of common stock offered hereby. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares are
being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is of the initial public offering price. We
have agreed to pay the underwriters the following fees, assuming either no
exercise or full exercise by the underwriters of the underwriters' over-
allotment option:
TOTAL FEES
----------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
Fees we pay...............
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .
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We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors, and substantially all of our
stockholders and holders of options and warrants to purchase our stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock or
derivatives of our common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held by these persons
for a period of 180 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. This consent may be given at
any time without public notice. We have entered into a similar agreement with
the representatives of the underwriters, except that we may grant options and
sell shares pursuant to our 1996 Equity Incentive Plan, our 2000 Combination
Stock Option Plan, our 2000 Employee Stock Purchase Plan and our 2000
Nonemployee Director Stock Option Plan without such consent. There are no
agreements between the representatives and any of our stockholders or affiliates
releasing them from these lock-up agreements prior to the expiration of the
180-day period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
A prospectus in electronic format is being made available on Internet web
sites maintained by one or more of the lead underwriters of this offering,
including Wit SoundView Corporation's affiliate, Wit Capital Corporation, and
may be made available on web sites maintained by other underwriters. In
addition, other dealers purchasing shares from Wit SoundView Corporation in this
offering have agreed to make a prospectus in electronic format available on web
sites maintained by each of these dealers. Other than the prospectus in
electronic format, the information on any underwriter's web site and any
information contained in any other web site maintained by an underwriter is not
part of the prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or any underwriter in
its capacity as underwriter and should not be relied upon by investors.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on The Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares for our vendors, employees, family
members of employees, customers and other third parties. The number of shares of
our common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved
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shares that are not purchased by these persons will be offered by the
underwriters to the general public on the same basis as the other shares in this
offering.
Pursuant to exercise of the preemptive right described in "Certain
Transactions -- Preemptive Rights" the holders of our series D preferred stock
have the right to purchase up to an aggregate of 10% of the shares offered
hereby at the public offering price and otherwise on the same terms as the
shares sold to the public.
In November 1999, we sold 3,054,692 shares of our series D preferred stock
in a private placement at a price of $7.72 per share. Each share of our series D
preferred stock will be automatically converted upon the closing of this
offering into three shares of our common stock. Baker Communications Fund, L.P.
purchased 1,683,938 shares of our series D preferred stock in this private
placement on the same terms as the other investors in the private placement. BT
Investment Partners, Inc. has a 2.46% limited partnership interest in Baker
Communications Fund, L.P. BT Investment Partners, Inc. is under common control
with one of our underwriters, Deutsche Bank Securities Inc. Its limited
partnership interest in Baker Communications Fund, L.P. gives BT Investment
Partners, Inc. a pecuniary interest in approximately 41,424 shares of our series
D preferred stock. Upon the automatic conversion of these shares into 124,272
shares of our common stock, the value of these shares of common stock, based
upon an initial public offering price of $ per share, will be $ ,
representing an increase from the price paid for the corresponding series D
preferred stock of $ . Similarly, BSC Employee Fund, L.P. has a 1.23%
limited partnership interest in Baker Communications Fund, L.P. BSC Employee
Fund, L.P. is under common control with one of our underwriters, Bear, Stearns &
Co. Inc. This limited partnership interest in Baker Communications Fund, L.P.
gives BSC Employee Fund, L.P. a pecuniary interest in approximately 20,712
shares of our series D preferred stock. Upon the automatic conversion of these
shares into 62,136 shares of our common stock, the value of these shares of
common stock, based upon an initial public offering price of $ per share,
will be $ , representing an increase for the price paid for the
corresponding series D preferred stock of $ .
Pursuant to the rules and regulations of the National Association of
Securities Dealers, Inc., if any of the shares currently held by Baker
Communications Fund, L.P. are deemed underwriting compensation, such shares may
not be sold, transferred, assigned, pledged or hypothecated by any person for a
period of one year after the effective date of this offering, except, in each
case, to officers or partners of the underwriters and members of the selling
group and their officers and partners.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
- estimates of our business potential.
75
79
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed upon for us by Brown, Rudnick, Freed & Gesmer, Boston, Massachusetts.
Certain legal matters with respect to our patents and proprietary rights
described in this prospectus will be passed upon by Weingarten, Schurgin,
Gagnebin & Hayes LLP, Boston, Massachusetts. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Palmer & Dodge
LLP, Boston, Massachusetts.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. You can inspect and copy the registration statement and the
exhibits and schedules thereto at the public reference facility maintained by
the SEC at Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the
SEC's regional offices at Seven World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
may call the SEC at 1-800-732-0330 for further information about the operation
of the public reference rooms. Copies of all or any portion of the registration
statement can be obtained from the Public Reference Section of the SEC, 450
Fifth Street, NW., Washington, DC 20549, at prescribed rates. The Securities and
Exchange Commission maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the website of the SEC referred to above.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and to
make available to our stockholders quarterly reports containing unaudited
financial data for the first three quarters of each year.
76
80
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998 and 1999.................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
81
After the recapitalization discussed in Note 9(a) to Connected
Corporation's consolidated financial statements is effected, we expect to be in
a position to render the following audit report.
/s/ ARTHUR ANDERSEN LLP
- --------------------------------
Boston, Massachusetts
March 28, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Connected Corporation:
We have audited the accompanying consolidated balance sheets of Connected
Corporation (a Delaware corporation) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Connected Corporation as of
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
F-2
82
CONNECTED CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, PRO FORMA
--------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,822,662 $ 20,356,564 $ 20,356,564
Accounts receivable, net of allowance for doubtful
accounts of $10,000 and $85,000 in 1998 and 1999,
respectively............................................ 520,883 2,004,822 2,004,822
Prepaid expenses and other current assets................. 78,587 168,212 168,212
------------ ------------ ------------
Total current assets.................................... 2,422,132 22,529,598 22,529,598
------------ ------------ ------------
Property and Equipment, net................................. 375,051 1,003,206 1,003,206
------------ ------------ ------------
Other Assets................................................ 16,498 106,210 106,210
------------ ------------ ------------
$ 2,813,681 $ 23,639,014 $ 23,639,014
============ ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of equipment note with bank............... $ 210,121 $ 127,080 $ 127,080
Accounts payable.......................................... 116,901 800,962 800,962
Accrued expenses.......................................... 838,718 1,243,482 1,243,482
Deferred revenue.......................................... 442,916 1,342,331 1,342,331
Line of credit borrowings................................. 550,000 -- --
------------ ------------ ------------
Total current liabilities............................... 2,158,656 3,513,855 3,513,855
------------ ------------ ------------
Equipment Note with Bank, net of current portion............ 109,832 -- --
------------ ------------ ------------
Commitments and Contingencies (Note 10)
Series D Redeemable Convertible Preferred Stock, at
redemption value (Note 8)................................. -- 23,582,222 --
Stockholders' Equity (Deficit):
Preferred stock, $.001 par value -- no shares authorized,
issued or outstanding at December 31, 1999, 5,000,000
shares authorized, no shares issued or outstanding, pro
forma................................................... -- -- --
Convertible preferred stock, $.001 par value --
Authorized -- 13,387,086 shares; no shares pro forma
Issued and outstanding -- 3,474,710 shares; no shares
pro forma (preference in liquidation of
$11,025,232).......................................... 3,475 3,475 --
Common stock, $.001 par value --
Authorized -- 12,000,000 shares; 100,000,000 shares pro
forma
Issued -- 6,226,893 and 6,638,544 shares at December 31,
1998 and 1999, respectively and 26,851,209 shares pro
forma................................................. 6,227 6,639 26,852
Additional paid-in capital................................ 11,119,256 14,800,956 38,366,440
Accumulated deficit....................................... (10,531,401) (16,671,462) (16,671,462)
Deferred compensation..................................... -- (1,544,307) (1,544,307)
Treasury stock -- 1,370,448 shares........................ (52,364) (52,364) (52,364)
------------ ------------ ------------
Total stockholders' equity (deficit).................... 545,193 (3,457,063) 20,125,159
------------ ------------ ------------
$ 2,813,681 $ 23,639,014 $ 23,639,014
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
83
CONNECTED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
REVENUES:
License........................................... $ 111,526 $ 1,166,012 $ 3,157,080
Subscription...................................... 210,030 975,109 2,586,015
Other............................................. 230,002 899,012 196,075
----------- ----------- ------------
Total revenues................................. 551,558 3,040,133 5,939,170
Cost of revenues.................................... 551,370 602,008 928,407
----------- ----------- ------------
Gross profit........................................ 188 2,438,125 5,010,763
----------- ----------- ------------
OPERATING EXPENSES:
Sales and marketing............................... 2,504,281 2,838,386 5,164,568
Research and development.......................... 942,603 1,418,267 1,979,022
General and administrative........................ 1,103,063 1,059,028 1,731,176
Stock-based compensation (Note 9(d)).............. -- -- 594,454
----------- ----------- ------------
Total operating expenses....................... 4,549,947 5,315,681 9,469,220
----------- ----------- ------------
Operating loss...................................... (4,549,759) (2,877,556) (4,458,457)
----------- ----------- ------------
INTEREST INCOME (EXPENSE):
Interest income................................... 169,186 118,215 222,658
Interest expense.................................. -- (34,225) (674,651)
----------- ----------- ------------
Total interest income (expense)................ 169,186 83,990 (451,993)
----------- ----------- ------------
Net loss............................................ (4,380,573) (2,793,566) (4,910,450)
Accretion of preferred stock........................ -- -- (1,229,611)
----------- ----------- ------------
Net loss available to common stockholders........... $(4,380,573) $(2,793,566) $ (6,140,061)
=========== =========== ============
Net loss per share -- basic and diluted............. $ (1.51) $ (0.77) $ (1.31)
=========== =========== ============
Weighted average common shares outstanding -- basic
and diluted....................................... 2,909,144 3,634,081 4,679,388
=========== =========== ============
Pro forma net loss per share -- basic and diluted
(unaudited)....................................... $ (0.37)
============
Pro forma weighted average common shares
outstanding -- basic and diluted (unaudited)...... 16,572,758
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
84
CONNECTED CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES C
SERIES D CONVERTIBLE
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE SERIES B CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
------------------------- ---------------------- ---------------------- ----------
NUMBER REDEMPTION NUMBER $.001 NUMBER $.001 NUMBER
OF SHARES VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES
---------- ------------ ---------- --------- ---------- --------- ----------
Balance, December 31, 1996............. -- $ -- 1,050,000 $ 1,050 1,042,750 $ 1,043 --
Sale of Series C convertible preferred
stock, net of issuance costs of
$39,441.............................. -- -- -- -- -- -- 1,381,960
Exercise of stock options............. -- -- -- -- -- -- --
Cash received for restricted stock.... -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
---------- ------------ ---------- ------- ---------- ------- ----------
Balance, December 31, 1997............. -- -- 1,050,000 1,050 1,042,750 1,043 1,381,960
Exercise of stock options............. -- -- -- -- -- -- --
Repurchase of restricted shares....... -- -- -- -- -- -- --
Exercise of warrants.................. -- -- -- -- -- -- --
Sale of common stock.................. -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
---------- ------------ ---------- ------- ---------- ------- ----------
Balance, December 31, 1998............. -- -- 1,050,000 1,050 1,042,750 1,043 1,381,960
Issuance of warrants in connection
with bridge financing................ -- -- -- -- -- -- --
Sale of Series D redeemable
convertible preferred stock, net of
issuance costs of $259,593........... 3,054,692 22,612,204 -- -- -- -- --
Accretion of Series D redeemable
convertible preferred stock.......... -- 970,018 -- -- -- -- --
Deferred compensation related to stock
option grants to employees........... -- -- -- -- -- -- --
Amortization of deferred
compensation......................... -- -- -- -- -- -- --
Exercise of stock options............. -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
---------- ------------ ---------- ------- ---------- ------- ----------
Balance, December 31, 1999............. 3,054,692 23,582,222 1,050,000 1,050 1,042,750 1,043 1,381,960
Pro forma conversion of preferred
stock to common stock and conversion
of warrants into common stock........ (3,054,692) (23,582,222) (1,050,000) (1,050) (1,042,750) (1,043) (1,381,960)
---------- ------------ ---------- ------- ---------- ------- ----------
Pro Forma Balance, December 31, 1999
(unaudited)........................... -- $ -- -- $ -- -- $ -- --
========== ============ ========== ======= ========== ======= ==========
COMMON STOCK
----------------------
--------- ---------------------- ADDITIONAL
$.001 NUMBER $.001 PAID-IN ACCUMULATED SUBSCRIPTION
PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT RECEIVABLES
--------- ---------- --------- ----------- ------------ ------------
Balance, December 31, 1996............. $ -- 6,179,274 $ 6,180 $ 5,327,680 $ (3,357,262) $(121,420)
Sale of Series C convertible preferred
stock, net of issuance costs of
$39,441.............................. 1,382 -- -- 5,763,409 -- --
Exercise of stock options............. -- 8,823 8 1,169 -- --
Cash received for restricted stock.... -- -- -- -- -- 121,420
Net loss.............................. -- -- -- -- (4,380,573) --
------- ---------- ------- ----------- ------------ ---------
Balance, December 31, 1997............. 1,382 6,188,097 6,188 11,092,258 (7,737,835) --
Exercise of stock options............. -- 2,826 3 374 -- --
Repurchase of restricted shares....... -- -- -- -- -- --
Exercise of warrants.................. -- 17,970 18 23,942 -- --
Sale of common stock.................. -- 18,000 18 2,682 -- --
Net loss.............................. -- -- -- -- (2,793,566) --
------- ---------- ------- ----------- ------------ ---------
Balance, December 31, 1998............. 1,382 6,226,893 6,227 11,119,256 (10,531,401) --
Issuance of warrants in connection
with bridge financing................ -- -- -- 1,486,186 -- --
Sale of Series D redeemable
convertible preferred stock, net of
issuance costs of $259,593........... -- -- -- -- (259,593) --
Accretion of Series D redeemable
convertible preferred stock.......... -- -- -- -- (970,018) --
Deferred compensation related to stock
option grants to employees........... -- -- -- 2,138,761 -- --
Amortization of deferred
compensation......................... -- -- -- -- -- --
Exercise of stock options............. -- 411,651 412 56,753 -- --
Net loss.............................. -- -- -- -- (4,910,450) --
------- ---------- ------- ----------- ------------ ---------
Balance, December 31, 1999............. 1,382 6,638,544 6,639 14,800,956 (16,671,462) --
Pro forma conversion of preferred
stock to common stock and conversion
of warrants into common stock........ (1,382) 20,212,665 20,213 23,565,484 -- --
------- ---------- ------- ----------- ------------ ---------
Pro Forma Balance, December 31, 1999
(unaudited)........................... $ -- 26,851,209 $26,852 $38,366,440 $(16,671,462) $ --
======= ========== ======= =========== ============ =========
TREASURY STOCK
-------------------- TOTAL
-------------------- STOCKHOLDERS'
DEFERRED NUMBER EQUITY
COMPENSATION OF SHARES COST (DEFICIT)
------------ --------- -------- -------------
Balance, December 31, 1996............. $ -- -- $ -- $ 1,857,271
Sale of Series C convertible preferred
stock, net of issuance costs of
$39,441.............................. -- -- -- 5,764,791
Exercise of stock options............. -- -- -- 1,177
Cash received for restricted stock.... -- -- -- 121,420
Net loss.............................. -- -- -- (4,380,573)
----------- --------- -------- -----------
Balance, December 31, 1997............. -- -- -- 3,364,086
Exercise of stock options............. -- -- -- 377
Repurchase of restricted shares....... -- 1,370,448 (52,364) (52,364)
Exercise of warrants.................. -- -- -- 23,960
Sale of common stock.................. -- -- -- 2,700
Net loss.............................. -- -- -- (2,793,566)
----------- --------- -------- -----------
Balance, December 31, 1998............. -- 1,370,448 (52,364) 545,193
Issuance of warrants in connection
with bridge financing................ -- -- -- 1,486,186
Sale of Series D redeemable
convertible preferred stock, net of
issuance costs of $259,593........... -- -- -- (259,593)
Accretion of Series D redeemable
convertible preferred stock.......... -- -- -- (970,018)
Deferred compensation related to stock
option grants to employees........... (2,138,761) -- -- --
Amortization of deferred
compensation......................... 594,454 -- -- 594,454
Exercise of stock options............. -- -- -- 57,165
Net loss.............................. -- -- -- (4,910,450)
----------- --------- -------- -----------
Balance, December 31, 1999............. (1,544,307) 1,370,448 (52,364) (3,457,063)
Pro forma conversion of preferred
stock to common stock and conversion
of warrants into common stock........ -- -- -- 23,582,222
----------- --------- -------- -----------
Pro Forma Balance, December 31, 1999
(unaudited)........................... $(1,544,307) 1,370,448 $(52,364) $20,125,159
=========== ========= ======== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
85
CONNECTED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(4,380,573) $(2,793,566) $(4,910,450)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 163,007 231,484 264,643
Amortization of original issuance discount and
deferred financing costs......................... -- -- 537,489
Amortization of stock-based compensation........... -- -- 594,454
Change in assets and liabilities:
Accounts receivable.............................. (151,230) (345,771) (1,483,939)
Prepaid expenses and other current assets........ (22,776) (48,240) (89,625)
Accounts payable................................. (52,810) 11,182 684,061
Accrued expenses................................. 173,495 382,868 487,041
Deferred revenue................................. 173,446 267,468 899,415
----------- ----------- -----------
Net cash used in operating activities......... (4,097,441) (2,294,575) (3,016,911)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (109,188) (312,722) (892,798)
Decrease (increase) in other assets.................. 15,559 4,491 (89,712)
----------- ----------- -----------
Net cash used in investing activities......... (93,629) (308,231) (982,510)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net of
issuance costs..................................... 5,764,791 -- 20,275,890
Proceeds from issuance of bridge notes and
warrants........................................... -- -- 3,000,000
Deferred financing costs............................. -- -- (56,859)
Proceeds from sale of restricted stock............... 121,420 2,700 --
Proceeds from (payments on) equipment note........... 250,724 230,537 (192,873)
Payments on long term debt........................... (50,146) (111,164) --
Payments on capital lease obligation................. (9,641) (11,752) --
Proceeds from exercise of warrants and stock
options............................................ 1,177 24,337 57,165
Repurchase of restricted stock....................... -- (52,364) --
Borrowings (repayments) under working capital line of
credit............................................. -- 550,000 (550,000)
----------- ----------- -----------
Net cash provided by financing activities..... 6,078,325 632,294 22,533,323
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents... 1,887,255 (1,970,512) 18,533,902
Cash and Cash Equivalents, beginning of period......... 1,905,919 3,793,174 1,822,662
----------- ----------- -----------
Cash and Cash Equivalents, end of period............... $ 3,793,174 $ 1,822,662 $20,356,564
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest............................... $ 16,790 $ 34,225 $ 137,102
=========== =========== ===========
Supplemental Disclosure of Noncash Financing
Activities:
Accretion on Series D redeemable convertible
preferred stock.................................... $ -- $ -- $ 1,229,611
=========== =========== ===========
Conversion of subordinated convertible promissory
notes to Series D redeemable convertible preferred
stock.............................................. $ -- $ -- $ 2,076,721
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
86
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND OPERATIONS
Connected Corporation (the Company) (a Delaware corporation) is provider of
application services and software that support personal computers over the
Internet and corporate intranets. The Company's solution automates diagnosis and
self-repair, supports upgrades, and restores data and applications lost due to
such problems as virus damage, lost or stolen PCs, and hard drive crashes. The
Company introduced its first service in 1996 and began licensing its software to
end-users in 1997.
The Company is subject to a number of risks common to companies in similar
stages of development, including dependence on key individuals, competition from
substitute services and larger companies, the need for successful ongoing
development and marketing of products and the Company's need either to generate
or otherwise obtain adequate financing to fund future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
significant accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements and notes.
(A) USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results may differ from those estimates.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
operations of Connected Corporation and its wholly owned subsidiary. All
significant intercompany transactions and balances have been eliminated in
consolidation.
(C) PRO FORMA INFORMATION (UNAUDITED)
Immediately prior to the closing of the Company's proposed initial public
offering of common stock, each outstanding share of convertible preferred stock
and redeemable convertible preferred stock will be automatically converted into
shares of common stock (see Notes 8 and 9(b)). In addition, holders of warrants
to purchase 624,459 shares of common stock will convert their warrants into
common stock upon the closing of the proposed initial public offering pursuant
to the automatic cashless exercise provision in the related agreements (see
Notes 5 and 6). The preferred stock and warrant conversions have been reflected
on a pro forma basis in the consolidated balance sheet and consolidated
statements of redeemable convertible preferred stock and stockholders' equity
(deficit) as of December 31, 1999.
(D) REVENUE RECOGNITION
The Company generates revenue from software licenses, subscriptions and
other services. The Company executes separate arrangements that govern the terms
and conditions of each software license, subscription arrangement and support
and maintenance arrangement. The
F-7
87
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company applies Statement of Position (SOP) 97-2, Software Revenue Recognition
and recognizes software license revenue upon execution of a signed license
agreement, delivery of the software to a customer and determination that
collection of a fixed license fee is probable . Revenues under multiple element
arrangements, which typically include software products and maintenance and
support services sold together, are allocated to each element based on the
residual method in accordance with SOP 98-9, Software Revenue Recognition with
Respect to Certain Arrangements. Under the residual method, the fair value of
the undelivered elements is deferred and subsequently recognized. The Company
has established sufficient vendor specific objective evidence for training and
maintenance based on the price charged when these elements are sold separately.
Subscription revenues consist of (1) revenue from customers who use the
Company's eSupport application and (2) support and maintenance services fees
related to licensed software applications and (3) royalty payments from reseller
partners. The Company recognizes such revenues ratably as the services are
provided from monthly, quarterly and annual arrangements. Support and
maintenance sold to licencees of software include the right to unspecified
upgrades on a when-and-if-available basis and on-going technical support.
Maintenance and customer support fees are recognized ratably over the term of
the maintenance and support contract on a straight-line basis.
Costs of revenues consist primarily of personnel and operating costs
associated with the Company's subscription business. Costs related to software
licenses and other revenue are not significant for any period presented.
(E) CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's cash equivalents are invested in financial
instruments with high credit ratings. To control credit risk, the Company
performs regular credit evaluations of its customers' financial condition and
maintains allowances for potential credit losses. The Company maintains an
allowance for potential credit issues but historically has not experienced any
significant losses related to individual customers or groups of customers in any
particular industry or geographic area. Concentration of credit risk with
respect to accounts receivable is limited to customers to whom the Company makes
significant sales.
Revenues from two customers represented 26% and 41% of the Company's total
revenues for the year ended December 31, 1997.
Revenues from two customers represented 11% and 23% of the Company's total
revenues for the year ended December 31, 1998. Accounts receivable from two
customers represented 18% and 35% of the Company's total accounts receivable as
of December 31, 1998.
Revenues from one customer represented 13% of the Company's total revenues
for the year ended December 31, 1999. Accounts receivable from two customers
represented 12% and 26% of the Company's total accounts receivable as of
December 31, 1999.
(F) EARNINGS PER SHARE
Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of unrestricted common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common shares and
potential common stock outstanding during the period, if dilutive.
F-8
88
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Potential common stock consists of the incremental common shares issuable upon
the exercise of stock options and warrants. Shares of common stock issuable upon
the conversion of convertible preferred stock and redeemable convertible
preferred stock have also been excluded from the date of issuance. In accordance
with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 98,
Earnings Per Share in an Initial Public Offering, the Company has determined
there were no nominal issuances of common stock prior to the Company's proposed
initial public offering. The following potential common shares were excluded
from the calculation of dilutive weighted average shares outstanding as their
effect would be anti-dilutive.
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
Convertible preferred stock............ 8,738,443 10,424,130 11,893,370
Common stock options................... 1,356,000 2,183,757 2,976,456
Warrants............................... 448,500 147,849 772,308
---------- ---------- ----------
Total........................ 10,542,943 12,755,736 15,642,134
========== ========== ==========
Unaudited pro forma basic and diluted net loss per share for the year ended
December 31, 1999 is computed using the weighted average number of unrestricted
common shares outstanding, including the pro forma effects of the automatic
conversion of convertible preferred stock and redeemable convertible preferred
stock into common stock on a three-for-one basis, which will automatically occur
upon the closing of the Company's proposed initial public offering, as if such
conversion occurred at the date of original issuance.
The calculation of pro forma basic and diluted shares outstanding is as
follows:
Shares used in computing basic and diluted net loss per
share..................................................... 4,679,388
Adjustment to reflect the effect of the conversion of
preferred stock........................................... 11,893,370
----------
Shares used in computing pro forma basic and diluted net
loss per share............................................ 16,572,758
==========
(G) COMPREHENSIVE LOSS
Statement of Financial Accounting Standards, (SFAS), No. 130, Reporting
Comprehensive Income, requires disclosure of all components of comprehensive
income on an annual and interim basis. Comprehensive income (loss) is defined as
the change in stockholders' equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. The
Company did not have any items of comprehensive loss, other than its net loss,
for any of the periods presented in the accompanying consolidated financial
statements; thus, the Company's comprehensive net loss is the same as its
reported net loss for all periods presented.
(H) CASH AND CASH EQUIVALENTS
The Company accounts for investments under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
investments for which the Company has the positive intent and ability to hold to
maturity, consisting of cash equivalents, are reported at amortized cost, which
approximates fair market value. Cash equivalents are
F-9
89
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
highly liquid investments with original maturities of three months or less. Cash
and cash equivalents consist of the following:
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
Cash and cash equivalents --
Cash............................................... $ 40,472 $ 152,742
Money market funds................................. 72,190 46,762
Commercial paper................................... 1,710,000 20,157,060
---------- -----------
Total cash and cash equivalents............ $1,822,662 $20,356,564
========== ===========
(I) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the
straight-line method based on the estimated useful lives of the related assets.
Substantially all of the Company's assets are depreciated over three years,
except leasehold improvements, which are amortized over the shorter of the
remaining lease term or three years.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash and cash equivalents, investments, accounts
receivable, accounts payable and notes payable. The estimated fair value of
these financial instruments approximates their carrying value.
(K) LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, the
Company evaluates the realizability of its long-lived assets at each reporting
period. As of December 31, 1998 and 1999, the Company has determined that no
material adjustment to the carrying value of its long-lived assets was required.
(L) SOFTWARE DEVELOPMENT COSTS
The Company accounts for its software development costs in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Accordingly, the costs for the development of new software
and substantial enhancements to existing software are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. The Company has determined that technological
feasibility is established at the time a working model of the software is
completed. Because the Company believes its current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility, no costs have been capitalized to date.
(M) NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board, (FASB), issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for
F-10
90
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
does not anticipate that the adoption of SFAS No. 133 will have a material
impact on its financial position or results from operations.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following at
December 31,
1998 1999
-------- ----------
Computer hardware and software........................... $790,966 $1,563,908
Assets under capital lease............................... 31,260 --
Furniture and fixtures................................... 6,228 51,194
Leasehold improvements................................... 14,585 120,734
-------- ----------
843,039 1,735,836
Less -- Accumulated depreciation and amortization........ 467,988 732,630
-------- ----------
$375,051 $1,003,206
======== ==========
4. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31,
1998 1999
-------- ----------
Accrued payroll and benefits............................. $380,427 $ 595,240
Accrued other............................................ 278,541 440,549
Accrued marketing........................................ 177,548 207,693
-------- ----------
$836,516 $1,243,482
======== ==========
5. EQUIPMENT NOTE AND LINE OF CREDIT
On February 18, 1997, the Company entered into an equipment note with a
bank, which was amended on May 15, 1998. Under the terms of the equipment note,
the Company borrowed at total of $481,260, for the purchase of equipment. The
amended equipment note also included a provision for working capital advances
under a revolving line of credit (the line of credit). The maximum borrowings
outstanding under the line of credit were $1,000,000. The equipment note is
secured by substantially all assets of the Company and bears interest at the
bank's prime rate (8.5% at December 31, 1999) plus 1%. The Company is required
to make monthly principal and interest payments on the equipment note. In June
1999, the Company entered into a bridge loan that extended the Company's
$1,000,000 line of credit and allowed the existing equipment term notes to
amortize in accordance with the original agreement. During the bridge period,
all borrowings under the working capital line of credit and equipment term notes
bore interest at the prime rate plus 2%. All borrowings under the bridge loan
were repaid in November 1999 and the Company has no borrowing capabilities at
December 31, 1999.
In connection with the bridge loan, the Company issued a warrant to the
bank. Under the terms of the warrant, the bank may purchase 13,842 shares of
Series D Redeemable Convertible Preferred Stock (Series D preferred stock) at an
exercise price of $5.96 per share through the earlier of June 2004 or at the
close of a qualifying public offering, as defined. The
F-11
91
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company computed the fair value of the warrant using the Black-Scholes option
pricing model and amortized the resulting original issue discount of $72,749
over the life of the bridge loan. Upon the closing of the proposed initial
public offering, the warrant will be automatically converted into common stock
pursuant to the cashless exercise provision in the related agreement.
6. SUBORDINATED CONVERTIBLE PROMISSORY NOTES
On June 11, 1999 the Company entered into an unsecured subordinated
convertible promissory note and warrant purchase agreement with investors
totaling $3,000,000 (the Notes). The Notes accumulated interest at a rate of 7%
per annum, and had a maturity date of the earlier of June 11, 2000 or upon the
closing date of a qualified financing, as defined. Upon closing of the Series D
preferred stock financing on November 3, 1999 (See Note 8) all principal and
interest on the Notes automatically converted into 399,251 shares of Series D
preferred stock at a conversion price equal to $7.72 per share.
Pursuant to the terms of the warrant purchase agreement, the noteholders
received warrants to purchase 582,933 shares of common stock at an exercise
price of $0.22 per share. The warrants are exercisable through the earlier of
(i) the closing of an initial public offering, meeting certain criteria or (ii)
June 11, 2004. Upon the closing of the proposed initial public offering, the
warrants will be automatically converted into common stock pursuant to the
cashless exercise provision in the related agreements. The Company computed the
fair value of the warrants using the Black-Scholes option pricing model. The
resulting original issuance discount of $1,413,437 will be amortized over the
life of the Notes; $443,418 of such original issuance discount was amortized to
interest expense through the date of conversion, with the remainder charged to
stockholders' equity (deficit) upon the conversion of the Notes into Series D
preferred stock.
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or
liabilities are computed based on the differences between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate.
No provision for federal or state income taxes has been recorded, as the
Company has incurred losses for all periods presented. As of December 31, 1999,
the Company has net operating loss and research credit carryforwards of
approximately, $14,200,000 and $190,000, respectively, available to reduce
future federal and state income taxes, if any. If not utilized, these
carryforwards expire at various dates through 2019. If substantial changes in
the Company's ownership should occur, as defined in section 382 of the Internal
Revenue Code (the Code), there could be annual limitations on the amount of
carryforwards which can be realized in future periods. The Company has completed
several financings since its inception and believes that it has not incurred an
ownership change as defined under the Code. The Company believes that the
proposed initial public offering will result in an ownership change as defined
under the Code. The Company does not believe that such change will place a
significant limitation on its ability to utilize its net operating loss
carryforward.
F-12
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CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate income tax effects of each type of temporary difference and
carryforward are as follows:
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
Net operating loss and credit carryforwards......... $ 4,100,000 $ 5,867,000
Other temporary differences......................... 84,000 526,000
Valuation allowance................................. (4,184,000) (6,393,000)
----------- -----------
$ -- $ --
=========== ===========
The Company has recorded a full valuation allowance against the net
deferred tax asset as of December 31, 1998 and 1999, because the future
realizability of such asset is uncertain. The increase in the valuation
allowance during these periods relates primarily to the Company's net losses
recorded in each period.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In November 1999, the Company sold 2,655,441 shares of Series D preferred
stock for aggregate proceeds of $20,500,004. In addition, holders of the Notes
described in Note 6 converted $3,082,217 of such Notes and accrued interest
thereon, into 399,251 shares of Series D preferred stock. The rights,
preferences and privileges of the Series D preferred stock are as follows:
VOTING
The holders are entitled to the number of votes equal to the number of
whole shares of common stock into which the preferred shares are convertible.
The holders vote together with the holders of common stock as a single class.
DIVIDENDS
The holders are entitled to receive dividends equal to 10% of their
original investment, when and if declared by the Board of Directors. If the
Board declares such dividends, they will be cumulative and payable in preference
to any dividends payable on all other classes of stock. As of December 31, 1999,
no dividends had been declared by the Board of Directors.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders shall be entitled to receive, in
preference to the holders of all other classes and series of stock, an amount
equal to $7.72 per share plus all accrued and unpaid dividends. If the assets of
the Company are insufficient to pay the full preferential amounts to the
shareholders, the assets legally available for distribution shall be distributed
first to the holders as described above in proportion to the preferential amount
each holder is entitled to, and then ratably among the holders of other classes
of preferred stock.
CONVERSION
The Series D preferred stock is convertible, at the option of the holder,
into three shares of common stock, adjustable for certain dilutive events. All
shares shall automatically convert into common stock upon the closing of an
underwritten initial public offering of the Company's common stock at per share
offering price of at least $5.79 and yielding aggregate gross
F-13
93
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proceeds to the Company of at least $25,000,000. Automatic conversion shall also
take place upon the consent of the holders of at least a majority of the then
outstanding shares of preferred stock (voting on an as-converted basis).
REDEMPTION
At any time on or after October 29, 2006, upon receipt of written request
for redemption from holders of at least a majority of the shares then
outstanding, the Company will redeem all of the outstanding shares. The price
per share to be paid to redeem the shares shall be an amount equal to the sum of
$7.72 plus all accrued and unpaid dividends, calculated at a rate of 10%, or the
fair market value per share as determined by an independent appraiser.
9. STOCKHOLDERS' EQUITY
As of December 31, 1999, the authorized capital stock of the Company was
12,000,000 shares of common stock, $.001 par value per share, and 13,387,086
shares of preferred stock, $.001 par value per share, of which 2,100,000 shares
are designated Series A convertible preferred stock, 2,085,500 shares are
designated Series B convertible preferred stock, 3,064,516 shares are designated
Series C convertible preferred stock and 3,054,692 shares are designated Series
D redeemable convertible preferred stock.
(A) RECAPITALIZATION
On March 23, 2000, the company's Board of Directors approved a
three-for-one stock split of the Company's common stock which will be effective
prior to the effective date of the proposed initial public offering of common
stock. All share and per share amounts of common stock for all periods have been
retroactively adjusted to reflect the stock split. Upon the closing of the
Company's proposed initial public offering, the Company's certificate of
incorporation will be amended and restated to, among other things, change its
authorized capital stock to 100,000,000 shares of $0.001 par value common stock
and 5,000,000 shares of $0.001 par value preferred stock.
(B) CONVERTIBLE PREFERRED STOCK
In 1995, the Company issued 1,050,000 shares of Series A convertible
preferred stock, $.001 par value (Series A preferred stock), for $1.00 per
share. In 1996, the Company also issued 1,042,750 shares of Series B convertible
preferred stock, $.001 par value (Series B preferred stock), for $4.00 per
share. In 1997, the Company issued 1,381,960 shares of Series C convertible
preferred stock, $.001 par value (Series C preferred stock), for $4.20 per
share. The rights, preferences and privileges of Series A, B and C preferred
stock listed below are identical, except as noted.
Conversion
Series A, B and C preferred stock are convertible into common stock on a
three-for-one basis, adjustable for certain dilutive events. Conversion is at
the option of the Series A, B and C preferred stockholders, although conversion
is mandatory upon the earlier of the consummation of an initial public offering
resulting in gross proceeds to the Company of at least $10,000,000 at a price of
at least $1.00, $2.67 and $2.67 per share, respectively, or the majority vote of
outstanding shares of Series A, B and C preferred stock. In the event that less
than 20% of issued Series A, B and C preferred stock is outstanding, all
remaining outstanding shares shall be converted.
F-14
94
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liquidation Preference
The Series A, B and C preferred stockholders have preference in the event
of a liquidation or dissolution of the Company equal to $1.00, $4.00 and $4.20
per share, respectively, plus declared but unpaid dividends. If the assets of
the Company are insufficient to pay the full preferential amounts to the
preferred stockholders, the assets shall be distributed ratably among such
holders in proportion to their aggregate liquidation preference amounts.
Voting Rights and Dividends
The Series A, B and C preferred stockholders shall be entitled to vote on
all matters and are entitled to the number of votes equal to the number of
shares of common stock into which each share is convertible. The holders of the
Series A, B and C preferred stock are entitled to receive, when and as declared
by the Board of Directors, any dividend declared or paid on any shares of common
stock.
Right of First Refusal
The Series A, B and C preferred stockholders have the right of first
refusal to purchase a pro rata share of any new securities offered by the
Company, as defined. The right of first refusal terminates upon the closing of
an initial public offering pursuant to a registration statement under the
Securities Act of 1933.
(C) COMMON STOCK
At various times in 1995 and 1996, the Company issued an aggregate of
6,173,649 shares of restricted stock to founders, employees and consultants.
Restricted shares issued to founders and employees vest ratably over 48 months.
If the individuals leave the Company, the Company has the right to buy back the
unvested shares at prices ranging from $0.003 to $0.13 per share. During 1998,
the Company repurchased an aggregate of 1,370,448 shares for $52,364. At
December 31, 1999, 37,854 shares remain unvested.
(D) OPTIONS AND WARRANTS
In 1996, the Company issued warrants to purchase an aggregate of 448,350
shares of common stock to employees and consultants, with exercise prices
ranging from $0.13 to $1.33 per share. The fair value of the warrants issued to
consultants did not result in any material charges to operations for any period
presented. In June 1999, the Company issued warrants to purchase 582,933 shares
of common stock in connection with the issuance of the Notes (Note 6). The
warrants are exercisable immediately at a price of $ 0.22 per share through the
earlier of (1) an initial public offering meeting certain criteria or (2) June
11, 2004. The Company also issued warrants to purchase 13,842 shares of Series D
Preferred Stock to a bank for the extension of a bridge loan (Note 5). Upon the
closing of the proposed initial public offering, the warrants issued to both the
Noteholders and the bank will be automatically converted into common stock
pursuant to the cashless exercise provision in the related agreements.
In March of 1996, the Company adopted the Connected Corporation 1996 Equity
Incentive Plan (the Plan) under which it may grant incentive stock options
(ISOs), nonqualified stock options (NSOs), stock appreciation rights,
performance shares, restricted stock, and stock units to purchase up to
5,250,000 shares of common stock. Under the Plan, ISOs may not be granted at
less than fair market value on the date of the grant, and all options generally
vest
F-15
95
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over a four-year period and are subject to immediate vesting based on certain
future events. As of December 31, 1999, options available for future grants
under the Plan are 1,850,241. Through March 27, 2000, the Company granted
options to purchase 1,850,241 shares of common stock with exercise prices per
share ranging from $0.32-$3.33 under the Plan.
In March 2000, the Company adopted, subject to shareholder approval, the
2000 Combination Stock Option Plan (the 2000 Plan) under which it may grant ISOs
to employees and NSOs to employees and consultants. A total of 6,000,000 shares
of common stock is currently reserved for issuance pursuant to the 2000 Plan,
subject to annual increases, as defined. In March 2000, options to purchase
2,906,859 shares of common stock at $3.33 per share were granted under the 2000
Plan, subject to shareholder approval.
In March 2000, the Company adopted, subject to shareholder approval, the
2000 Employee Stock Purchase Plan (2000 ESPP). A total of 500,000 shares of
common stock are reserved for issuance under the 2000 ESPP, subject to annual
increases, as defined. Eligible employees may purchase common stock at 85% of
the lesser of the average market price of the Company's common stock on the
first or last day of the applicable six-month payment period.
In March 2000, the Company adopted, subject to shareholder approval, the
2000 Nonemployee Director Option Plan (the 2000 Directors Plan) under which the
Company will grant options to purchase common stock to its nonemployee
directors. Under the terms of the 2000 Directors Plan, the Company will grant an
option to purchase 90,000 shares of common stock to all current nonemployee
directors when approved by the Company's shareholders; new directors will
receive an option to purchase 90,000 shares when first elected or appointed to
the Board. All nonemployee directors will receive an option to acquire an
additional 90,000 shares of common stock three years following the last grant.
All options will vest monthly; upon a change in control, all unvested options
will automatically vest. A total of 1,000,000 shares are reserved for issuance
pursuant to the 2000 Directors Plan. As of March 27, 2000, the Company granted
540,000 options to purchase common stock at an exercise price per share of
$3.33.
F-16
96
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee warrant and stock option activity for the three years in the
period ended December 31, 1999 is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
--------- -------------- --------------
Outstanding, December 31, 1996....... 903,750 $0.03 - $1.33 $0.19
Granted............................ 637,500 0.13 - 0.15 0.15
Canceled........................... (120,174) 0.03 - 0.13 0.08
Exercised.......................... (8,826) 0.13 0.13
--------- ------------- -----
Outstanding, December 31, 1997....... 1,412,250 0.03 - 1.33 0.18
Granted............................ 1,022,064 0.15 - 0.22 0.15
Canceled........................... (191,481) 0.03 - 0.15 0.13
Exercised.......................... (2,826) 0.13 0.13
--------- ------------- -----
Outstanding, December 31, 1998....... 2,240,007 0.03 - 1.33 0.17
Granted............................ 1,919,250 0.22 - 0.32 0.23
Canceled........................... (714,900) 0.03 - 0.22 0.16
Exercised.......................... (411,651) 0.13 - 0.15 0.14
--------- ------------- -----
Outstanding, December 31, 1999....... 3,032,706 $0.03 - $1.33 $0.22
========= ============= =====
Exercisable, December 31, 1999....... 741,202 $0.03 - $1.33 $0.22
========= ============= =====
Exercisable, December 31, 1998....... 1,046,102 $0.03 - $1.33 $0.20
========= ============= =====
Exercisable, December 31, 1997....... 520,828 $0.03 - $1.33 $0.26
========= ============= =====
Information regarding warrants and stock options as of December 31, 1999 is
as follows:
OUTSTANDING EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- --------- ----------- ---------
$0.03.................. 69,372 6.26 $0.03 66,559 $0.03
0.13 - $0.15.......... 1,050,834 7.73 0.15 567,528 0.14
0.22 - $0.32.......... 1,856,250 9.48 0.23 50,865 0.22
1.33.................. 56,250 6.46 1.33 56,250 1.33
--------- ----- ------- -----
3,032,706 $0.22 741,202 $0.22
========= ===== ======= =====
In connection with certain stock option grants during the year ended
December 31,1999, the Company recorded deferred compensation of $2,138,761. In
connection with expected additional stock option grants in the first half of
2000, the Company will record additional deferred compensation of approximately,
$21,038,000. The deferred compensation represents the aggregate difference
between the option exercise price and the deemed fair value of the common stock
on the date of grant for accounting purposes. The deferred compensation will be
recognized as an expense over the vesting period of the underlying stock
options. The Company recorded compensation expense of $594,454 in the year ended
December 31, 1999,
F-17
97
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to these options. The Company expects to record approximately
$10,380,000, $6,822,000, $3,615,000, $1,598,000, and 172,000 in compensation
expense in the years ended December 31, 2000, 2001, 2002, 2003, and 2004,
respectively.
The amortization of deferred compensation in the consolidated statement of
operations for the year ended December 31, 1999 by expense classification is as
follows:
Cost of sales............................................... $ 31,495
Sales and marketing......................................... 261,929
Research and development.................................... 174,686
General and administrative.................................. 126,344
--------
$594,454
========
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. The
Company accounts for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and follows the disclosure-only alternative
available under SFAS No. 123. The Company has computed the pro forma disclosures
under SFAS No. 123 for options granted in 1997, 1998 and 1999 using the
Black-Scholes option-pricing model.
The weighted average assumptions used for 1997, 1998 and 1999 are as
follows:
1997 1998 1999
----------- ----------- -----------
Risk-free interest rate................ 5.83 - 6.66% 4.46 - 5.72% 4.6 - 6.03%
Expected lives......................... 7 years 7 years 5 years
Expected volatility.................... -- -- --
Expected dividends..................... -- -- --
Weighted average remaining contractual
life of options outstanding.......... 9.02 years 9.06 years 8.82 years
Had compensation cost for the Company's 1996 Equity Incentive Plan been
determined consistent with SFAS No. 123, the Company's net loss would have been
as follows:
DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
Net loss available to common
stockholders --
As reported........................ $(4,380,573) $(2,793,566) $(6,140,061)
=========== =========== ===========
Pro forma.......................... (4,393,973) (2,816,780) (6,241,340)
=========== =========== ===========
Basic and diluted net loss per
share --
As reported........................ $ (1.51) $ (0.77) $ (1.31)
Pro forma.......................... (1.51) (0.78) (1.33)
10. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases that expire on various dates through October 2001. Rent expense charged
to operations in 1997, 1998 and 1999 was approximately $99,000, $144,000, and
$285,000 respectively.
F-18
98
CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the minimum future rent payments under the lease
agreements are as follows:
Years ending December 31,
2000...................................................... $ 915,000
2001...................................................... 543,000
----------
$1,458,000
==========
(B) PATENT LITIGATION CONTINGENCY
The Company has received notice from Stac Software, Inc. (Stac) alleging
that the Company's primary product infringes one of Stac's patents. The Company
does not believe that such an infringement exists and, in the event of
litigation, intends to vigorously defend its position. The Company cannot yet
predict whether the outcome of negotiations or litigation (if any) with Stac
will have a material impact on its financial position or results from
operations; however, the outcome could involve substantial costs to license
Stac's technology or if such a license was not available, reengineer the
Company's product. In addition, the Company could be forced to pay significant
legal fees, damages, or amounts in settlement in connection with any such
litigation or negotiations.
Stac also alleges that certain of the Company's advertising and marketing
of a certain product feature are misleading. The Company has modified its
advertising and marketing, and has renamed a product feature, to clarify the
operation of this feature. Despite these clarifications, the Company may still
be subject to litigation on this matter; the results of such litigation could
include significant legal fees, damages or amounts in settlement.
In addition, the Company received a notice dated March 23, 2000 from John
P. Shannon alleging that the Company's primary product infringes two of his
patents. Based on the Company's preliminary investigation of Mr. Shannon's
allegation, the Company does not believe that they are infringing any claims of
his patents.
The Company cannot yet predict whether the outcome of negotiations or
litigation (if any) with Mr. Shannon will have a material impact on its
financial position or results from operations; however, the outcome could
involve substantial costs to license Mr. Shannon's technology or if such a
license was not available, to reengineer the Company's product. In addition, the
Company could be forced to pay significant legal fees, damages, or amounts in
settlement in connection with any such litigation or negotiations.
11. 401(K) PLAN
The Company maintains the Connected Corporation 401(k) Pension and Profit
Sharing Plan (the Plan) under Section 401(k) of the IRC covering all employees.
Employees of the Company may participate in the Plan after reaching the age of
21. To be eligible for profit sharing contributions made for the Plan year,
employees must earn at least 1,000 hours of service. The Company may make
discretionary matching contributions and profit sharing contributions, as
determined annually by the Board of Directors. Employee contributions vest
immediately, while Company matching contributions vest ratably over three years.
To date, there have been no discretionary contributions made to the Plan.
12. RELATED PARTY TRANSACTIONS
In 1997, the Company entered into a software development and license
agreement with a stockholder of the Company for its back-up software. During the
years ended December 31,
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CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, 1998 and 1999, the Company recognized approximately $225,000, $695,000 and
$134,000, respectively, in revenues from this related party. The Company
believes the license fees payable under the agreement are reasonable and
comparable to those which would have been negotiated on an arm's-length basis
with an unaffiliated third party.
13. SEGMENT DISCLOSURE
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting financial information about
operating segments in annual and interim financial statements. Operating
segments are defined as units of a business for which financial information is
available that is evaluated by the primary decision-makers in determining the
manner in which resources are allocated and in assessing performance of the
business. The Company's chief operating decision-makers are its chief executive
officer and other members of senior management.
To date, the Company has viewed its operations and manages its business in
three primary segments: license, subscription and other revenues. The chief
operating decision-makers consider segment revenue as the primary measure of
segment performance. Revenues for these segments are reported as reported on the
accompanying consolidated statements of operations. The Company does not
allocate any expenses or any other source of income to its segments. Similarly,
property and equipment are not allocated to the segments for management or
segment reporting purposes. Substantially all of the Company's operations and
assets are in the United States.
14. VALUATION AND QUALIFYING ACCOUNTS
The following is a rollforward of the Company's allowance for doubtful
accounts:
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
YEARS ENDED DECEMBER 31, ---------- --------- ---------- ---------
1997................................... $ -- $10,000 $ -- $10,000
1998................................... 10,000 -- -- 10,000
1999................................... 10,000 77,000 2,000 85,000
15. SUBSEQUENT FINANCING
On March 28, 2000, the Company entered into a binding commitment with a
third party. Pursuant to the terms of the commitment, the Company will sell
74,101 shares of a newly designated class of convertible preferred stock (Series
E preferred stock) and a warrant to purchase 40,002 shares of common stock for
aggregate proceeds of $2,000,000. The Company's obligation to close the
transaction is subject to certain conditions, including a vote of the Company's
shareholders and the filing of an amended and restated certificate of
incorporation. The rights and privileges associated with the Series E preferred
stock are identical to those associated with the Series A, B and C convertible
preferred stock described in Note 9(b), except as follows: (1) the minimum
initial public offering price required to trigger the automatic conversion into
three shares of common stock is $8.00 (2) the liquidation preference is $26.99
per share plus accrued and unpaid dividends (3) dividends are payable only to
the extent that the Company's Board declares dividends on the common stock; and
(4) the series E holders do not have a right of first refusal.
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CONNECTED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This warrant may be exercised at any time during a one year period
beginning upon the close of the Company's initial public offering. The warrant
expires on the earlier of five years from the date of its grant or one year
after the closing of an initial public offering meeting certain criteria. The
warrant agreement also provides for an automatic cashless exercise immediately
prior to expiration. The exercise price will be equal to the issuance price of
the Company's initial public offering.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE 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.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................... 1
Risk Factors........................... 5
Special Note Regarding Forward-Looking
Statements And Industry Data......... 17
Use Of Proceeds........................ 18
Dividend Policy........................ 18
Capitalization......................... 19
Dilution............................... 20
Selected Historical Consolidated
Financial Data....................... 21
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations........................... 23
Business............................... 32
Management............................. 48
Certain Transactions................... 59
Principal Stockholders................. 62
Description Of Capital Stock........... 65
Shares Eligible For Future Sale........ 71
Underwriting........................... 73
Legal Matters.......................... 76
Experts................................ 76
Where You Can Find More Information.... 76
Index to Consolidated Financial
Statements........................... F-1
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT
BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS ARE ALSO OBLIGATED TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
LOGO
SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
BEAR, STEARNS & CO. INC.
WIT SOUNDVIEW
PROSPECTUS
, 2000
102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the registration fee and the NASD filing fee.
The costs of issuance and distribution will be borne by the Registrant as
follows:
AMOUNT
TO BE PAID
----------
Registration Fee............................................ $15,180
NASD Fee.................................................... $ 6,250
Nasdaq National Market Listing Fee.......................... $
Blue Sky Fees and Expenses.................................. $ 7,000
Transfer Agent and Registrar Fees........................... $ 3,500
Accounting Fees and Expenses................................ $
Legal Fees and Expenses..................................... $
Printing and Engraving...................................... $
Miscellaneous............................................... $
-------
Total............................................. $
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that a
corporation may specify in its certificate of incorporation that directors will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for any liability arising with respect to
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation further provides that we are authorized to
indemnify our directors, officers and employees and agents to the fullest extent
permitted by Delaware law. We believe the indemnification under our certificate
of incorporation covers negligence and gross negligence on the part of
indemnified parties.
Our bylaws provide that directors and officers shall be, and at the
discretion of our board of directors, non-officer employees and agents may be,
indemnified by us to the fullest extent authorized by Delaware law, as it now
exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of our company.
The bylaws also provide for the advancement of expenses to directors and
officers, and, at the discretion of our board of directors, non-officer
employees and agents. In addition, our bylaws provide that the right of
directors and officers to indemnification is a contract right and is not
exclusive of any other right now possessed or hereafter acquired under any
bylaw, agreement, vote of stockholders or otherwise. We also have directors' and
officers' insurance against certain liabilities.
In addition to and consistent with the indemnification provided for in our
certificate of incorporation and bylaws, we have entered into agreements to
indemnify our directors and
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officers. These agreements, among other things, require us to indemnify our
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by us or in our right arising out of
that person's services as our director or officer, any subsidiary of ours or any
other company or enterprise to which the person provides services at our
request. Under the indemnification agreements, a director or officer will not
receive indemnification if he is found to have received any improper personal
benefit or if he has not acted in good faith or in a manner he reasonably
believed to be in our best interests.
We believe that the indemnification agreements, together with the
limitation of liability and indemnification provisions of our certificate of
incorporation and bylaws and directors' and officers' insurance will assist us
in attracting and retaining qualified individuals to serve as our directors and
officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification would be
required or permitted. We are not aware of any pending or threatened litigation
or proceeding that might result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be provided to directors, officers or persons controlling our company as
described above, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities issued
by us since March 1, 1997 which were not registered under the Securities Act.
The registrant plans to effect a three-for-one split of the registrant's capital
stock prior to the effective date of this registration statement, subject to
stockholder approval. All references to numbers of shares and prices of capital
stock give effect to this stock split.
The issuances of securities pursuant to the exercise of stock options were
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 under the Securities Act as transactions pursuant to compensatory
benefit plans and contracts relating to compensation or as private placements
under Section 4(2) of the Securities Act. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments used in such transactions. All recipients
either received adequate information about us or had access, through employment
or other relationships, to such information.
All other securities issued in the following transactions were sold in
reliance upon the exemptions from registration set forth in Section 3(b) and
4(2) of the Securities Act relating to sales by an issuer not involving any
public offering.
There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
(1) On June 12, 1996, we entered into an agreement to sell 245,325 shares
of common stock to Ezra Goldman, for aggregate consideration of
$32,710. On June 26, 1997, Mr. Goldman paid for and we issued these
shares.
(2) On June 12, 1996, we entered into an agreement to sell 245,325 shares
of common stock to Ronald Lachman, for aggregate consideration of
$32,710. On June 26, 1997, Mr. Lachman paid for and we issued these
shares.
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104
(3) On June 12, 1996, we entered into an agreement to sell 420,000 shares
of common stock to Kinetech, Inc., for aggregate consideration of
$56,000. On June 26, 1997, Kinetech paid for and we issued these
shares.
(4) On May 28, 1997, we issued a total of 1,381,960 shares of series C
convertible preferred stock convertible into a total of 4,145,880
shares of common stock for aggregate consideration of $5,804,232 to
the following persons: Intel Corporation, Technologies for Information
& Entertainment III, L.P., H&Q Connected Investors, L.P., Solstice
Capital L.P., David Hirschman, Morris Ventures, East River Ventures,
L.P., United Acquisition Company, Michael T. Lash, and Robert Hartman.
(5) On November 21, 1997, we issued 5,040 shares of common stock to Robert
Hartman for aggregate consideration of $672 upon his option exercise.
(6) On November 21, 1997, we issued 3,456 shares of common stock to Thomas
C. Tormey for aggregate consideration of $460.80 upon his option
exercise.
(7) On November 21, 1997, we issued 330 shares of common stock to Sonja M.
Schluchter for aggregate consideration of $44 upon her option
exercise.
(8) On April 8, 1998, we issued 2,196 shares of common stock to Andrew
Broadstone for aggregate consideration of $292.80 pursuant to his
option exercise.
(9) On May 20, 1998, we issued 18,000 shares of common stock to Charles
Robbins for aggregate consideration of $2,400.
(10) On November 2, 1998, we issued 630 shares of common stock to Kathleen
J. Bruce for aggregate consideration of $84 upon her option exercise.
(11) On January 18, 1999, we issued 146,193 shares of common stock to
Matthew Westover for aggregate consideration of $19,762.65 upon his
option exercise.
(12) In January 1999 we agreed to issue 18,000 shares of common stock to
Charles Robbins for aggregate consideration of $3,900. In January
2000, Mr. Robbins paid for and was issued these shares.
(13) On April 28, 1999, we issued 6,912 shares of common stock to Michael
Carusi for aggregate consideration of $1,036.80 upon his option
exercise.
(14) On May 11, 1999, we issued 510 shares of common stock to Jennifer
Bassett-Glynn for aggregate consideration of $76.50 upon her option
exercise.
(15) On May 18, 1999, we issued 1,572 shares of common stock to Lawrence
Jones for aggregate consideration of $235.80 upon his option exercise.
(16) On June 11, 1999, we issued 1,440 shares of common stock to Arun
Mukherjee for aggregate consideration of $216 upon his option
exercise.
(17) On June 11, 1999, in connection with obtaining a credit facility we
issued a warrant to purchase shares of series C preferred stock to
Silicon Valley Bank at an exercise price of $4.20 per share if a
subsequent financing was not completed or series D preferred stock if
a subsequent financing was completed. Upon the closing of the series D
financing, the warrant became exercisable to purchase 13,842 shares of
series D preferred stock at an exercise price of $5.96 per share.
These shares of series D preferred stock are convertible into 41,526
shares of common stock.
(18) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 107,838 shares of common stock to
Technologies Information & Entertainment III, L.P. at an exercise
price of $0.22 per share. The principal
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and accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(19) On June 11, 1999 we issued an unsecured subordinated convertible note
and a warrant to purchase 97,152 shares of common stock to Middlefield
Ventures, Inc. at an exercise price of $0.22 per share. The principal
and accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(20) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 58,293 shares of common stock to Ronald D.
Lachman at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(21) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 48,576 shares of common stock to Solstice
Capital at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(22) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 68,007 shares of common stock to Softbank
America, Inc. at an exercise price of $0.22 per share. The principal
and accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(23) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 4,860 shares of common stock to Craig
Randall at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(24) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 4,860 shares of common stock to Norman
Meisner at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(25) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 9,717 shares of common stock to Carl Lazarus
at an exercise price of $0.22 per share. The principal and accrued
interest on the note converted into shares of series D preferred stock
upon the closing of the series D financing. See Items (36) and (41).
(26) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 4,860 shares of common stock to James Priest
at an exercise price of $0.22 per share. The principal and accrued
interest on the note converted into shares of series D preferred stock
upon the closing of the series D financing. See Items (36) and (41).
(27) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 9,717 shares of common stock to David Cane
at an exercise price of $0.22 per share. The principal and accrued
interest on the note converted into shares of series D preferred stock
upon the closing of the series D financing. See Items (36) and (41).
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106
(28) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 4,860 shares of common stock to Charles
Robbins at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(29) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 13,602 shares of common stock to Charles
Kline at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(30) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 13,602 shares of common stock to William
Keating at an exercise price of $0.22 per share. The principal and
accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(31) On June 11, 1999, we issued an unsecured subordinated convertible note
and a warrant to purchase 19,431 shares of common stock to David
Arthur Norman and Mamie Ruth Norman as Trustees of the Norman Family
Revocable Trust at an exercise price of $0.22 per share. The principal
and accrued interest on the note converted into shares of series D
preferred stock upon the closing of the series D financing. See Items
(36) and (41).
(32) On July 20, 1999, we issued 6,945 shares of common stock to Bryan
Dolan for aggregate consideration of $1,041.75 upon his option
exercise.
(33) On August 26, 1999, we issued 40,917 shares of common stock to Michael
Lash for aggregate consideration of $5,814.35 upon his option
exercise.
(34) On August 31, 1999, we issued 7,512 shares of common stock to Joel
Arbeitman for aggregate consideration of $1,126.80 upon his option
exercise.
(35) On September 23, 1999, we issued 147,150 shares of common stock to
William M. Marohn for aggregate consideration of $20,479.10 upon his
option exercise.
(36) On November 3, 1999, we issued shares of series D convertible
preferred stock convertible into a total of 9,164,076 for aggregate
consideration of $23,582,222.24 to the following persons: Craig
Randall, Carl Lazarus, Norman Meisner, James Priest, David Cane,
Technologies for Information & Entertainment III, L.P., Softbank
America, Inc., Middlefield Ventures, Inc., William Keating, David
Arthur Norman and Mamie Ruth Norman, as Trustees of the Norman Family
Revocable Trust, Ronald D. Lachman, Charles Kline, Solstice Capital
L.P., H&Q Connected Investors L.P., Hambrecht & Quist Employee Venture
Fund, L.P., J3D Family Limited Partnership, Baker Communications Fund,
L.P., Fidelity Ventures Telecom and Technology II Limited Partnership,
Fidelity Investors II Limited Partnership, STT Ventures Limited,
Technologies for Information & Entertainment III, L.P., Charles
Robbins, TIE Mezzanine Fund, L.P., and David Hirschman.
(37) On November 30, 1999, we issued 22,500 shares of common stock to
Daniel Murray for aggregate consideration of $3,375 upon his option
exercise.
(38) On December 28, 1999, we issued 18,372 shares of common stock to
Rosemary Fedorchak for aggregate consideration of $612.40 upon her
option exercise.
(39) On December 29, 1999, we issued 30,000 shares of common stock to Wayne
Babich for aggregate consideration of $4,000 upon his option exercise.
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107
(40) On January 21, 2000, we issued 7,062 shares of common stock to David
A. Roberts for aggregate consideration of $1,015.60 upon his option
exercise.
(41) Immediately prior to the closing of this offering, the warrant issued
to Silicon Valley Bank and the warrants issued June 11, 1999,
referenced above, will be automatically exercised for the number of
shares indicated above multiplied by the difference between the
exercise price and the offering price and divided by the exercise
price.
(42) Since inception and through March 27, 2000, we have issued options to
purchase aggregate of 9,216,414 shares of common stock with a weighted
average exercise price of $1.37. Since inception and through March 27,
2000, options to purchase 1,059,555 shares have been canceled without
exercise.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DOCUMENT REFERENCE
- ------- -------- ---------
1.1 Form of Underwriting Agreement *
3.1 Fourth Amended and Restated Certificate of Incorporation of Filed herewith
the Registrant
3.2 Form of Fifth Amended and Restated Certificate of Filed herewith
Incorporation of the Registrant (to be effective upon the
closing of this offering)
3.3 Second Amended and Restated Bylaws of the Registrant Filed herewith
3.4 Form of Third Amended and Restated Bylaws of the Registrant Filed herewith
(to be effective upon the closing of this offering)
4.1 Form of Registrant's common stock certificate *
4.2 Third Amended and Restated Rights Agreement Filed herewith
4.3 Warrant dated June 12, 1996 issued to Softbank Holdings, Filed herewith
Inc.
4.4 Warrant dated June 12, 1996 issued to Carl Lazarus Filed herewith
4.5 Warrant dated June 12, 1996 issued to Sandpiper Software Filed herewith
Consulting, LLC
4.6 Form of Amended and Restated Warrant, together with a list Filed herewith
of holders
4.7 Restricted Stock Agreement between Registrant and Carl Filed herewith
Lazarus
5.1 Legal opinion of Brown, Rudnick, Freed & Gesmer *
10.1 Form of Indemnification Agreement entered into by Registrant Filed herewith
with each of its directors and executive officers
10.2 Form of Change of Control Agreement entered into by and Filed herewith
between the Registrant and each of its executive officers
10.3 Sublease Agreement by and between The Mathworks, Inc. and Filed herewith
the Registrant and related Lease Agreement by and between
LMF Cochituate Corp. and The Mathworks, Inc.
10.4 1996 Equity Incentive Plan Filed herewith
10.5 2000 Combination Stock Option Plan Filed herewith
10.6 2000 Employee Stock Purchase Plan Filed herewith
10.7 2000 Nonemployee Director Stock Option Plan Filed herewith
10.8 Offer letter from the Registrant to Norman B. Meisner Filed herewith
10.9 Offer letter between the Registrant and James M. Priest Filed herewith
21.1 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Brown, Rudnick, Freed & Gesmer (included in *
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP, independent accountants Filed herewith
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EXHIBIT
NUMBER DOCUMENT REFERENCE
- ------- -------- ---------
23.3 Consent of Weingarten, Schurgin, Gagnebin & Hayes LLP Filed herewith
24.1 Powers of Attorney (included on the signature pages hereto) Filed herewith
27.1 Financial Data Schedule Filed herewith
- -------------------------
* To be filed by amendment.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the financial statements or the notes to
those statements.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14. Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirement 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 the city of Boston, The Commonwealth
of Massachusetts, on March 30, 2000.
CONNECTED CORPORATION
By: /s/ DAVID A. CANE
-----------------------------------
David A. Cane
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints David Cane, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him or in his
name, place and stead, in any and all capacities to sign any and all amendments
or post-effective amendments to this registration statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
and in connection with any registration of additional securities pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, to sign any
abbreviated registration statements and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID A. CANE Director, Chief Executive March 30, 2000
- --------------------------------------------------- Officer and President
David A. Cane (principal executive officer,
principal financial officer and
principal accounting officer)
/s/ FREDERICK BAMBER Director March 30, 2000
- ---------------------------------------------------
Frederick Bamber
/s/ LAWRENCE BETTINO Director March 27, 2000
- ---------------------------------------------------
Lawrence Bettino
/s/ HARRY A. GEORGE Director March 21, 2000
- ---------------------------------------------------
Harry A. George
II-8
110
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT KETTERSON Director March 28, 2000
- ---------------------------------------------------
Robert Ketterson
/s/ RONALD D. LACHMAN Director March 27, 2000
- ---------------------------------------------------
Ronald D. Lachman
/s/ ASHLEY LEEDS Director March 27, 2000
- ---------------------------------------------------
Ashley Leeds
II-9
111
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT REFERENCE
- ------- -------- ---------
1.1 Form of Underwriting Agreement *
3.1 Fourth Amended and Restated Certificate of Incorporation of Filed herewith
the Registrant
3.2 Form of Fifth Amended and Restated Certificate of Filed herewith
Incorporation of the Registrant (to be effective upon the
closing of this offering)
3.3 Second Amended and Restated Bylaws of the Registrant Filed herewith
3.4 Form of Third Amended and Restated Bylaws of the Registrant Filed herewith
(to be effective upon the closing of this offering)
4.1 Form of Registrant's common stock certificate *
4.2 Third Amended and Restated Rights Agreement Filed herewith
4.3 Warrant dated June 12, 1996 issued to Softbank Holdings, Filed herewith
Inc.
4.4 Warrant dated June 12, 1996 issued to Carl Lazarus Filed herewith
4.5 Warrant dated June 12, 1996 issued to Sandpiper Software Filed herewith
Consulting, LLC
4.6 Form of Amended and Restated Warrant, together with a list Filed herewith
of holders
4.7 Restricted Stock Agreement between Registrant and Carl Filed herewith
Lazarus
5.1 Legal opinion of Brown, Rudnick, Freed & Gesmer *
10.1 Form of Indemnification Agreement entered into by Registrant Filed herewith
with each of its directors and executive officers
10.2 Form of Change of Control Agreement entered into by and Filed herewith
between the Registrant and each of its executive officers
10.3 Sublease Agreement by and between The Mathworks, Inc. and Filed herewith
the Registrant and related Lease Agreement by and between
LMF Cochituate Corp. and The Mathworks, Inc.
10.4 Amended and Restated 1996 Equity Incentive Plan Filed herewith
10.5 2000 Combination Stock Option Plan Filed herewith
10.6 2000 Employee Stock Purchase Plan Filed herewith
10.7 2000 Nonemployee Director Stock Option Plan Filed herewith
10.8 Offer letter from the Registrant to Norman B. Meisner Filed herewith
10.9 Offer letter between the Registrant and James M. Priest Filed herewith
21.1 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Brown, Rudnick, Freed & Gesmer (included in *
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP, independent accountants Filed herewith
23.3 Consent of Weingarten, Schurgin, Gagnebin & Hayes LLP Filed herewith
24.1 Powers of Attorney (included on the signature pages hereto) Filed herewith
27.1 Financial Data Schedule Filed herewith
- -------------------------
* To be filed by amendment.