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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 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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BUILDNET, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 7389 56-1990041
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
4813 EMPEROR BOULEVARD, SUITE 130
DURHAM, NORTH CAROLINA 27703
(919) 941-6269
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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NATHAN P. MORTON
CHIEF EXECUTIVE OFFICER
BUILDNET, INC.
4813 EMPEROR BOULEVARD, SUITE 130
DURHAM, NORTH CAROLINA 27703
(919) 941-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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PLEASE SEND COPIES TO:
DONALD R. REYNOLDS, ESQ. SARAH BESHAR, ESQ.
WYRICK ROBBINS YATES & PONTON LLP DAVIS POLK & WARDWELL
4101 LAKE BOONE TRAIL, SUITE 300 450 LEXINGTON AVENUE
RALEIGH, NORTH CAROLINA 27607 NEW YORK, NEW YORK 10017
(919) 781-4000 (212) 450-4000
FAX: (919) 781-4865 FAX: (212) 450-4800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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,
check the following box. [ ] ________.
CALCULATION OF REGISTRATION FEE(1)
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(2) REGISTRATION FEE(3)
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Common Stock, $.01 par value........... $230,000,000 $60,720
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(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended,
the number of shares being registered and the proposed maximum offering
price per share are not included in this table.
(2) Estimated solely for purposes of calculating the registration fee. Includes
shares the underwriters have the option to purchase to cover
over-allotments.
(3) Calculated pursuant to Rule 457(a) based on an estimate of the maximum
aggregate offering price.
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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 prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 20, 2000
Shares
[LOGO]
BUILDNET, INC.
Common Stock
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Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $
and $ per share. We intend to apply to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "BNET".
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
9.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS BUILDNET
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Per Share................................ $ $ $
Total.................................... $ $ $
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Robertson Stephens
Salomon Smith Barney
Thomas Weisel Partners
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 8
FORWARD-LOOKING STATEMENTS............ 21
USE OF PROCEEDS....................... 21
DIVIDEND POLICY....................... 21
CAPITALIZATION........................ 22
DILUTION.............................. 24
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 27
BUSINESS.............................. 35
MANAGEMENT............................ 46
Page
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CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 57
PRINCIPAL STOCKHOLDERS................ 60
DESCRIPTION OF CAPITAL STOCK.......... 62
SHARES ELIGIBLE FOR FUTURE SALE....... 66
UNDERWRITING.......................... 68
NOTICE TO CANADIAN RESIDENTS.......... 71
LEGAL MATTERS......................... 72
EXPERTS............................... 72
CHANGE IN ACCOUNTANTS................. 72
WHERE YOU CAN FIND MORE INFORMATION... 72
INDEX TO FINANCIAL STATEMENTS......... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and our financial statements and notes appearing elsewhere in this
prospectus before you decide to purchase our common stock.
BUILDNET, INC.
OUR BUSINESS
Our objective is to be the business-to-business e-commerce solution for the
residential construction industry. We have designed the BuildNet Exchange to
provide secure Internet-based procurement, e-commerce and information services
for homebuilders, suppliers and manufacturers. We believe that the BuildNet
Exchange addresses many of the supply chain inefficiencies that adversely impact
the residential construction industry. The supplier and homebuilder segments of
the residential construction industry are highly fragmented and driven by
regional and local demand. Participants lack accurate and timely information on
product requirements, building materials are transferred multiple times through
the supply chain and most procurement processes are paper-based and
labor-intensive. The BuildNet Exchange allows users to confirm pricing and
product specifications, place purchase orders and add both product and order
information automatically to builders' and suppliers' management systems. In
addition, manufacturers can place product information and catalogs on the
BuildNet Exchange for access by homebuilders and suppliers.
We are testing the BuildNet Exchange and expect to initiate a limited
market rollout in two cities in the second quarter of 2000 and to commence a
commercial rollout in an additional four to six cities in the second half of
2000. Our position as a leading provider of management software to homebuilders
and suppliers gives us a critical mass of software users to connect to the
BuildNet Exchange. Our aggregated software customer base includes homebuilders
that accounted for approximately 43% of 1999 U.S. single-family home closings,
according to our estimates, and three of the top ten residential construction
suppliers in the U.S., according to Pro Sales magazine.
Our customers currently use our software to plan and manage projects and
back-office functions. We have already upgraded four of our six existing builder
management software products and our two principal supplier management software
products so that they connect to the BuildNet Exchange. We refer to the process
by which we connect the BuildNet Exchange to the back-office systems of
homebuilders and suppliers as BuildNet Enabling. We will BuildNet Enable our
remaining builder management software products prior to our commercial rollout.
We believe that BuildNet Enabling our software products gives us a significant
competitive advantage since it connects builders and suppliers with minimal
disruption to their existing systems and processes. We are also developing
software to enable homebuilders, suppliers and manufacturers who are not users
of our management software products to connect to the BuildNet Exchange.
We believe that the BuildNet Exchange will provide significant benefits to
homebuilders, suppliers and manufacturers. Homebuilders will be able to automate
and streamline their procurement process and improve their production planning
efficiency. Suppliers will be able to improve inventory management and enjoy
greater lead times for providing value-added services. Manufacturers will be
able to provide updated and cost-effective online product information to buyers
and increase the efficiency of their marketing efforts.
We have established relationships with many major homebuilders, suppliers
and manufacturers through equity investments and our warrant incentive program
to encourage the rapid adoption of the BuildNet Exchange. We also have an
existing strategic relationship with EDS, which has built and will host our
transaction hub and is promoting the BuildNet Exchange as the standard for the
homebuilding industry. In addition, we have a relationship with mortgage.com
under which we have exclusive rights to offer to homebuilders the ability to
arrange mortgage loans for their homebuyers through mortgage.com.
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OUR MARKET OPPORTUNITY
Business-to-business e-commerce is expected to grow rapidly as the
widespread adoption of intranets and the acceptance of the Internet has created
a business communications platform that offers the potential for companies to
streamline complex processes, lower costs and improve productivity. Business-
to-business e-commerce is expected to grow from an estimated $406 billion in
2000 to $2.7 trillion in 2004, according to Forrester Research.
The residential construction industry is one of the largest sectors of the
U.S. economy. According to the U.S. Census Bureau, the value of residential
construction in the United States in 1997 was approximately $238 billion. Also,
according to the Census Bureau, there were approximately 1.3 million
single-family housing starts in 1999. We believe that this industry has
characteristics that create an attractive opportunity for business-to-business
e-commerce, including large numbers of buyers and sellers, a high degree of
fragmentation among buyers and sellers, significant dependence on information
exchange and large transaction volume.
OUR STRATEGY
Our objective is to be the business-to-business e-commerce solution for the
residential construction industry. Key elements of our strategy to achieve our
objective include the following:
- Roll out the BuildNet Exchange commercially;
- Leverage strategic relationships;
- Generate multiple revenue streams;
- Connect manufacturers to the BuildNet Exchange;
- Build brand recognition;
- Expand e-commerce solutions into complementary markets; and
- Pursue strategic acquisitions and relationships.
OUR HISTORY
BuildNet was incorporated in the state of North Carolina in October 1996.
Prior to the consummation of this offering, we will reincorporate as a Delaware
corporation.
In 1999, we acquired F.A.S.T Management, McCosker Corporation, Systems
Analysis and Maxwell & Company, providers of builder management software
products, and also Site Trak, a management software product for the
subcontractor segment of the homebuilding industry. In January 2000, we
purchased software products for the processing of electronic commerce
transactions in the electrical, plumbing, appliances and HVAC market from The
UniLink Group, LLC and the software and customer base for the homebuilder module
of the World Software System from J.D. Edwards World Source Company.
In February 2000, we entered into an agreement to purchase NxTrend
Technology, Inc., subject to regulatory approval. NxTrend is a leading provider
of supplier management software to suppliers and distributors in the residential
and commercial construction industry and other industries.
BUILDNET(R), BUILDSOFT(R), TREND(R), SHIMS(R), NXTREND(R) and the NxTrend
Logo are registered trademarks, and BUILDNET ENABLED, FAST, TRUELINE, TOM
SYSTEMS, LLOYD's, the BuildNet logo, the BuildSoft logo, Strategic Exchange, SX,
WDS-II, the FAST logo, the TrueLine logo and the TOM Systems logo are trademarks
of BuildNet. This prospectus also includes trademarks of entities other than
BuildNet, as to which BuildNet claims no interest. In addition, buildnet.com,
buildnet.net, buildsoft.com and nxtrend.com are domain names that are owned by
BuildNet.
CORPORATE INFORMATION
BuildNet's executive offices are located at 4813 Emperor Boulevard, Suite
130, Durham, North Carolina 27703, and its telephone number at that location is
(919) 941-4000. Our primary Web site is located at www.buildnet.com. Information
on our Web sites is not part of this prospectus.
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THE OFFERING
Common Stock Offered................ shares
Common Stock Outstanding after the
Offering............................ shares
Use of Proceeds..................... General corporate purposes, potential
acquisitions and repayment of NxTrend
notes
Proposed Nasdaq National Market
Symbol.............................. BNET
The outstanding share information set forth above is based on the number of
shares of our common stock outstanding on March 1, 2000. This information
includes:
- 2,678,760 shares of common stock issued upon the assumed exercise of the
outstanding warrants that will expire if not exercised prior to the
consummation of this offering; and
- shares issued upon the assumed conversion of convertible
notes with an aggregate principal of approximately $ as of
, 2000 (at a conversion price equal to the midpoint of the
price range set forth on the front cover of this prospectus).
The outstanding share information above excludes:
- 19,275,363 shares of common stock issuable upon the exercise of stock
options outstanding as of March 1, 2000 under our 1997 stock plan, our
1999 stock plan, the F.A.S.T. Management Group, Inc. 1997 stock option
plan and the NxTrend 1999 amended and restated equity incentive plan,
with a weighted average exercise price of $0.87 per share;
- an additional 28,125,900 shares reserved for issuance under our stock
plans as of March 17, 2000; and
- 16,014,880 shares of common stock issuable upon exercise of outstanding
warrants as of March 17, 2000 with a weighted average exercise price of
$2.38 per share which are not required to be exercised in connection with
and will not expire upon the consummation of this offering.
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
- the issuance of a total of 94,473,379 shares of common stock upon the
consummation of this offering as a result of the conversion of all
outstanding shares of our Series A preferred stock, Series B preferred
stock and Series C preferred stock;
- no exercise of the underwriters' over-allotment option;
- a for stock split of our common stock which will become
effective before consummation of this offering;
- the consummation of our acquisition of NxTrend Technology, Inc., which is
subject to regulatory approval; and
- our reincorporation as a Delaware corporation.
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SUMMARY FINANCIAL DATA
The following financial data is a summary of the more complete financial
data information provided in our financial statements elsewhere in this
prospectus.
INCEPTION
(OCTOBER 24, YEARS ENDED PRO FORMA
1996) TO ------------------------------------------ YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1999
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(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:.................................. $ 388 $ 4,257 $ 4,506 $ 14,601 $ 85,806
Cost of revenues........................... 164 1,369 1,436 9,026 45,836
------ ------- ------- -------- --------
Gross profit............................... 224 2,888 3,070 5,575 39,970
Operating expenses:
General and administrative............... 96 1,348 1,969 8,151
Sales and marketing...................... 224 1,594 2,073 4,845
Research and development................. 168 1,122 2,035 9,898
Amortization of stock based
compensation.......................... -- 202 22 666
------ ------- ------- -------- --------
Total operating expenses......... 488 4,266 6,099 23,560 95,586
------ ------- ------- -------- --------
Operating loss............................. (264) (1,378) (3,029) (17,986) (55,616)
Interest, net.............................. (11) (288) (210) (10,515) (11,158)
------ ------- ------- -------- --------
Provision for income taxes................. -- -- -- -- (1,788)
Loss before extraordinary item............. (275) (1,666) (3,239) (28,501) (68,562)
Extraordinary loss on early extinguishment
of debt.................................. -- -- (107) (28) (28)
------ ------- ------- -------- --------
Net loss................................... (275) (1,666) (3,346) (28,529) (68,590)
Accretion of mandatorily redeemable
preferred stock.......................... -- -- -- (2,069) --
Preferred stock dividends.................. -- -- -- (167) --
------ ------- ------- -------- --------
Net loss available to common
stockholders............................. $ (275) $(1,666) $(3,346) $(30,765) $(68,590)
Net loss per common share -- basic and
diluted.................................. $(0.01) $ (0.08) $ (0.17) $ (0.84)
Weighted average common shares
outstanding -- basic and diluted......... 20,043 20,043 20,043 36,527
AS OF DECEMBER 31, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $51,875 $ $
Working capital............................................. 67,495
Total assets................................................ 134,726
Long term liabilities....................................... 13,746
Mandatorily redeemable convertible preferred stock.......... 135,723
Stockholder's equity (deficit).............................. (28,775)
The pro forma statement of operations data for the year ended December 31,
1999 combine the historical statements of operations of BuildNet, Inc., NxTrend
Technology, Inc., The UniLink Group, LLC, Key Prestige Inc., McCosker
Corporation, F.A.S.T. Management Group, Inc., Systems Analysis, Inc., and
Maxwell & Company, Inc. as if the acquisitions by BuildNet of NxTrend, UniLink,
McCosker, FAST, Systems Analysis, and Maxwell & Company and the acquisition by
UniLink of Key Prestige had been completed on January 1, 1999.
In addition, the pro forma statement of operations data and balance sheet
information gives effect to the following:
- the conversion of all outstanding shares of our preferred stock into
shares of our common stock upon closing of this offering;
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- the assumed exercise of warrants to purchase 2,890,960 shares of our
common stock that will expire if not exercised prior to the consummation
of this offering;
- the issuance, and reservation for issuance upon exercise of outstanding
options, of 25,954,659 shares of our common stock and notes payable in
the aggregate amount of $32.5 million to the former stockholders and
optionees of NxTrend Technology, Inc. in connection with our pending
acquisition of NxTrend, the assumed conversion of $4.4 million of the
principal of the notes payable into shares of common stock
(assuming a conversion price equal to the midpoint of the range set forth
on the front cover page of this prospectus) and the assumed repayment of
the remaining balance of $28.1 million of the notes payable;
- the issuance of a note payable in the amount of $27.0 million in
connection with our acquisition of UniLink and the assumed conversion of
the principal balance of this note payable into 6,136,363 shares of our
common stock; and
- the issuance of a note payable in the amount of $5.9 million in
connection with our purchase of software from J.D. Edwards World Source
Company and the assumed conversion of this note payable into
shares of our common stock (assuming a conversion price
equal to the midpoint of the range set forth on the front cover page of
this prospectus).
The pro forma as adjusted balance sheet information reflects our sale of
shares in this offering at an assumed initial public offering
price of $ per share, after deducting underwriting discounts,
commissions and estimated offering expenses payable by us.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information
contained in this prospectus before deciding to invest in our common stock.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED INTERNET OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS
Although BuildNet was founded in 1996, we have a very limited operating
history on the Internet. Our limited Internet operating history makes an
evaluation of our future prospects very difficult. We only began testing the
BuildNet Exchange in March 2000. As a result, we will face risks and
difficulties frequently encountered by companies in new and rapidly evolving
markets and our future prospects will depend on a number of factors including:
- we may be unable to attract, increase and maintain customer adoption and
use of the BuildNet Exchange;
- we depend substantially on an e-commerce solution that has not yet been
presented in the market commercially and may not be successful;
- we may be unable to develop and enhance the BuildNet Exchange or to do so
on a timely basis;
- we may be unable to maintain existing or establish new relationships with
homebuilders, suppliers and manufacturers of building materials and
products;
- we may be unable to adapt to rapidly changing technologies and developing
markets;
- we may be unable to compete in a highly competitive market; and
- we may be unable to successfully integrate operations and technologies
from acquisitions or other business combinations.
To date, we have not generated any revenues from our e-commerce business.
Also, we expect that our revenues derived from sales of our builder and supplier
management software will decline as a percentage of our revenues and will
decrease in absolute terms on a pro forma combined basis as we redirect our
efforts to generate revenues from our e-commerce activities. We are also
considering implementing changes to our pricing structure for our software
products. Further, our 1999 revenues were impacted substantially by acquisitions
made in that year. As a result, you should not rely on our revenues or results
of operations for any period as an indication of future performance or
prospects.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE INCREASED LOSSES
We incurred net losses of $1.7 million in 1997, $3.3 million in 1998, $28.5
million in 1999 and $68.6 million in 1999 on a pro forma basis. As of December
31, 1999, our accumulated deficit was $35.5 million. We have not achieved
profitability and expect to incur increasing operating losses for the
foreseeable future. We intend to increase our operating expenses substantially
as we initiate the commercial rollout of the BuildNet Exchange, increase our
marketing and brand-building activities in support of the rollout, and increase
our general and administrative functions and our research and development
activities to support our growing operations. We will need to generate
significant revenues to achieve and maintain profitability and we might not be
able to do so. Even if we do achieve profitability, we might not be able to
sustain or increase profitability. If our revenues grow more slowly than we
anticipate or if our operating expenses exceed our expectations, our financial
performance likely will be adversely affected.
IF WE DO NOT SUCCESSFULLY DEVELOP AND ROLL OUT THE BUILDNET EXCHANGE, OUR
BUSINESS WILL BE HARMED
We are now testing the BuildNet Exchange among a small group of builders
and suppliers and have further development and testing to complete. We expect to
initiate a limited market rollout in two cities in
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the second quarter of 2000 and a commercial rollout in an additional four to six
cities in the second half of 2000. Our failure to implement this scheduled
rollout and to further develop the BuildNet Exchange on a timely basis and to
roll it out into other cities will materially adversely affect our business
plan.
We must further develop user interfaces, database management and search
technology, security controls and other features and functionality that
customers want. In addition, we have integrated only four of our six existing
builder management software products into the BuildNet Exchange. Developing new
technologies and new services involves numerous technical challenges and
substantial personnel resources, and often takes many months to complete. We
might not be successful at developing or integrating this technology and the
BuildNet Exchange on a timely basis, or in accordance with our product release
objectives. Some of our potential customers may use third-party management
software systems. The vendors of these software systems may not support the
BuildNet Enabling of their customers' systems.
In addition, once developed and implemented, the BuildNet Exchange might
not function as expected. The BuildNet Exchange is complex and might contain
undetected errors or failures. This might result in loss of, or delay in, market
acceptance of our products and services. We might in the future discover errors
and scalability limitations in the BuildNet Exchange. Any inability to timely
deliver fault free services could have a negative effect on our business and
results of operations.
We have no experience operating the BuildNet Exchange commercially and we
might not be able to operate it effectively.
HOMEBUILDERS, SUPPLIERS AND MANUFACTURERS MIGHT NOT ACCEPT THE BUILDNET EXCHANGE
Our operating results will become increasingly dependent on market
acceptance of the BuildNet Exchange. To date, we have not derived any revenues
from the BuildNet Exchange. If we do not attract and retain a substantial number
of homebuilders, suppliers and manufacturers to participate in and use the
BuildNet Exchange, our operating results will be negatively affected. To date,
no homebuilders, suppliers or manufacturers have transacted any business through
the BuildNet Exchange.
In addition, none of the homebuilders with whom we have strategic
relationships is contractually obligated to use the BuildNet Exchange. Upon its
initial rollout the BuildNet Exchange will not allow homebuilders and suppliers
to effect online transactions with manufacturers. There can be no assurance that
the BuildNet Exchange will ever allow homebuilders and suppliers to effect
online transactions with manufacturers.
Homebuilders, suppliers and manufacturers might reject the BuildNet
Exchange because:
- the benefits we believe the BuildNet Exchange offers to these entities
might not materialize;
- homebuilders, suppliers and manufacturers who do not currently use our
software products might be unwilling to invest the time and money to
reconfigure their existing information systems to BuildNet Enable them;
- homebuilders, suppliers and manufacturers might develop and implement
their own exchanges, either individually or by forming joint ventures;
and
- the quality or quantity of goods and services made available on the
BuildNet Exchange might not be sufficient to attract and retain buyers.
Further, because the business-to-business e-commerce market is new and
underdeveloped, potential customers in this market may be confused or uncertain
about the relative merits of different products and services or which to adopt,
if any. Confusion and uncertainty in the marketplace might inhibit customers
from using the BuildNet Exchange, which could harm our business and operating
results.
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OUR CUSTOMERS MIGHT BECOME DISSATISFIED WITH THE BUILDNET EXCHANGE OR BE
ATTRACTED TO ONE OR MORE OF OUR COMPETITORS
To the extent that we establish contractual relationships with
homebuilders, suppliers and manufacturers, we anticipate that these
relationships will be nonexclusive or terminable at will. Consequently, these
parties may transfer their business in part or in whole to our competitors
quickly and at relatively low costs. Our success will depend on our ability to
convince homebuilders, suppliers and manufacturers of the benefits of our
products and services and on our ability to retain, broaden and diversify our
future base of homebuilders, suppliers and manufacturers.
OUR QUARTERLY OPERATING RESULTS MIGHT FLUCTUATE
Our revenues and operating results have varied significantly in the past
and are likely to vary significantly from quarter to quarter in the future. As a
result, you should not rely on period-to-period comparisons of our results of
operations as an indication of future performance. Our operating results might
vary based on a number of factors including:
- demand for and market acceptance of the BuildNet Exchange;
- introduction of new and enhanced purchasing solutions and services by our
competitors;
- loss of one or more of our key customers or strategic relationships;
- timing and number of new hires;
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure;
- technical difficulties or system downtime affecting the BuildNet Exchange
specifically and the Internet generally;
- the ability of our suppliers and manufacturers to offer sufficient
products and materials for the demands of homebuilders through the
BuildNet Exchange;
- budgeting cycles of customers and users;
- the cyclical and seasonal nature of the homebuilding industry;
- general economic conditions, as well as economic conditions specific to
the technology, Internet and/or homebuilding industries; and
- timing of and revenues generated by acquired businesses.
Due to the lack of an operating history for the BuildNet Exchange, we have
limited meaningful historical financial data upon which to base our planned
revenues and operating expenses. We cannot be certain that we will be able to
accurately predict our revenues, particularly in light of the limited operating
history of the BuildNet Exchange, the intense competition in the Internet
industry, and the resulting uncertainty as to the success of our business model
for the BuildNet Exchange.
In some future quarter or quarters, our results of operations might fall
below the expectations of securities analysts or investors. Our failure to meet
these expectations would likely adversely affect the price of our common stock.
WE MIGHT NOT BE ABLE TO ESTABLISH AND STRENGTHEN THE BUILDNET BRAND
We believe that establishing and strengthening the BuildNet brand is
critical to achieving widespread acceptance of the BuildNet Exchange,
particularly because of the early stage of the online market for building
materials. Promoting and positioning our brand will depend largely on the
success of our marketing efforts and our ability to provide consistent,
high-quality customer experiences. We will need to incur additional expenditures
to promote our brand, both on marketing and on customer service. Our brand
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promotion activities might not be successful or result in enough increased
revenues to offset the expenses incurred.
OUR STRATEGY FOR GENERATING MULTIPLE STREAMS OF REVENUE FROM THE BUILDNET
EXCHANGE MAY NOT BE SUCCESSFUL
Because we have only recently begun to test the BuildNet Exchange, we have
not yet developed or implemented our other strategies related to growth for the
BuildNet Exchange, including generating e-commerce revenues from fees for
transactions processed through the BuildNet Exchange, monthly and annual
subscription fees from users of the BuildNet Exchange, advertising revenues,
fees for marketing services related to our mortgage.com relationship and other
complementary revenue opportunities. Even if we are successful in operating the
BuildNet Exchange, we cannot assure you that we will be able to develop our
strategic growth plans for generating multiple streams of revenues from the
BuildNet Exchange.
TO ATTRACT HOMEBUILDERS, SUPPLIERS AND MANUFACTURERS TO THE BUILDNET EXCHANGE,
WE MUST NOT FAVOR ONE OVER ANOTHER
The building market consists of a complex set of relationships among
homebuilders, suppliers, manufacturers and others. Adoption of our solution by
homebuilders, suppliers, manufacturers and others depends on their perception
that we provide a neutral, unbiased marketplace to purchase and sell products.
To the extent that we are perceived by our customers or suppliers as favoring
one over another, others might lose confidence in the BuildNet Exchange as a
fair and neutral marketplace and choose alternative solutions. To facilitate the
establishment and adoption of the BuildNet Exchange, we have established
manufacturing and supplier marketing programs that provide special benefits to
participants that might be viewed as favoring a particular manufacturer or
supplier over others, and therefore might have an adverse effect on our business
and operating results.
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS
We have acquired nine businesses or business lines in the past 12 months,
and will consider acquiring businesses, technologies, services or products that
we believe are a strategic fit with our business. These recent and future
acquisitions subject us to the following risks:
- we might not be able to successfully integrate the services, products,
technologies or personnel of any acquisition into our operations;
- acquisitions might disrupt our ongoing business, distract our management
or other resources, or make it difficult to maintain our standards,
controls and procedures;
- we might acquire companies in markets in which we have little experience;
- acquisitions might result in potentially dilutive issuances of equity
securities, the incurrence of debt or contingent liabilities, or
amortization of expenses related to goodwill; and
- acquisitions might not result in any return on our investment and we
might lose our entire investment.
We might not be able to grow if we are not able to complete and integrate
recent and future acquisitions.
Our acquisition strategy is also subject to the risk of not being able to
identify additional suitable acquisition candidates available for sale at
reasonable prices or on reasonable terms. Additionally, regardless of whether
suitable candidates are available, we might not be able to complete future
acquisitions for other reasons, such as the lack of available capital. If we are
unable to complete future acquisitions, our business, financial condition and
operating results could be adversely affected.
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FLUCTUATIONS DUE TO THE CYCLICAL NATURE OF THE REAL ESTATE MARKET, ECONOMIC
CONDITIONS AND THE RESIDENTIAL CONSTRUCTION INDUSTRY COULD NEGATIVELY AFFECT US
The residential construction industry is cyclical and is significantly
affected by changes in general and local economic conditions. Any significant
downturn in the residential construction market could reduce homebuilder demand
for our services and could materially and adversely affect our business,
financial condition, results of operations and prospects. Factors that could
affect the residential construction market include:
- housing demand;
- availability of financing for home buyers;
- interest rates;
- consumer confidence; and
- employment levels.
The cost and availability of alternatives to new homes, including rental
properties and used homes, directly affects the demand for new homes. Increases
in unemployment and decreases in consumer confidence weaken demand for new
homes. Rising interest rates mean higher monthly mortgage payments, which could
weaken the demand for new homes. We have no control over these economic
conditions.
WE HAVE AND WILL CONTINUE TO HAVE SIGNIFICANT PRODUCT CONCENTRATION
We have derived substantially all of our revenues from our builder and
supplier management software products and related services. We expect that these
products will continue to account for a significant portion of our revenues for
the immediate future, and that we will begin to generate revenues from the
BuildNet Exchange over the next few years. Our future operating results will
depend upon continued market acceptance of our software products and our ability
to develop and market the BuildNet Exchange. Our existing products, including
our recently acquired products, might not retain their market acceptance, and
the BuildNet Exchange might not achieve market acceptance at all. Any decrease
in demand or market acceptance for our products or the BuildNet Exchange would
have a material adverse effect on our business, operating results and financial
condition.
WE DEPEND ON KEY PERSONNEL
We depend to a significant extent on the continued services of our senior
management and other key individuals, including Keith T. Brown, our chairman,
Nathan P. Morton, our Chief Executive Officer, Bayard M. Atwood, our President
and Chief Operating Officer, and other executive officers. Our employment
agreement with Mr. Brown is subject to termination in May 2001, if either
BuildNet or Mr. Brown gives notice of non-renewal 90 days prior to expiration.
The loss of the services of key individuals would likely have a significantly
detrimental effect on our business and operating results.
COMPETITION FOR PERSONNEL IN OUR INDUSTRY AND PRINCIPAL LOCATION IS INTENSE
Our future success depends on our continuing to attract, retain and
motivate highly skilled employees, each of which we might be unable to do in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. We plan to hire additional
sales employees to implement the commercial rollout of the BuildNet Exchange.
There is significant competition for qualified employees in the Internet
industry and in the Research Triangle Park in North Carolina, where our
principal offices are located, as well as in cities where our other offices are
located. As a result, we are incurring and might continue to incur increased
salaries, benefits and recruiting expenses. If we do not attract new personnel
or retain and motivate our current personnel, our business will be adversely
affected.
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WE ARE EXPERIENCING A PERIOD OF SIGNIFICANT GROWTH, WHICH IS PLACING A
SUBSTANTIAL STRAIN ON OUR RESOURCES
We have experienced and might continue to experience rapid growth. From
January 1, 1999 to March 1, 2000 we grew from approximately 70 to approximately
868 full-time employees. This growth has placed, and could continue to place,
significant strain on our managerial, financial and operational resources,
systems, procedures and controls. We will also need to train employees and
maintain close coordination among our product development, marketing and sales,
and general administrative organizations. These processes are time-consuming and
expensive, will increase managerial responsibility, and will divert management
attention from our business. If we are unable to manage our growth effectively,
our business, financial condition, results of operations and prospects could be
materially adversely affected.
OUR MANAGEMENT SYSTEMS SOFTWARE SALES CYCLE CAN BE LONG, WHICH CAN DELAY
REVENUES
Our software sales cycle varies by product, but can take up to 12 months
from initial client contact until we sign a contract. In addition, the
implementation cycle at customer sites can take up to an additional 24 months.
These lengthy cycles have a negative impact on the timing of our revenues.
Not every potential client that we solicit actually purchases our
management system software products. Other factors that contribute to the length
and uncertainty of our software sales cycle and that might reduce the likelihood
that clients will purchase our products include budgeting constraints, incentive
structures that do not reward decision makers for savings achieved through
cost-cutting and the strength of pre-existing software supplier relationships.
If we are unable to enter into contracts with clients on a consistent basis,
then our business might suffer from diminished revenues.
OUR MARKETS ARE COMPETITIVE AND THERE ARE LOW BARRIERS TO ENTRY
Our markets are intensely competitive. In the marketplace for builder and
supplier management software, competitive pressures are likely to result in
price reduction, reduced margins and possibly reduced market share, any one of
which factors could seriously harm our business. The principal market segments
of competitive software management tools or online shopping models that compete
with parts of our planned e-commerce platform include builder and supplier
management (ERP) systems, customer relationship management (CRM) systems, point
of sale and supply chain e-commerce procurement tools, catalog or product data
systems, and online building material shopping solutions.
The business-to-business e-commerce marketplace is new and expected to
evolve rapidly. Many different companies, including our customers and potential
customers, are positioned to emerge as competitors in this marketplace. In
addition, companies that have established online exchanges for different
industries could introduce exchanges that would compete with the BuildNet
Exchange. Manufacturers, homebuilders and suppliers, either individually or
through joint ventures, may develop exchanges that would compete with the
BuildNet Exchange.
Many of our competitors and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, greater name recognition, a larger installed base of potential
customers and more extensive knowledge of our industry. These competitors might
be able to spend more aggressively on marketing and advertising for their
brands, products and services. They also might adopt more aggressive pricing
policies and make more attractive offers to employees. In addition, current and
potential competitors might establish cooperative relationships among themselves
or with third parties to increase the ability of their products to address
customer needs. Accordingly, it is possible that new competitors or alliances
among competitors might emerge and rapidly acquire significant market share. We
also expect that competition will increase as a result of industry
consolidations.
There are minimal barriers to entry in the business-to-business e-commerce
market. Competitors can launch Web-enabled products and services at relatively
low cost. Other companies might develop products and services that are less
expensive and more useful to the homebuilding industry. These companies might be
more successful in their marketing efforts and thereby limit our ability to gain
market share. In
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addition, more established e-commerce participants might enter the online
homebuilding market and compete directly with us.
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS UNCERTAIN
We believe that our intellectual property is critical to our success. We
rely on trademark, copyright and trade secret protection to protect our
proprietary rights. We rely on non-disclosure and other contractual restrictions
on copying and distribution to protect our proprietary technology. The measures
we take to protect our intellectual property might not be successful, which
could have a material adverse effect on our business. The United States or
foreign countries might not grant us any copyrights, trademarks or other
protection for our intellectual property. Our intellectual property rights might
be challenged, invalidated or circumvented, and the rights granted thereunder
might not provide any competitive advantage.
Furthermore, litigation might be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. This litigation could result in substantial costs
and diversion of resources, and could harm our business, operating results and
financial condition.
CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY OF OTHERS COULD HARM US
Companies might assert infringement claims against us for the use of
technology they believe belongs or is licensed to them. The defense against any
such claims, whether with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel or require
us to develop non-infringing technology or enter into licensing agreements.
These licensing agreements, if required, might not be available on terms
acceptable to us, or at all. In the event of a successful claim of infringement
against us and our failure or inability to develop non-infringing technology or
to license the infringed or similar technology on a timely basis, our business,
financial condition, results of operations and prospects could be materially
adversely affected.
WE DEPEND ON THIRD PARTIES TO PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED
SERVICES TO US
We currently license from third parties certain technologies and
information incorporated into our products and services. As we continue to
introduce new services, we might be required to license additional technology
and information from others. These third-party technology and information
licenses might not continue to be available to us on commercially reasonable
terms, if at all. Additionally, third parties from which we currently license
technology and information might not be able to defend their proprietary rights
successfully against claims of infringement. Any failure to obtain any of these
technology and information licenses could result in delays or reductions in the
introduction of new features, functions, products or services. It could also
negatively affect the performance of our existing products and services until
equivalent technology or information can be identified, obtained and integrated.
We are relying substantially upon third-party service providers, including
EDS, to help us build, maintain and house key components of the BuildNet
Exchange. These services might not be available in a timely manner or at
commercially reasonable terms, if at all. Any failure to obtain the necessary
services to enable us to build, maintain and house the BuildNet Exchange could
have a material adverse effect on our business, financial condition, results of
operations and prospects.
Several of the third parties upon whom we depend have a limited operating
history, have relatively immature technology and are themselves dependent on
reliable delivery of services from others. As a result, our ability to deliver
various services to our users might be adversely affected by the failure of any
of these third parties to provide reliable software, systems and related
services to us.
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WE NEED TO EXPAND OUR DIRECT SALES OPERATIONS IF WE ARE TO INCREASE MARKET
AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES
We need to substantially expand our direct sales operations if we are to
implement our rollout strategy and increase market awareness and sales of our
products and services. We plan to hire additional sales employees to implement
the commercial rollout of the BuildNet Exchange. If we fail to increase our
direct sales capabilities, our business, financial condition and results of
operations would be materially adversely affected. In particular, the BuildNet
Exchange requires a sophisticated sales effort targeted at senior management of
participants in the building supply chain. We have recently expanded our direct
sales force and plan to hire additional sales personnel. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. New hires often require
extensive training and typically take several months to achieve productivity.
SYSTEMS FAILURE OR DELAY MIGHT CAUSE INTERRUPTION AND DISRUPTION OF OUR BUSINESS
The satisfactory performance, reliability and availability of the BuildNet
Exchange will be critical to our ability to achieve profitability, as well as to
our brand, reputation and ability to attract and retain homebuilders, suppliers,
manufacturers and other business partners. In particular, our ability to provide
high-quality service to our users largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems. Our
servers could be vulnerable to malfunctions, computer viruses, physical or
electronic break-ins and similar disruptions. Our systems and operations could
also be vulnerable to damage or interruption from fire, flood, other natural
disasters, power outages, telecommunications failures and similar events. Such
disruptions could lead to interruptions, delays, loss of data and content, or
the inability to provide access to our online operations and could cause user
dissatisfaction and thereby materially adversely affect our business, financial
condition, results of operations and prospects. In addition, because the
BuildNet Exchange will be hosted in facilities of EDS in Plano, Texas, we are
dependent on EDS for the avoidance of system failures or interruptions.
We might not be successful in our efforts to improve and increase the
capacity of our systems infrastructure, if required by increases in traffic and
the number of users. Further, we might not be able to accurately project the
rate or timing of increases, if any, in our traffic, or expand and upgrade our
systems in a timely manner to accommodate increases in demand. Our inability to
add software, content or hardware, or to develop and upgrade our existing
technology or systems infrastructure to accommodate increased traffic might
cause unanticipated system disruptions or reduce response times or user
acceptance of our services, any of which could have a material adverse effect on
our business, financial condition, results of operations and prospects.
WE MIGHT NOT BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY
The development of our products and services entails significant technical
and business risks. To remain competitive, we must continue to enhance and
improve the responsiveness, functionality, versatility and creative features of
our products and services. In particular, the Internet is characterized by rapid
technological change, new services embodying new technologies, and new industry
standards and practices. The evolving nature of the Internet could render our
products and services obsolete. Our success will depend, in part, on our ability
to enhance our existing products, and develop new products, services (including,
in particular the BuildNet Exchange) and technology that respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis.
IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS THAT GOVERN THE
MORTGAGE LENDING INDUSTRY, OUR BUSINESS COULD BE ADVERSELY AFFECTED
Any mortgage lending business that is facilitated through the BuildNet
Exchange through our relationship with mortgage.com must comply with extensive
and complex rules and regulations of, and licensing and examination by, various
federal, state and local government authorities. These rules impose obligations
and restrictions on residential loan brokering and lending activities. In
particular, these rules
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limit the broker fees, interest rates, finance charges and other fees that may
be assessed, require extensive disclosure to our customers, prohibit
discrimination and impose multiple qualification and licensing obligations. We
might not always be in compliance with these requirements. Failure to comply
with these requirements may result in, among other things, revocation of
required licenses or registrations, loss of approved status, voiding of loan
contracts or security interests, indemnification liability or the obligation to
repurchase mortgage loans sold to mortgage loan purchasers, rescission of
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability.
ADDITIONAL FINANCING IS UNCERTAIN, WHICH COULD AFFECT OUR GROWTH PROSPECTS
We currently anticipate that our available cash resources, combined with
the net proceeds from this offering, will be sufficient to meet our working
capital and capital expenditure requirements for at least 12 months. We might
need to raise additional funds, however, to
- fund more rapid expansion;
- develop new or enhance existing services or products;
- fund acquisitions, joint ventures or partnerships;
- respond to competitive pressures; or
- acquire complementary products, businesses or technologies.
If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage of ownership of our then-current
stockholders will be reduced. Any new securities might have rights, preferences
or privileges senior to these stockholders. Additional financing might not be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. This limitation could seriously harm our business and
operating results.
OUR PUBLICATION OF INACCURATE CATALOG CONTENT COULD CAUSE THE LOSS OF OUR
HOMEBUILDING CUSTOMERS AND EXPOSE US TO LEGAL LIABILITY
The accurate publication of catalog content is critical to our customers'
businesses. Our failure to accurately publish catalog content could deter
businesses from participating in the BuildNet Exchange, damage our business
reputation, harm our ability to win new customers and potentially expose us to
legal liability. In addition, from time to time some of our customers might
submit to us inaccurate pricing or other information. Even if these inaccuracies
are not our fault and are not within our control, similar consequences could
occur. We currently do not carry insurance that would adequately cover losses
which might be incurred as a result of inaccurate content publication.
UNDETECTED YEAR 2000 COMPLIANCE ISSUES COULD STILL HARM OUR BUSINESS
Our business might suffer as a result of defects relating to Year 2000
compliance issues that have not been detected.
RISKS RELATED TO THE INTERNET INDUSTRY
WE ARE DEPENDENT ON CONTINUED GROWTH IN USE OF THE INTERNET AS A MEDIUM FOR
COMMERCE
Our market is new and rapidly evolving. Our business would be adversely
affected if the Internet did not continue to grow as a medium for commerce,
particularly for the residential construction industry. A
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number of factors might inhibit the development of the Internet and commercial
online services into a commercial marketplace, including:
- inadequate network infrastructure;
- security and privacy concerns;
- inconsistent quality of services and products;
- lack of availability of cost-effective, high-speed service;
- difficulties in delivery, exchange or return of products; and
- government regulation.
Internet infrastructure might not be able to support any Internet growth,
and its performance and reliability might decline. In addition, many Web sites
have experienced interruption in their service as a result of outages and other
delays occurring throughout the Internet. If Internet outages or delays occur
frequently in the future, Internet usage, as well as the usage of the BuildNet
Exchange, could decline or grow more slowly than we anticipated.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD COSTS TO DOING BUSINESS
ON THE INTERNET
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations might
be adopted in the future that address issues such as user privacy, pricing,
taxes and the characteristics and quality of products and services. Any new laws
or regulations relating to the Internet could adversely affect our business. For
example, the Telecommunications Act sought to prohibit transmitting various
types of information and content over the Internet. Several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on those companies.
This could increase the cost of transmitting data over the Internet. It might
take years to determine the extent to which existing laws relating to issues
such as property ownership, content, taxation, libel and personal privacy are
applicable to the Internet. Taxes, laws or regulations might limit the growth of
the Internet, suppress e-commerce, reduce the number of transactions, increase
the costs of doing business or increase our exposure to litigation.
We do not collect sales or other similar taxes in respect of goods and
services purchased through the BuildNet Exchange. However, one or more states
might seek to impose sales tax collection obligations on out-of-state companies
like us that engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services over the Internet. These proposals, if
adopted, could substantially impair the growth of electronic commerce and could
adversely affect our opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states or any
foreign country that we should collect sales or other taxes on the exchange of
goods and services through the BuildNet Exchange could seriously harm our
business. Current Federal law imposes a moratorium on the ability of the states
to impose taxes on Internet-based transactions. The moratorium is scheduled to
end in 2001. Failure to enact or renew or an invalidation of this legislation
could allow various states to impose taxes on electronic commerce which could
reduce use of the Internet and the BuildNet Exchange and harm our business and
results of operations.
THE ACCELERATED GROWTH AND INCREASING VOLUME OF INTERNET TRAFFIC MAY CAUSE
PERFORMANCE PROBLEMS WHICH MAY SLOW ADOPTION OF THE BUILDNET EXCHANGE
The growth of Internet traffic to very high volumes of use over a
relatively short period of time has caused frequent periods of decreased
Internet performance, delays and, in some cases, system outages. This decreased
performance is caused by limitations inherent in the technology infrastructure
supporting the Internet and the internal networks of Internet users. If Internet
usage continues to grow rapidly, the
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infrastructure of the Internet and its users might not be able to support the
demands of growing e-commerce usage, and the Internet's performance and
reliability might decline. If our existing or potential customers experience
frequent outages or delays on the Internet, the adoption or use of the BuildNet
Exchange might grow more slowly than we expect or even decline. Our ability to
increase the speed and reliability of the BuildNet Exchange is limited by and
depends upon the reliability of both the Internet and the internal networks of
our customers.
SECURITY AND DISRUPTION PROBLEMS WITH THE INTERNET OR TRANSACTING BUSINESS OVER
THE INTERNET MIGHT INHIBIT OUR GROWTH
The secure transmission of confidential information over the Internet is
essential to maintaining builder, manufacturer and supplier confidence in the
BuildNet Exchange. Customers generally are concerned with security and privacy
on the Internet and any publicized security problems could inhibit the growth of
the Internet, and therefore the BuildNet Exchange, as a means of conducting
transactions. Substantial security breaches on our system could significantly
harm our business. Someone might circumvent our security systems and
misappropriate proprietary information or cause interruptions in our operations.
We incur substantial expense to protect against and remedy security breaches and
their consequences. Despite the implementation of security measures, our
networks may be vulnerable to unauthorized and illegal access, computer viruses
and other disruptive problems. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of
service to users accessing our solution.
Internet service providers and on-line service providers have in the past
experienced, and might in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. We may be required to expend significant capital or
other resources to protect against the threat of security breaches or to
alleviate problems caused by these breaches. Although we intend to continue to
implement industry-standard security measures, we cannot be certain that
measures implemented by us will not be circumvented in the future.
If we experience a security breach that results in the misappropriation of
proprietary information maintained in our systems or if we experience
interruptions in our service, our reputation and brand may be damaged and we
might be exposed to a risk of loss or litigation and possible liability. Damage
to our reputation and brand could cause us to lose our community of builders,
suppliers and manufacturers and negatively affect our business and results of
operations. Our insurance policies might not be adequate to reimburse us for
losses caused by security breaches or service disruption.
RISKS RELATED TO THE OFFERING
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MIGHT BE LOWER THAN THE PRICE
YOU PAY
The price of our common stock that will prevail in the market after this
offering might be lower than the price you pay. After this offering, an active
trading market in our stock might not develop or continue. If you purchase
shares of our common stock in this offering, you will pay a price that was
negotiated by us with the representatives of the underwriters and not a price
that was established in a competitive market.
MARKET PRICES OF EMERGING INTERNET COMPANIES HAVE BEEN HIGHLY VOLATILE, AND THE
MARKET FOR OUR STOCK MAY EXHIBIT VOLATILITY AS WELL
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been extremely volatile. Recent initial public
offerings by Internet companies have been accompanied by exceptional share price
and trading volume volatility in the first days and weeks after the securities
were released for public trading. Investors may not be able to resell their
shares at or above the initial public offering price,
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particularly after periods of volatility because of the market's adverse
reaction to such volatility. There are several factors that could cause such
volatility, many of which are beyond our control, including:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial performance;
- changes in market valuations of similar companies;
- announcements by us or our present and future competitors of significant
acquisitions, strategic partnerships, joint ventures, technical
developments or capital commitments;
- concerns about the viability of e-commerce companies; and
- additions or departures of key personnel.
These factors might materially adversely affect the market price for our
common stock, regardless of our operating performance and other achievements.
THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK MIGHT LIMIT YOUR
ABILITY TO INFLUENCE CORPORATE ACTIONS
The concentration of ownership of our common stock might have the effect of
delaying, preventing or deterring a change in control of BuildNet, could deprive
our stockholders of an opportunity to receive a premium for their common stock
as part of a sale of BuildNet and might affect the market price of our common
stock. Immediately following this offering, our executive officers and directors
and their affiliates will beneficially own approximately % of our
outstanding common stock ( % if the underwriters exercise their
over-allotment option in full). As a result, those stockholders, if they act
together, might be able to control all matters requiring stockholder approval,
including the election of directors and approval of any significant corporate
transactions such as a change in control.
A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF STOCK AT A
PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS
Provisions of our certificate of incorporation and bylaws, including
provisions allowing the issuance of preferred stock and the classification of
our board of directors, and Delaware law could make it more difficult for a
third party to acquire us, even though the acquisition might be beneficial to
you and our other stockholders.
FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS OUR COMMON STOCK PRICE
In this offering, we will sell only shares of common stock, which
represent approximately % of the total outstanding shares of our stock.
Consequently, if new investors or our current stockholders sell substantial
amounts of our common stock, including shares issued upon the exercise of
outstanding options and warrants, in the public market following this offering,
the market price of our common stock could fall. The negative effect of such
sales on our common stock market price could be more pronounced given the
relatively small number of shares offered to the public in this offering
relative to the total number of shares of our common stock to be outstanding
following this offering. In addition, sales could create the perception to the
public of difficulties or problems with our products and services. As a result,
these sales might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
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Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants, based on the shares
outstanding as of March 1, 2000. Of these shares, the shares sold in this
offering are freely tradable. The remaining shares, or approximately
% of our stock, will become eligible for sale in the public market as
follows:
NUMBER OF SHARES: DATE:
- ----------------- -----
-- ............................. 180 days after the date of this
prospectus
-- ............................. More than 180 days after the date of this
prospectus
The above table gives effect to certain lock-up arrangements with Credit
Suisse First Boston under which our directors, officers and stockholders have
agreed not to sell or otherwise dispose of their shares of common stock. Credit
Suisse First Boston may remove these contractual lock-up restrictions at any
time after the offering without prior notice.
We are party to two investor rights agreements which grant some of our
stockholders the right to demand that we register with the SEC the common stock
they acquired from us in private placements. The registration of this stock
would allow these shareholders to sell the stock publicly without any
limitations on the manner or amount of sale. These two registration rights
agreements cover an aggregate of 111,233,358 shares of our common stock. If
these registration rights were exercised in whole or in part, a substantial
number of shares of our common stock could be sold at once and the market price
of our common stock could fall.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM THIS OFFERING AND MIGHT
NOT USE THEM IN A MANNER STOCKHOLDERS WOULD PREFER
We have not identified specific uses for most of the proceeds from this
offering, and we will have broad discretion in how we use them. In addition, we
are unable to determine how much of the proceeds will be used for any identified
purpose other than repayment of up to $32.5 million of the NxTrend notes because
circumstances regarding our planned uses of the proceeds may change. You will
not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds. If we
fail to apply the funds effectively, it could have a material adverse effect on
our business and financial performance.
YOU WILL EXPERIENCE DILUTION UPON PURCHASE OF YOUR SHARES
The initial public offering price of our shares will substantially exceed
our pro forma net tangible book value per share, which is $0.15 as of December
31, 1999. Investors purchasing shares in this offering will therefore incur
immediate and substantial net tangible book value dilution. To the extent that
future options or warrants to purchase the common stock or shares are exercised,
there will be further dilution.
WE MIGHT IN THE FUTURE BE THE TARGET OF SECURITIES CLASS ACTION LITIGATION,
WHICH WOULD BE COSTLY AND TIME CONSUMING TO DEFEND
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We might in the future be the target of similar litigation.
Securities litigation might result in substantial costs and divert management's
attention or resources, which might seriously harm our business and operating
results.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future financial
performance. In some cases you can identify forward-looking statements by
terminology such as "may," "might," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus or to conform these statements to actual results.
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately
$ million (approximately $ million if the underwriters
exercise their over-allotment option in full), assuming that our common stock is
sold at $ per share, the midpoint of the range shown on the cover page
of this prospectus, and after deducting underwriting discounts and the estimated
expenses of this offering. We intend to use the net proceeds for general
corporate purposes, including marketing efforts and technology infrastructure
related to the development of the BuildNet Exchange, for potential acquisitions
and to repay all outstanding principal and accrued interest on notes issued to
the stockholders of NxTrend with an aggregate principal of up to $32.5 million.
The NxTrend notes mature on the effective date of this offering and have an
annual interest rate of 8%. As part of our expansion strategy, we may make
acquisitions and enter into joint ventures or strategic alliances which we may
fund with a portion of the net proceeds from this offering. Currently, we are
not contemplating any specific acquisitions. The precise allocation of funds
among these uses will depend on developments in or affecting our business, the
competitive climate in which we operate and the emergence of future
opportunities. The net proceeds will be invested in government securities and
other short-term, investment grade securities until we use them in our business.
DIVIDEND POLICY
We do not intend to pay cash dividends on our common stock in the
foreseeable future. We plan to retain earnings, if any, for use in the operation
of our business and to fund future growth.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
Our capitalization is presented:
- on an actual basis;
- on an unaudited pro forma basis to reflect:
- the conversion of all outstanding shares of our preferred stock into
shares of our common stock upon closing of this offering;
- the assumed exercise of warrants to purchase 2,890,960 shares of our
common stock that will expire if not exercised prior to the
consummation of this offering;
- the issuance, and reservation for issuance upon exercise of
outstanding options, of 25,954,659 shares of our common stock and
notes payable in the aggregate amount of $32.5 million to the former
stockholders and optionees of NxTrend Technology, Inc. in connection
with our pending acquisition of NxTrend, the assumed conversion of
$4.4 million of the principal of the notes payable into
shares of common stock (assuming a conversion price
equal to the midpoint of the range set forth on the front cover page
of this prospectus) and the assumed repayment of the remaining balance
of $28.1 million of the notes payable;
- the issuance of a note payable in the amount of $27 million in
connection with our acquisition of The UniLink Group, LLC and the
assumed conversion of the principal balance of this note payable into
6,136,363 shares of our common stock; and
- the issuance of a note payable in the amount of $5.9 million in
connection with our purchase of software from J.D. Edwards World
Source Company and the assumed conversion of this note payable into
shares of our common stock (assuming a conversion price
equal to the midpoint of the range set forth on the front cover page
of this prospectus).
- on an unaudited pro forma as adjusted basis to reflect our receipt of net
proceeds from our sale of shares of common stock at an initial
public offering price of $ per share, after deducting underwriting
discounts, commissions and estimated offering expenses payable by us.
The outstanding share information shown in the table excludes:
- 13,938,382 shares of common stock issuable upon the exercise of stock
options outstanding as of March 1, 2000 under our 1997 stock plan, our
1999 stock plan and the F.A.S.T. Management Group, Inc. 1997 stock option
plan, with a weighted average exercise price of $0.90 per share;
- an additional 28,125,900 shares reserved for issuance under our stock
plans as of March 17, 2000; and
- 16,014,880 shares of common stock issuable upon exercise of outstanding
warrants as of March 17, 2000 with a weighted average exercise price of
$2.38 per share which are not required to be exercised in connection with
and will not expire upon the consummation of this offering.
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AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
Debt and capital leases obligations, long-term portion...... $ 3,287 $ $
Redeemable warrants......................................... 10,458 10,458 10,458
Mandatorily redeemable preferred stock, $.01 par value,
99,563,680 shares authorized actual, no shares authorized
pro forma or pro forma as adjusted........................ -- -- --
Series B -- 74,563,680 shares authorized, 69,031,920
shares issued and outstanding actual and pro forma; no
shares issued and outstanding pro forma as adjusted.... 36,949 -- --
Series C -- 25,000,000 shares authorized, 24,322,619
shares issued and outstanding actual and pro forma; no
shares issued and outstanding pro forma as adjusted.... 102,299 -- --
Subscriptions to purchase mandatorily redeemable convertible
preferred stock........................................... (3,525) -- --
Shareholders equity (deficit):
Preferred stock, undesignated, $.01 par value, 49,167,400
shares authorized, no shares issued or outstanding
actual or pro forma: shares authorized pro forma as
adjusted, none issued or outstanding pro forma as
adjusted...............................................
Series A convertible preferred stock, $.01 par value;
1,268,920 shares authorized; 1,118,840 shares issued
and outstanding actual and pro forma; no shares issued
and outstanding pro forma as adjusted.................. 11 -- --
Common stock, $.01 par value; 350,000,000 shares
authorized; 54,872,024 shares issued and outstanding
actual; shares issued and outstanding pro
forma; shares issued and outstanding pro forma
as adjusted............................................ 549
Subscriptions to purchase common stock.................... -- (3,525) (3,525)
Additional paid-in capital................................ 37,281
Deferred compensation..................................... (28,912) (28,912)
Notes receivable from stockholders........................ (2,237) (2,237) (2,237)
Accumulated deficit....................................... (35,467) (35,467) (35,467)
-------- --------- ---------
Total stockholders' equity (deficit).............. (28,775)
-------- --------- ---------
Total capitalization.............................. $120,693 $ $
======== ========= =========
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DILUTION
As of December 31, 1999, our pro forma net tangible book value was
approximately $25.5 million, or $0.15 per share of common stock. Pro forma net
tangible book value represents the amount of our total tangible assets less
total liabilities, reduced by notes payable in the aggregate amount of $65.4
million issued in connection with our acquisition of The UniLink Group, LLC, our
pending acquisition of NxTrend Technology, Inc, and the purchase of proprietary
software from J.D. Edwards World Source Company and gives effect to the
conversion of all outstanding shares of our preferred stock into shares of our
common stock, and the issuance, and reservation for issuance upon exercise of
outstanding options, of 25,954,659 shares of our common stock to the former
stockholders and optionees of NxTrend Technology, Inc. After giving effect to
our sale of shares of common stock at an assumed initial public
offering price of $ per share and the assumed application of the
estimated net proceeds from this sale, the assumed exercise of warrants to
purchase 2,890,960 shares of our capital stock that will expire if not exercised
prior to the consummation of this offering, the conversion of the principal of
$4.4 million into shares of our common stock at a price of $
per share and the repayment of the remaining balance of $28.1 million of the
notes payable issued to the former owners of NxTrend Technology, Inc., the
conversion of the principal balance of the $27 million note payable to the
former owners of The UniLink Group, LLC, into shares of our
common stock, and the conversion of principal of $5.9 of the note payable to
J.D. Edwards World Source Company into shares of our common stock, our
pro forma as adjusted net tangible book value would have been approximately $
million, or $ per share of common stock. This represents an immediate
increase in such pro forma as adjusted net tangible book value of $ per
share to existing stockholders and an immediate decrease in pro forma as
adjusted net tangible book value of $ per share to new investors. The
following table illustrates this per share dilution to new investors:
PER SHARE
-------------------
Assumed initial public offering price....................... $
Pro forma net tangible book value as of December 31,
1999...................................................
Increase attributable to new investors.................... $
-------
Pro forma as adjusted net tangible book value after this
offering..................................................
Dilution as adjusted to new investors.......................
---------
$
=========
The following summarizes, as of December 31, 1999, the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price per share paid to us by existing stockholders and by investors
purchasing shares of common stock in this offering, 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................. $ $
New investors......................... $
------- ----- -------- ----- -------
Total....................... 100.0% 100.0% $
======= ===== ======== ===== =======
The tables above assume no exercise of stock options outstanding as of
December 31, 1999. Options to purchase 14,941,254 shares of common stock were
outstanding as of December 31, 1999, with a weighted average exercise price of
$0.75 per share. The tables above assume the exercise of warrants to purchase
2,890,960 shares of common stock which would expire if not exercised prior to
the consummation of this offering but assumes no exercise of warrants to
purchase 8,014,880 shares of common stock with a weighted exercise price of
$0.36 per share which will remain outstanding following the consummation of this
offering and no conversion of notes convertible into common stock upon
consummation of this offering. To the extent these unexercised options and
warrants are exercised, investors in this offering will experience further
dilution.
If the underwriters exercise their over-allotment in full, the following
will occur:
- the number of shares of common stock held by existing stockholders will
decrease to approximately % of the total number of shares of our common
stock outstanding; and
- the number of shares held by new investors will increase to ,
or approximately % of the total number of shares of our common stock
outstanding after this offering.
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SELECTED CONSOLIDATED FINANCIAL DATA
Our selected financial data set forth below should be read in conjunction
with our financial statements and accompanying notes, including the unaudited
pro forma combined statement of operations data, appearing elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The historical statements and operations data for the
years ended December 31, 1997, 1998, and 1999, and the balance sheet as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
our financial statements, which have been audited by PricewaterhouseCoopers LLP.
The balance sheet as of December 31, 1997 is derived from our audited balance
sheet not included in this prospectus. The acquisitions of FAST, McCosker,
Systems Analysis, and Maxwell have been accounted for using the purchase method
of accounting. Accordingly, the actual consolidated statement of operations data
reflects the results of operations of FAST, McCosker, Systems Analysis, and
Maxwell since their acquisition dates of May 19, 1999, May 22, 1999, June 21,
1999, and August 27, 1999, respectively. The pro forma consolidated statement of
operations data combine the historical statements of operations of BuildNet,
NxTrend, UniLink, Key Prestige, McCosker, FAST, Systems Analysis, and Maxwell as
if the acquisitions by BuildNet of NxTrend, UniLink, McCosker, FAST, Systems
Analysis, and Maxwell and the acquisition by UniLink of Key Prestige had been
completed on January 1, 1999. Historical results are not necessarily indicative
of results to be expected in the future.
PERIOD FROM
INCEPTION
(OCTOBER 24, 1996)
TO DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 ---------------------------- PRO FORMA
(UNAUDITED) 1997 1998 1999 1999
------------------ ------- ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 388 $ 4,257 $ 4,506 $ 14,601 $ 85,806
Cost of revenues............................................ 164 1,369 1,436 9,026 45,836
------- ------- ------- -------- --------
Gross profit................................................ 224 2,888 3,070 5,575 39,970
------- ------- ------- -------- --------
Operating expenses:
General and administrative................................ 96 1,348 1,969 8,151
Sales and marketing....................................... 224 1,594 2,073 4,845
Research and development.................................. 168 1,122 2,035 9,898
Stock-based compensation.................................. -- 202 22 666
------- ------- ------- -------- --------
Total operating expenses............................ 488 4,266 6,099 23,560 95,586
------- ------- ------- -------- --------
Operating loss.............................................. (264) (1,378) (3,029) (17,986) (55,616)
Interest, net............................................... (11) (288) (210) (10,515) (11,158)
Provision for income taxes.................................. -- -- -- -- (1,788)
------- ------- ------- -------- --------
Loss before extraordinary item.............................. (275) (1,666) (3,239) (28,501) (68,562)
Extraordinary loss on early extinguishment of debt.......... -- -- (107) (28) (28)
------- ------- ------- -------- --------
Net loss.................................................... (275) (1,666) (3,346) (28,529) (68,590)
Accretion of mandatorily redeemable preferred stock......... -- -- -- (2,069) --
Preferred stock dividend.................................... -- -- -- (167) --
------- ------- ------- -------- --------
Net loss available to common shareholders................... $ (275) $(1,666) $(3,346) $(30,765) $(68,590)
======= ======= ======= ======== ========
Net loss per common share -- basic and diluted.............. $ (0.01) $ (0.08) $ (0.17) $ (0.84)
Weighted average common shares outstanding -- basic and
diluted................................................... 20,043 20,043 20,043 36,527
AS OF DECEMBER 31, 1999
----------------------------
1997 1998 1999
------- ------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,344 $ 260 $ 51,875
Working capital (deficit)................................... 498 (954) 67,495
Total assets........................................ 2,208 916 134,726
Long term liabilities....................................... 2,939 4,418 13,746
Mandatorily redeemable convertible preferred stock.......... -- -- 135,723
Stockholder's equity (deficit).............................. (1,980) (4,897) (28,775)
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The pro forma net loss per common share assumes the following:
- the conversion of all outstanding shares of our preferred stock into
shares of our common stock upon closing of this offering;
- the assumed exercise of warrants to purchase 2,890,960 shares of our
common stock that will expire if not exercised prior to the
consummation of this offering;
- the issuance, and reservation for issuance upon exercise of
outstanding options, of 25,954,659 shares of our common stock and
notes payable in the aggregate amount of $32.5 million to the former
stockholders and optionees of NxTrend Technology, Inc. in connection
with our pending acquisition of NxTrend, the assumed conversion of
$4.4 million of the principal of the notes payable into
shares of common stock (assuming a conversion price
equal to the midpoint of the range set forth on the front cover page
of this prospectus) and the assumed repayment of the remaining balance
of $28.1 million of the notes payable;
- the issuance of a note payable in the amount of $27 million in
connection with our acquisition of The UniLink Group, LLC and the
assumed conversion of the principal balance of this note payable into
6,136,363 shares of our common stock; and
- the issuance of a note payable in the amount of $5.9 million in
connection with our purchase of software from J.D. Edwards World
Source Company and the assumed conversion of this note payable into
shares of our common stock (assuming a conversion price
equal to the midpoint of the range set forth on the front cover page
of this prospectus).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes, which appear elsewhere
in this prospectus. This discussion contains forward-looking statements that
involve risk and uncertainties. Our actual results could differ materially from
those anticipated in these forward looking statements as a result of various
risk factors, including those discussed below and elsewhere in this prospectus,
particularly under the heading "Risk Factors."
OVERVIEW
Our objective is to be the business-to-business e-commerce solution for the
residential construction industry. The BuildNet Exchange is designed to provide
secure Internet-based procurement, e-commerce and information services for
homebuilders, suppliers and manufacturers. We are testing the BuildNet Exchange
and expect to initiate a limited market rollout in the second quarter of 2000
and a commercial rollout in the second half of 2000.
History of Losses. We have never been profitable, we expect to incur net
losses in the foreseeable future and we may never be profitable. As of December
31, 1999, we had an accumulated deficit of $35.5 million. Net losses have
increased and we expect this trend will continue.
Sources of Revenues. From our incorporation in 1996 through December 31,
1999, substantially all of our revenues were generated from the sale of
management software and related services for homebuilders. In January 2000, we
acquired assets and assumed liabilities of The UniLink Group, LLC. UniLink's
revenues have been primarily comprised of transaction and service fees related
to transactions between suppliers and manufacturers in the heating, ventilation
and air conditioning (HVAC) and appliance industries using UniLink's transaction
exchange and transaction fees for the processing of warranty claims. In February
2000, we entered into an agreement to acquire NxTrend Technology. NxTrend's
revenues have been primarily generated from the sale of back-office systems to
suppliers of building, electrical, plumbing, HVAC and industrial products.
As we roll out the BuildNet Exchange, we expect that a primary and growing
source of our revenues will be transaction fees paid by suppliers who sell
building materials and products to homebuilders through the BuildNet Exchange.
We expect that these fees will be based upon a negotiated percentage of the
sales price of materials and products ordered online by homebuilders over the
BuildNet Exchange.
As a result of our planned rollout of the BuildNet Exchange, we are
considering changing our pricing structure for homebuilders using our software
products so that they may be charged for software based upon the number of homes
built each year as opposed to one-time license fee payments. In addition, we
anticipate that our sales and marketing efforts will be redirected to focus on
the BuildNet Exchange, which is expected to be an increasingly significant
component of our total revenues. Based on these factors, we expect revenues from
software and related services to decrease in absolute terms on a pro forma basis
and not be as significant a component of our revenues in the future as it has
been in the past. In addition, we do not expect revenues from other sources,
including revenues from the BuildNet Exchange, to offset this decline in the
near term.
In addition to transaction fees processed through the BuildNet Exchange, we
also plan to derive revenues in the future from the following sources:
- subscription fees paid by manufacturers to be included in the BuildNet
Exchange;
- marketing and advertising by manufacturers and suppliers on the BuildNet
Exchange;
- marketing services related to our mortgage.com relationship;
- warranty claim processing;
- administering manufacturer loyalty and rebate programs; and
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29
- selling information collected from the BuildNet Exchange.
We anticipate that both sales and marketing expenses and research and
development expenses will increase as we continue to develop and roll out the
BuildNet Exchange. We cannot assure you that we will be successful in developing
our business and generating revenues and we refer you to the specific risks
outlined under the heading "Risk Factors."
Revenue Recognition Policy. Both we and NxTrend recognize software
revenues from multiple element contracts for which the software license element
can be separated from the service elements when the following conditions are
satisfied: there is evidence of an arrangement; the product has been shipped;
fees are fixed and determinable; and collection of the fees is probable.
Software revenues from multiple element contracts for which the software element
cannot be separated from the service elements are recognized based on the
percentage of completion method, whereby revenues are recognized based on the
estimated stage of completion of individual contracts. Revenues from
software-related services, which include customer maintenance and support,
training and consulting, are recognized as the services are performed. UniLink
recognizes transaction fees as the transactions occur, and services fees in the
period in which the services are performed. In addition, once the BuildNet
Exchange is rolled out, we expect to recognize transaction fees as the
transactions occur.
RECENT ACQUISITIONS
Between May and August 1999, we acquired four businesses which were also
providers of back-office management and productivity-based integrated software
for the homebuilder segment of the residential construction industry, including
The F.A.S.T. Management Group, which we acquired on May 19, 1999, McCosker
Corporation, which we acquired on May 22, 1999, Systems Analysis, which we
acquired on June 21, 1999, and Maxwell & Company, which we acquired on August
27, 1999. We also purchased Site Trak, which is a back-office proprietary
software system for the subcontractor segment of the homebuilding industry, on
September 15, 1999. We refer to these acquisitions collectively as the "1999
Acquisitions."
On January 18, 2000, we purchased certain assets and assumed certain
liabilities of UniLink in exchange for a convertible note payable in the amount
of $27.0 million. The assets acquired included software products for the
processing of electronic commerce transactions in the electrical, plumbing,
appliances and HVAC markets, via electricalonline.com, plumbingonline.com,
appliancepartner.com, and hvaconline.com and assets for the electronic
processing of warranty claims. In connection with this purchase, we entered into
a one-year agreement with the former owners of UniLink whereby we will process
warranty transactions in the consumer electronics industry in exchange for fees
of 75% of the fees charged by the former owners of UniLink to those customers.
On January 31, 2000, we purchased the software and customer base for the
homebuilder module of the World Software System from J.D. Edwards World Source
Company in exchange for $650,000 in cash and a note payable in the amount of
$5.9 million. The acquisition of this customer base and software provides us
additional access to the larger homebuilders in the U.S. residential
construction industry.
On February 21, 2000, we entered into an agreement to purchase NxTrend in
exchange for 25,954,659 shares of our common stock and notes payable in the
aggregate amount of $32.5 million. This transaction is subject to regulatory
approval. NxTrend is a leading provider of enterprise-wide solutions designed to
enable suppliers to better manage inventory, order processing, sales, warehouse
logistics and electronic commerce. NxTrend's supply chain solutions are targeted
to the needs of suppliers of building materials, electrical, plumbing, HVAC, and
industrial products.
STRATEGIC RELATIONSHIPS
In May 1999, we issued GE Capital Equity Investments a warrant to purchase
up to 5,426,380 shares of our Series B preferred stock, which will become
exercisable for common stock upon closing of this offering, at an exercise price
of $0.52 per share which vests incrementally upon the achievement of sales and
marketing objectives. As of December 31, 1999, 1,356,660 warrants had been
earned under this
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30
agreement based on the achievement of objectives related to the signing of
contracts with specific manufacturers. Accordingly, we recorded $5.6 million in
deferred customer acquisition costs based on the estimated fair value of these
warrants using the Black-Scholes pricing model. Deferred customer acquisition
costs are being amortized as a sales and marketing expense over the term of the
manufacturer contracts. For the year ended December 31, 1999, $117,000 was
amortized as a sales and marketing expense.
In the first quarter of 2000, we issued to homebuilders and suppliers
warrants to purchase 500,000 shares of our common stock at an exercise price of
$4.40 per share and 600,000 shares of our Series C preferred stock, which will
become exercisable for common stock upon closing of this offering, at an
exercise price of $4.40 per share. The warrants become exercisable as the
homebuilders and suppliers achieve milestones related to the promotion and
adoption of the BuildNet Exchange. As and when the homebuilders and suppliers
achieve these milestones, we will record a non-cash charge as sales and
marketing expense, based on the fair market value of the warrants at that time.
In addition, the homebuilders and suppliers can earn warrants to purchase up to
an additional 2,500,000 shares of our common stock at an exercise price of $4.40
and 4,400,000 shares of our Series C preferred stock, which will become
exercisable for common stock upon closing of this offering at an exercise price
of $4.40 per share based on the homebuilders' and suppliers' volume of
transactions through the BuildNet Exchange. We will record a non-cash charge as
sales and marketing expense as and when these warrants become exercisable, based
on the fair market value of the warrants at that time. All of the warrants
issued to the homebuilders and suppliers will expire three years from their
respective dates of issuance.
Stock-Based Compensation. As of December 31, 1999, we had a deferred
compensation balance of $28.9 million as a result of grants of employee stock
options with an exercise price below the assumed fair value of the underlying
common stock for financial accounting purposes only. This deferred compensation
is being amortized as stock-based compensation over the vesting periods. Vesting
periods are generally between three and five years, although some options
include acceleration clauses whereby the vesting of the options will accelerate
upon our achievement of milestones related to the adoption of the BuildNet
Exchange.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenues for the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... 100.0% 100.0% 100.0%
----- ----- ------
Cost of revenues............................................ 32.2 31.8 61.8
----- ----- ------
Gross profit................................................ 67.8 68.2 38.2
----- ----- ------
Operating expenses
General and administrative................................ 31.7 43.7 55.8
Sales and marketing....................................... 37.4 46.0 33.2
Research and development.................................. 26.4 45.2 67.8
Stock-based compensation.................................. 4.7 0.5 4.6
----- ----- ------
Total operating expenses.......................... 100.2 135.4 161.4
----- ----- ------
Operating loss.............................................. (32.4) (67.2) (123.2)
Net interest expense........................................ (6.7) (4.7) (72.0)
----- ----- ------
Loss before extraordinary item.............................. (39.1) (71.9) (195.2)
Extraordinary loss on early extinguishment of debt.......... -- (2.4) (0.2)
----- ----- ------
Net loss.................................................... (39.1) (74.3) (195.4)
Accretion of mandatorily redeemable preferred stock......... -- -- (14.2)
Preferred stock dividend.................................... -- -- (1.1)
----- ----- ------
Net loss available to common shareholders................... (39.1)% (74.3)% (210.7)%
===== ===== ======
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Revenues consist primarily of sales of software licenses,
professional services and support and maintenance contracts. Revenues increased
by 224% to $14.6 million in 1999 from $4.5 million in 1998. The increase in
revenues was due primarily to revenues generated by the 1999 Acquisitions.
Revenues generated by the 1999 Acquisitions accounted for $10.2 million of our
revenues during 1999.
Cost of Revenues. Cost of revenues consist primarily of employee payroll
and related expenses for consulting, training and customer support. Cost of
revenues increased by 529% to $9.0 million in 1999 from $1.3 million in 1998. As
a percentage of revenues, cost of revenues increased to 62% in 1999 from 32% in
1998. The increase in cost of revenues was due primarily to cost of revenues
incurred by the 1999 Acquisitions. Cost of revenues incurred by the 1999
Acquisitions accounted for $6.7 million of our cost of revenues during 1999. As
a percentage of revenues, cost of revenues increased because revenues generated
by the 1999 Acquisitions are comprised largely of revenues from training and
consulting, which tend to have higher related costs due to the personnel
expenses incurred to perform the services.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other expenses for executive, administrative
and finance personnel. General and administrative expenses increased by 314% to
$8.2 million in 1999 from $2.0 million in 1998. As a percentage of revenues,
general and administrative expenses increased to 56% in 1999 from 44% in 1998.
Both the overall increase in general and administrative expenses and the
increase in general and administrative expenses as a percentage of revenues was
due primarily to an increase in the number of general and administrative
employees to 93 at December 31, 1999 from 11 at December 31, 1998, due primarily
to the continued development of our infrastructure and the 1999 Acquisitions. We
expect these expenses to increase as we develop and roll out the BuildNet
Exchange.
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Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of promotional
materials, trade shows and other sales and marketing programs. Sales and
marketing expenses increased by 134% to $4.8 million in 1999 from $2.1 million
in 1998. The increase in sales and marketing expenses were due primarily to an
increase in the number of sales and marketing employees to 48 at December 31,
1999 from 13 at December 31, 1998, due in part to the 1999 Acquisitions. As a
percentage of revenues, sales and marketing expenses decreased to 33% in 1999
from 46% in 1998. The decrease in sales and marketing expense as a percentage of
revenues was due to revenues generated by the 1999 Acquisitions, the effect of
recurring revenues from maintenance and support contracts and co-marketing
efforts between us and the 1999 Acquisitions. We expect these expenses to
increase as we develop and roll out the BuildNet Exchange.
Research and Development. Research and development expenses consist
primarily of employee salaries and related costs, consulting fees and other
expenses incurred in connection with the development of our products and
services. Research and development expenses increased by 386% to $9.9 million in
1999 from $2.0 million in 1998. As a percentage of revenues, research and
development expenses increased to 68% in 1999 from 45% in 1998. Both the overall
increase in research and development expenses and the increase in research and
development expenses as a percentage of revenues were due to an increase in the
number of research and development employees to 94 at December 31, 1999 from 25
at December 31, 1998, as we increased our efforts to develop the BuildNet
Exchange. In addition, a consulting contract with a third party for the
development of the BuildNet Exchange accounted for research and development
costs of $2.2 million during 1999. We expect these expenses to increase as we
develop and roll out the BuildNet Exchange.
Stock-Based Compensation. Amortization of stock-based compensation
increased to $666,000 in 1999 from $22,000 in 1998. During 1999, we recorded
deferred compensation charges of $29.4 million related to employee stock
options, compared to $359,000 of deferred compensation that was recorded prior
to December 31, 1998. We are amortizing these deferred compensation charges over
the vesting periods of the related options, and therefore the increase in
amortization of stock-based compensation in 1999 is due to the amortization of
the deferred compensation charges that were recorded in 1999.
Interest Expense, Net. Interest expense, net of interest income, increased
to $10.5 million in 1999 from $210,000 in 1998. In October 1997, we entered into
a $3 million debt agreement under which we issued redeemable warrants to
purchase our common stock. These warrants include provisions which may require
us to repurchase the warrants at the fair market value of the warrant.
Therefore, these warrants are required to be carried at their fair market value,
with any changes in the carrying value of the warrants being charged to non-cash
interest income or expense. The fair market value of the warrants increased
significantly in 1999 from 1998, which caused the non-cash charge to interest
expense in 1999. We also recorded debt discount for warrants issued with debt,
which was amortized over the life of the loans as non-cash interest expense. In
1999, net interest expense consisted of non-cash interest charges of $10.1
million, interest income of $643,000, and interest expense of $1.0 million
payable in cash. During 1998, net interest expense consisted of interest expense
of $513,000 payable in cash, interest income of $39,000 and non-cash interest
income of $264,000.
Extraordinary Loss on Early Extinguishment of Debt. Extraordinary loss on
early extinguishment of debt decreased to $28,000 in 1999 from $107,000 in 1998.
The loss on early extinguishment of debt in 1999 consisted of the difference in
the principal balance and the carrying value of two notes payable that were
repaid prior to the maturity date in 1999. The loss on early extinguishment of
debt in 1998 was due to a note payable that was revised in 1998, and represents
the difference in the terms of the revised note payable as compared to the
original terms of the note payable.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Revenues increased by 6% to $4.5 million in 1998 from $4.3
million in 1997. The increase in revenues was primarily due to an increase in
recurring revenues from support and maintenance fees as we continued to build
our customer base.
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Cost of Revenues. Cost of revenues increased by 5% to $1.4 million in 1998
from $1.4 million in 1997. As a percentage of revenues, cost of revenues were
32% in both 1998 and 1997. The increase in cost of revenues was due in part to
an increase in the number of support and maintenance and professional service
employees to 19 at December 31, 1998 from 15 at the beginning of 1997.
General and Administrative. General and administrative expenses increased
by 46% to $2.0 million in 1998 from $1.3 million in 1997. As a percentage of
revenues, general and administrative expenses increased to 44% in 1998 from 32%
in 1997. Both the overall increase in general and administrative expenses and
the increase in general and administrative expenses as a percentage of revenues
were primarily due to the leasing of additional facilities and due to the hiring
of additional general and administrative employees, as we contained to build our
infrastructure.
Sales and Marketing. Sales and marketing expenses increased by 30% to $2.1
million in 1998 from $1.6 million in 1997. As a percentage of revenues, sales
and marketing expenses increased to 46% in 1998 from 37% in 1997. The increase
in sales and marketing expenses was due primarily to reinitiating our
advertising, marketing and tradeshow efforts as a result of $3.0 million we
received from the issuance of notes payable in the fourth quarter of 1997.
Research and Development. Research and development expenses increased by
81% to $2.0 million in 1998 from $1.1 million in 1997. As a percentage of
revenues, research and development expenses increased to 45% in 1998 from 26% in
1997. Both the overall increase in research and development expenses and the
increase in research and development expenses as a percentage of revenues was
due to an increased emphasis on the development of our software products and the
BuildNet Exchange and an increase in the number of research and development
employees to 25 at December 31, 1998 from 20 at the beginning of 1997.
Stock-Based Compensation. Amortization of stock-based compensation
decreased by 89% to $22,000 in 1998 from $202,000 in 1997. The decrease was
attributable to employee stock options that were granted during 1997 that were
immediately partially vested, resulting in an immediate charge of $189,000.
There were no such immediate charges during 1998.
Interest Expense, Net. Interest expense, net of interest income, decreased
by 27% to $210,000 in 1998 from $288,000 in 1997. During 1998, net interest
expense consisted of interest expense of $513,000 payable in cash, interest
income of $39,000 and non-cash interest income of $264,000. During 1997, net
interest expense consisted primarily of interest expense of $178,000 payable in
cash, interest income of $29,000 and non-cash interest expense of $139,000.
Extraordinary Loss on Early Extinguishment of Debt. Extraordinary loss on
early extinguishment of debt increased to $107,000 in 1998 from zero in 1997.
The loss on early extinguishment of debt in 1998 was due to a note payable that
was revised in 1997, and represents the difference in the terms of the revised
note payable as compared to the original terms of the note payable.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations through cash from operations
and through private placements of debt instruments and our preferred stock. As
of December 31, 1999, we had cash and cash equivalents of $51.9 million and
long-term investments of $29.7 million. We also had funds of $25.3 million held
in an escrow account at December 31, 1999 from the sale of our preferred stock,
which was disbursed to us in January 2000. Our long-term investments at December
31, 1999 are comprised solely of student loan bonds which are secured by the
U.S. government and underwritten by a major financial institution. We have the
option to sell these bonds back to the financial institution at their face value
approximately every 28 days. Therefore, our long-term investments at December
31, 1999 are considered highly liquid.
Cash used in operating activities during 1999, 1998 and 1997 was $13.4
million, $2.9 million, and $1.4 million, respectively. Cash used in operating
activities was primarily for the development of the BuildNet
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Exchange, the expansion of our sales and marketing force and the expansion of
our administrative and operations staff to support our growth.
Cash used in investing activities during 1999, 1998 and 1997 was $37.6
million, $122,000 and $31,000, respectively. During 1999, cash used in investing
consisted of net cash paid for the 1999 Acquisitions of $3.3 million and
purchases of long-term investments of $33.7 million.
Cash provided by financing activities during 1999, 1998 and 1997 was $102.6
million, $1.9 million, and $2.6 million, respectively. During 1999, 1998 and
1997, we issued an aggregate of $7.5 million of notes payable in exchange for
cash. During 1997, certain of these notes payable with a principal balance of
$200,000 and related accrued interest were converted into 229,200 shares of our
Series A convertible preferred stock. During 1999, certain of these notes with
an aggregate principal balance of $4.7 million and related accrued interest were
converted into 9,471,187 shares of our Series B mandatorily redeemable preferred
stock. Also during 1999, we repaid the remaining notes payable that were issued
during 1999, 1998 and 1997 with an aggregate principal balance of $2.4 million.
During 1999, we issued an additional 59,560,733 shares of our Series B
mandatorily redeemable preferred stock at a price of $0.52 per share and issued
24,322,617 shares of our Series C mandatorily redeemable preferred stock at a
price of $4.40 per share. We received net proceeds of $102.3 million from the
sales of our Series B and Series C mandatorily preferred stock during 1999. At
December 31, 1999, we had funds of $25.3 held in an escrow account which we
received in January 2000 related to shares of our Series B and Series C
mandatorily redeemable preferred stock that were issued during 1999, and
received an additional $3.5 million in January and February 2000 related to
subscriptions for our Series B and Series C mandatorily redeemable preferred
stock that were outstanding at December 31, 1999.
As of December 31, 1999, we had notes payable outstanding in the aggregate
amount of $4.9 million related to our 1999 Acquisitions and the Site Trak
software system. These notes mature between 2001 and 2002 and incur interest at
a rate of 8% per annum.
The $27.0 million note payable to the former shareholders of UniLink is
convertible into shares of our common stock at a rate of $4.40 per share at the
option of the holder at any time prior to the maturity date. Conversion is
mandatory upon the expiration of any lock-up period to which our investors are
subject following the closing of this offering. The $5.9 million note payable to
J.D. Edwards World Source Company is convertible at the option of the holder
into shares of our common stock upon the closing of this offering at the price
per share of the common stock sold in this offering. Of the $32.5 million of
notes payable issued to the former shareholders of NxTrend, $4.4 million of the
notes are convertible at the option of the holders into shares of our common
stock upon the closing of this offering at the price per share of the common
stock sold in this offering. The remaining balance of the notes payable to the
former shareholders of NxTrend is payable in full on the seventh day following
the closing of this offering.
NxTrend has a financing facility including a secured term loan of $25.0
million and a secured revolving credit line. The revolving loan provides for a
maximum outstanding balance of $10.0 million. The facility expires on December
31, 2000, or earlier, based on certain provisions included in the facility.
Principal payments are due quarterly, with interest due monthly. Under certain
conditions, based primarily on our earnings, we might be required to make
certain prepayments of the term loan principal. As of December 31, 1999, $4.1
million was outstanding under the term loan and $500,000 was outstanding under
the revolving loan.
We also have issued warrants to purchase 2,215,660 shares of our common
stock at an exercise price of $0.0005 per share. At the option of the holders of
these warrants, we might be required to repurchase the warrants beginning May
31, 2006 at the fair value of the warrants.
Since our inception in 1996, we have experienced net losses and negative
cash flows from our operations. For the foreseeable future, we expect to
experience significant net losses and negative cash flows. We believe that our
existing liquidity and capital resources, including the proceeds resulting from
the sale of our common stock in this offering, will be sufficient to satisfy our
cash requirements for at least the next 12 months. To the extent that such
amounts are insufficient, we will be required to raise
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additional funds through debt or equity financing. There can be no assurance
that we will be able to raise such funds on favorable terms, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This statement is
effective for financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We intend to adopt this statement when required;
however, it is not expected to have a material impact on our financial position
or results of operations.
IMPACT OF YEAR 2000 COMPUTER ISSUES
Most reports to date have indicated that computer systems are functioning
normally and the compliance and remediation work was effective to prevent any
problems resulting from systems' inability to recognize dates on and after
January 1, 2000. However, computer experts have warned that there may still be
residual consequences of the change in centuries. It is also possible that
errors or defects may remain undetected, or that dates other than January 1 may
trigger Year 2000 type problems. We designed the most recent versions of our
products and systems to be Year 2000 compliant. To date, Year 2000 remediation
efforts to our products and services were minor due to our awareness of Year
2000 issues when our products were developed. To date, we have not developed any
formalized contingency plans to address the risk that our products, systems,
customers, vendors or other third-parties might fail to be or become Year 2000
compliant. To the extent that we identify third party or other Year 2000
compliance issues that are not capable of remediation on a timely basis, we plan
to develop contingency plans in order to minimize our risks. Although we have
not experienced any Year 2000 problems, it is possible that we could face
problems or disruptions during 2000. Any Year 2000 problems could cause
difficulties accessing the BuildNet Exchange and our Web site thereby resulting
in decreased sales of our services to our customers and damage to our
reputation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of our cash equivalents, capital lease obligations, and long-term debt
obligations are at fixed interest rates, and therefore the fair value of these
investments is affected by changes in market interest rates. However, our cash
equivalents are primarily comprised of high grade commercial paper and highly
liquid deposits with financial institutions. Most of our long-term investments
are comprised of auction rate bonds, for which the interest rate is determined
in an auction approximately every 28 days. Therefore, the fair value of the
underlying bonds are not materially effected by a change in market interest
rates. A hypothetical increase or decrease in market interest rate by 10% from
the market interest rates at December 31, 1999 would not have a material effect
on our portfolio.
All of our revenues recognized to date have been denominated in United
States dollars and are primarily from clients in the United States. Although
NxTrend has generated a small portion of its revenues in Canada, we do not
anticipate that sales denominated in foreign currencies will comprise a
significant portion of our sales in the foreseeable future.
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BUSINESS
OVERVIEW
Our objective is to be the business-to-business e-commerce solution for the
residential construction industry. We have designed the BuildNet Exchange to
provide secure Internet-based procurement, e-commerce and information services
for homebuilders, suppliers and manufacturers. We believe that the BuildNet
Exchange addresses many of the supply chain inefficiencies that adversely impact
the residential construction industry. Homebuilders, suppliers and manufacturers
lack accurate and timely information on product requirements, building materials
are transferred multiple times through the supply chain and most procurement
processes are paper-based and labor intensive. The BuildNet Exchange allows
users to confirm pricing and product specifications, place purchase orders and
add both product and order information automatically to builders' and suppliers'
management systems. In addition, manufacturers can place product information and
catalogs on the BuildNet Exchange for access by homebuilders and suppliers.
We are testing the BuildNet Exchange and expect to initiate a limited
market rollout in two cities during the second quarter of 2000 and plan to
commence a commercial rollout in an additional four to six cities in the second
half of 2000. Our position as a leading provider of management software to
homebuilders and suppliers gives us a critical mass of software users to connect
to the BuildNet Exchange. Our aggregated software customer base includes
homebuilders who accounted for approximately 43% of 1999 U.S. single-family home
closings, according to our estimates, and three of the top ten residential
construction suppliers in the U.S., according to Pro Sales magazine. We have
already completed the initial upgrade of four of our six existing builder
management software products and our two principal supplier management software
products to connect to the BuildNet Exchange. We refer to the process by which
we connect the BuildNet Exchange to the back-office management systems of
homebuilders and suppliers as BuildNet Enabling. We will BuildNet Enable our
remaining builder management software products prior to our commercial rollout.
We have established relationships with many major homebuilders, suppliers
and manufacturers through equity investments and our warrant incentive program
to encourage the rapid adoption of the BuildNet Exchange. We also have an
existing strategic relationship with EDS, under which EDS is promoting the
BuildNet Exchange as the standard for the homebuilding industry and has built
and will host our transaction hub. In addition, we have a relationship with
mortgage.com under which we have exclusive rights to offer to homebuilders the
ability to arrange mortgage loans for their homebuyers through mortgage.com.
INDUSTRY BACKGROUND
Growth of Business-to-Business Commerce on the Internet
The Internet has emerged as the fastest growing communications medium in
history and is dramatically changing how businesses communicate and share
information. International Data Corporation estimates that the number of U.S.
Web users in U.S. commercial business will grow from 33 million at the end of
1999 to 99 million by the end of 2003. Worldwide business-to-business
e-commerce, defined as the total volume of intercompany trade of goods and
services in which the final order is placed over the Internet, is expected to
grow from an estimated $406 billion in 2000 to $2.7 trillion in 2004, according
to Forrester Research.
The widespread adoption of intranets and the acceptance of the Internet as
a business communications platform has created a foundation for
business-to-business e-commerce that offers the potential for companies to
streamline complex processes, lower costs and improve productivity. Business-
to-business e-commerce solutions frequently automate or otherwise modify
workflows or processes that are fundamental to a company's operations by
replacing paper-based transactions with electronic communications. Buyers can
automate and centralize their purchasing processes and access more detailed
information
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on product pricing and availability. Sellers can access timely information
regarding their customers' needs, which enables them to reduce excess inventory
and deliver products and services that are in demand.
Business-to-business e-commerce solutions enable buyers and sellers in
fragmented markets to reduce supply chain inefficiencies. These solutions are
most applicable to industries characterized by large numbers of buyers and
sellers, a high degree of fragmentation among buyers and sellers, significant
dependence on information exchange, large transaction volume and user acceptance
of the Internet.
The Residential Construction Industry
Residential construction is one of the largest sectors of the U.S. economy.
According to the U.S. Census Bureau, the value of residential construction in
the United States in 1997 was approximately $238 billion. Also according to the
Census Bureau, there were approximately 1.3 million single-family housing starts
in 1999. There are many related markets to the residential construction
industry, including mortgage financing, residential construction lending and
advertising and information services to new homeowners.
The main participants in the procurement of residential construction
building materials and products include homebuilders, suppliers and
manufacturers. The homebuilder and supplier segments of the residential
construction industry are highly fragmented and driven by local demand. We
estimate based on Builder magazine data that the top ten largest homebuilders in
1998 represent only approximately 13% of all single-family housing starts.
According to the National Association of Homebuilders, in 1997, there were
approximately 146,000 residential construction companies in the United States,
many of which built fewer than 100 homes per year. We estimate based on
imarketinc data that there are approximately 54,000 building materials and
products suppliers in the United States. Residential construction is a very
local business driven by regional and local demands such as local economic
conditions, raw materials availability and style preferences. Homebuilders
depend on local suppliers to deliver products and materials to the job site on
time and in the order required, and to provide other value-added services such
as consulting, customization and assembly. As a consequence, even the large
national homebuilders generally make purchasing decisions at the local level.
Complex Distribution Network. The localized and fragmented nature of the
residential construction industry has created a complex distribution network for
building materials and products. Building materials and products are transferred
multiple times through the supply chain. A supplier either buys directly from a
manufacturer and then sells to a homebuilder, referred to as one-step
distribution, or buys from a national/regional supplier, who previously has
purchased the materials from the manufacturer, and then sells to the
homebuilder, referred to as two-step distribution. Suppliers vary widely by
their amount of sales, the variety of building materials and products they carry
and the value-added services they provide. We estimate that in 1999 homebuilders
purchased approximately $70 billion worth of building products and materials
from suppliers and each supplier purchased those products and materials from
either another supplier or a manufacturer.
Supply Chain Inefficiencies. We believe that supply chain inefficiencies
adversely impact the residential construction industry. Traditional purchasing
and planning methods in the residential construction industry are complex,
costly and inefficient. The major problems faced by homebuilders, suppliers and
manufacturers include the following:
- Homebuilders. New home construction typically takes between three to 12
months. To build a home, a homebuilder orders a broad range of materials
and products from a number of suppliers. Therefore, construction planning
and the timeliness of delivery of building materials and products from
multiple sources to the job site directly impacts the timing and cost of
completing a home. Homebuilders typically order materials and products
through a paper-based purchasing process that requires manual preparation
and tracking of purchase orders, invoices and reports. In addition, many
of the large residential construction companies have decentralized
purchasing functions. This system can be time-consuming and prone to
errors.
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- Suppliers. The priority of local suppliers is to serve and respond
quickly to the homebuilders. Due to inefficient communications, suppliers
typically do not have accurate and timely information to assess the
projected materials needs and delivery schedules of homebuilders.
Therefore, suppliers often maintain excess inventory of building
materials and products, which results in significant working capital
costs. Suppliers must maintain a vast array of materials and products
that fluctuate in price frequently based on a number of factors: regional
differences, changes in raw material prices and customer relationships.
As a result of this complex pricing of products and materials, the
typical system of manual and paper-based tracking of prices is
time-consuming and prone to errors.
- Manufacturers. Manufacturers have difficulty forecasting demand for
their building material and products. The build-up of inventory in the
supply chain and changes in working capital needs of suppliers can cause
fluctuations in building materials and product purchases unrelated to
underlying demand. In addition, the complexity of the distribution system
and difficulty of communications throughout the supply chain limits the
manufacturer's ability to gain market acceptance of new materials and
products and to establish brand recognition.
We believe that a significant opportunity exists in the residential
construction industry for a business-to-business e-commerce solution that
connects homebuilders, suppliers and manufacturers, enabling them to communicate
across existing back-office management software systems and transact business
with each other in an efficient manner.
THE BUILDNET SOLUTION
Our objective is to be the business-to-business e-commerce solution for the
residential construction industry, providing Internet-based procurement,
e-commerce and information services that address many of the residential
construction industry's supply chain inefficiencies. We are a leading provider
of builder and supplier management software to the residential construction
industry. We intend to leverage our existing management software customer base
to make the BuildNet Exchange the standard for business-to-business e-commerce
in the residential construction industry. By leveraging our own established
customer base, our homebuilder and supplier software customers can obtain
e-commerce capability without time consuming and expensive changes to their
software systems.
We expect to initiate a limited market rollout of the BuildNet Exchange in
the second quarter of 2000 and plan to commence a commercial rollout in the
second half of 2000. We have BuildNet Enabled four of our six existing builder
management software systems and our two principal supplier management software
products. Prior to our commercial rollout we will BuildNet Enable our remaining
builder management software products. We are customizing the back-office systems
of a select number of homebuilders and suppliers who are not users of our
management software systems for connection to the BuildNet Exchange. We are
developing standard browser-based software enhancements and interfaces for
homebuilders, suppliers and manufacturers who are not users of our management
software products to enable access to the BuildNet Exchange. Upon rollout, the
BuildNet Exchange will offer the following benefits to homebuilders, suppliers
and manufacturers:
Benefits to Homebuilders
- Streamline the procurement process. The BuildNet Exchange automates
formerly paper-based purchasing processes and enables cost-effective
communication with suppliers.
- Enhance efficiency of the homebuilding process. Homebuilders will use
the BuildNet Exchange to control the ordering and delivery of building
materials, thereby improving construction planning. Better production
planning should allow homebuilders to build homes more efficiently which
should enable homebuilders to achieve better returns on capital and
increase customer satisfaction.
- Increase options available to customers. The BuildNet Exchange should
enable homebuilders to benefit from improved access to product and price
information from multiple suppliers.
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Benefits to Suppliers
- Increase administrative efficiency. Suppliers will use the BuildNet
Exchange to sell building materials and products and track inventory,
delivery and payments through a secure e-commerce solution which should
increase efficiency. Suppliers should be able to reduce the time spent on
their manual, paper-based communications and fulfillment processes.
- Reduce working capital costs. The BuildNet Exchange enables suppliers to
more accurately track their demand for materials and products from
homebuilders and provide more lead time on requirements. This information
should allow suppliers to reduce their excess inventory, which should
result in reduced carrying costs and improved profitability.
- Facilitate delivery of value-added services. Increased information flow
between manufacturers, suppliers and builders, through the BuildNet
Exchange, will enhance the suppliers' ability to aggregate an optimum mix
of products, deliver products in a timely manner, consult with builders
on materials requirements and product selection and provide other
value-added services.
Benefits to Manufacturers
- Provide cost-effective, timely and accurate dissemination of product
information. Compared to the costs of developing a stand-alone product
catalog and Web site, manufacturers using the BuildNet Exchange should
reduce costs with our shared server environment, catalog technology and
personalization tools. Manufacturers will be able to immediately update
product information, technical documentation and builder specifications,
and should benefit from the commensurate savings in printing and
promotional costs.
- Improve marketing ability. The BuildNet Exchange should enable
manufacturers to further target marketing efforts and increase brand
recognition. We also plan to collect data which should enable
manufacturers to more effectively offer and track targeted rebates and
affinity programs.
- Enhance forecasting ability. The accurate, real-time scheduling, pricing
and purchasing information that we plan to make available in the future
through the BuildNet Exchange should provide manufacturers with enhanced
forecasting capabilities, allowing them to be more efficient. We plan to
distribute this information while protecting the privacy of our users.
STRATEGY
Our objective is to be the business-to-business e-commerce solution for the
residential construction industry. Key elements of our strategy to achieve this
objective include the following:
Commercial Rollout of the BuildNet Exchange. We are testing the BuildNet
Exchange in two cities with a limited number of homebuilders and suppliers. Upon
successful completion of our testing, we expect to begin a limited market
rollout in these two cities in the second quarter of 2000 by expanding the
number of our homebuilders and suppliers connected to the BuildNet Exchange.
During the second half of 2000, we plan to commence our commercial rollout by
expanding to another four to six cities where our strategic homebuilders and
suppliers are located.
Leverage Strategic Relationships. We currently have strategic
relationships with four of the top five homebuilders in the United States ranked
by number of housing starts in 1999, three of the top ten construction suppliers
ranked by 1998 revenues and several of the leading manufacturers. These
strategic relationships consist of equity investments in BuildNet and
participation by the homebuilders and suppliers in our warrant program that
provide an incentive to these homebuilders and suppliers to use the BuildNet
Exchange. We intend to continue to develop relationships with leading
homebuilders, suppliers and manufacturers, and to leverage our strategic
relationships to accelerate adoption of the BuildNet Exchange.
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Generate Multiple Revenue Streams. We believe the BuildNet Exchange should
create multiple revenue streams. In addition to fees generated for transactions
that are processed through the BuildNet Exchange, we plan to generate additional
e-commerce revenues from the following:
- subscription fees paid by manufacturers to be included in the BuildNet
Exchange;
- marketing and advertising by manufacturers and suppliers on the BuildNet
Exchange;
- marketing services related to our mortgage.com relationship;
- warranty claim processing;
- administering manufacturer loyalty and rebate programs; and
- selling information collected from the BuildNet Exchange.
Connect Manufacturers to the BuildNet Exchange. Our objective is to
connect homebuilders, suppliers and manufacturers and enable them to communicate
and transact business with one another in an efficient manner. We intend to
integrate UniLink's products and services that connect residential and
commercial construction suppliers and manufacturers into the BuildNet Exchange.
This integration will enable them to automatically send and receive purchase
orders, warranty claims, advance shipping notices, and invoices and broaden the
use of the BuildNet Exchange. We believe that by integrating manufacturers into
the BuildNet Exchange we will enhance our e-commerce solution for the
residential construction industry.
Build Brand Recognition. Our builder and supplier management software
products have established leading brand recognition in the residential
construction industry. We intend to leverage this brand recognition to establish
the BuildNet brand as the business-to-business e-commerce solution to the
residential construction industry. We have been building our brand recognition
through targeted advertising and promotions, strategic relationships,
participation in trade associations and press coverage. We plan to further
promote the BuildNet Exchange through our Web site which we are designing to be
a leading product, service and information exchange for the residential
construction community.
Expand E-Commerce Solutions into Complementary Markets. There are markets
complementary to the residential construction industry, such as commercial
construction. We intend to expand our e-commerce offerings to electrical,
plumbing, HVAC and industrial suppliers by leveraging the NxTrend and UniLink
customer base. We plan to integrate UniLink's exchange into the BuildNet
Exchange for those contractors and subcontractors who conduct business in both
the residential and commercial construction industries to effectively transact
in one marketplace.
Pursue Strategic Acquisitions and Relationships. We intend to continue to
explore opportunities for strategic acquisitions and relationships. We will
consider acquiring additional builder and supplier management software companies
to access their customer bases. We also will continue to explore opportunities
to acquire other complementary technologies, services and products that will
enable us to add features and functionality to the BuildNet Exchange. In
addition, we will pursue acquisitions that enable us to expand into other
complementary markets such as commercial construction and repair and remodeling.
We are not currently contemplating any specific acquisitions.
PRODUCTS AND SERVICES
The BuildNet Exchange. We expect to initiate a limited market rollout of
the BuildNet Exchange in the second quarter of 2000 and plan to commence a
commercial rollout in the second half of 2000. The BuildNet Exchange will
initially connect homebuilders and suppliers involved in the residential
construction industry. We have BuildNet Enabled four of our existing builder
management software products and our key supplier management products and expect
to BuildNet Enable our remaining builder management software products prior to
our commercial rollout in the second half of 2000. Also, prior to this rollout,
we plan to BuildNet Enable the back-office management systems of a select number
of homebuilders and suppliers who are not users of our management software
systems. In the future, we plan
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to develop standard software enhancements and interfaces to connect
homebuilders, suppliers and manufacturers who are not users of our management
software products to our BuildNet Exchange. Also, we plan to extend our BuildNet
Exchange to connect manufacturers to our transaction hub and to add capability
for complementary markets.
Initial Offerings. When we roll out the BuildNet Exchange, it will offer
the following services:
- Basic Price Quoting, Purchase Orders and Invoices. Homebuilders can send
price requests directly to suppliers electronically. The supplier can
receive the request and automatically reply with responsive data. The
pricing information is sent back to the builder in a secure manner for
review and uploading to the homebuilder's construction management
software system. Homebuilders may then release purchase orders
electronically to the supplier. Those purchase orders are automatically
entered into the supplier's system. After delivery of the products, the
supplier can send an electronic invoice directly into the homebuilder's
system where it is compared with the original purchase order for
accuracy, then approved for payment.
- Online Manufacturers' Catalogs and Information. Manufacturers will be
able to offer complete online product catalogs. Manufacturers will be
able to use tools provided by us to build and manage catalog data
including photographs of products, product codes and Stock Keeping Unit
or SKU numbers, descriptive text, warranty policies and installation and
maintenance instructions. Manufacturers can also provide private and
secure pricing information unique to individual suppliers and
homebuilders. Our catalog environment gives manufacturers a set of
personalization tools. Our registration and information collection
processes help manufacturers create detailed builder profiles. Various
manufacturer marketing programs classify manufacturers in various
categories based on the level of benefits provided, including preferred
placement on our Web site, Web pages and links within our BuildNet
Exchange, and other advertising and sponsorship opportunities.
- Online Homebuyer Mortgages. We have a relationship with mortgage.com
under which we have exclusive rights to offer to homebuilders the ability
to arrange mortgage loans for their homebuyers through mortgage.com.
- Web Site -- BuildNet.com. The BuildNet.com Web site will play a key role
during the rollout of the BuildNet Exchange in communicating with
participants in the residential construction industry supply chain and
educating them about the services we offer. Through user registration and
lead identification the web site will provide an efficient mechanism for
engaging our existing customer base and transitioning them to the use of
e-commerce services as well as for prospecting for new customers.
Future Enhancements. We are developing enhancements to the BuildNet
Exchange that we plan to implement in the future including the following:
- Increase Functionality.
- Handle More Complex Transactions. We plan to enhance the BuildNet
Exchange to handle more complex transactions, such as split purchase
order fulfillment, product substitution and automatic product
information updates.
- Electronic Bill Payment. We plan to allow for electronic bill payment
between a homebuilder and a supplier based on generated and approved
electronic invoices.
- Expansion of User Base. We also plan to introduce BuildNet Enabled
system solutions to subcontractors. We also plan to make available
standard software tools to connect homebuilders, suppliers and
manufacturers to the BuildNet Exchange that are not using any of our
builder or supplier management software products.
- Expansion of Our Community Web Site. Our expanding community Web site
should allow for expansion of manufacturers' catalog offerings, third
party content services in several categories,
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expanded industry training and education content, and increased content
customization and user personalization.
- Manufacturer's Resource Site. We intend to create a resource site for
each manufacturer to augment and extend the functionality of manufacturer
services offered through their corporate branded Web sites on the
BuildNet Exchange. This site will include online tools to help builders
configure complex orders to suppliers to assure the right mix of product
components and subcomponents. In addition, we will add technical
documentation, online training in product installation, and cost
estimation tools that complement the manufacturer's builder loyalty
programs.
- Manufacturers' Loyalty Programs. Purchases of manufacturers' products by
suppliers and homebuilders conducted over the BuildNet Exchange will be
recorded and verified. This transaction data will be collected by
BuildNet and then reported back to manufacturers to assist in the
administration of their loyalty and rebate programs.
UniLink E-Commerce Products and Services. Using UniLink's products and
services, residential and commercial construction suppliers and manufacturers
can automatically send and receive purchase orders, warranty claims, advance
shipping notices, and invoices. We intend to integrate UniLink's products and
services with the BuildNet Exchange and broaden its use. These UniLink products
and services primarily serve customers in the electrical, plumbing, HVAC and
appliances segments.
Builder and Supplier Management Software. We currently offer builder and
supplier management software products designed to meet the needs of local and
national homebuilders and suppliers. Homebuilders use our systems to plan and
manage projects, including the creation and update of job schedules and the
management of back-office functions such as purchasing, payables, receivables
and accounting. Three of the top five U.S. homebuilders use our builder
management software products. Our supplier management software products help
construction materials suppliers manage their back-office functions. NxTrend
currently offers only its Strategic Exchange, or SX, product line to new
customers. The SX product line and other supplier management products consist of
numerous applications for inventory management, warehouse logistics, finance and
administration, business analysis, sales, distribution, customer service and
e-commerce. Our NxTrend customers represent distributors across several
industries, including building materials, electrical supply, industrial supply,
plumbing supply, and HVAC. Three of the top ten construction suppliers, four of
the top ten electrical products distributors, and three of the top ten
wholesalers of plumbing and HVAC products use our supplier management software
products.
The following chart describes our builder and supplier management software
products:
BUILDER MANAGEMENT PRODUCT TARGET CUSTOMERS YEAR INTRODUCED
- -------------------------- ---------------- ---------------
Homebuilder (acquired from Builders building over 1,000 1998
J.D. Edwards)............... homes per year
Systems Analysis Homebuilder Builders building over 1,000 1977
(acquired from Systems homes per year
Analysis)...................
TrueLine (acquired from Builders building over 400 1970
McCosker Corporation)....... homes per year
FAST (acquired from FAST)..... Builders building between 100 1986
and 500 homes per year
TOM (acquired from Maxwell & Builders building between 50 1978
Company).................... and 200 homes per year
BuildSoft..................... Builders building between 10 1989
and 100 homes per year
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SUPPLIER MANAGEMENT PRODUCTS NUMBER OF LICENSED CUSTOMERS/USERS YEAR INTRODUCED
- ---------------------------- ---------------------------------- ---------------
Strategic Exchange (SX)
line........................ 126 (approximately 14,000 total 1999
users licensed)
Trend line.................... 293 (approximately 38,000 total 1990
users licensed)
SHIMS......................... 291 (approximately 27,000 total 1978 (this product and the
users licensed) user base were acquired by
NxTrend in 1995)
WDS-II........................ 172 (approximately 7,000 total 1989 (this product and the
users licensed) user base were acquired by
NxTrend in 1997)
We also sell other software products, including SiteTrak, a management
software product for the subcontractor segment of the homebuilding segment of
the residential construction industry, and provide consulting, education and
training services to the homebuilding industry.
STRATEGIC RELATIONSHIPS
Homebuilders, Suppliers and Manufacturers. We have established
relationships with many key homebuilders, suppliers and manufacturers through
equity investments and our warrant incentive program. We believe these strategic
relationships will encourage the rapid adoption of the BuildNet Exchange.
The following homebuilders, suppliers and manufacturers have made equity
investments in BuildNet totaling an aggregate of approximately $26 million.
STRATEGIC EQUITY INVESTMENTS
HOMEBUILDERS SUPPLIERS MANUFACTURERS
- ------------ --------- -------------
Beazer Homes Building Materials Holding Andersen Windows
D.R. Horton Corp. GE Appliances (through GE
Kaufman and Broad Home Corp. Cameron Ashley Capital Equity Investments)
Lennar Corp. Lanoga Corp. Kohler
Pulte Home Corp. Lafarge
Toll Brothers Owens-Corning
We have issued to Beazer Homes, D.R. Horton, Kaufman and Broad Home Corp.,
Lennar Corp., Pulte Home Corp. and Toll Brothers warrants to purchase shares of
our common stock that will vest based on the level of participation of each
homebuilder in the BuildNet Exchange and the volume of transactions processed
through the BuildNet Exchange. We have also issued a warrant to GE Capital
Equity Investments that will vest based upon the achievement of sales and
marketing objectives by GE Appliances.
Electronic Data Systems. We have an existing strategic relationship with
Electronic Data Systems Corporation that terminates in December 2003 under which
EDS has agreed to promote the BuildNet Exchange as the standard for the
homebuilding industry, to perform supplier implementation services for the
BuildNet Exchange and to provide other resources that we request. EDS has built
and will host our transaction hub, a key component of the BuildNet Exchange.
mortgage.com. We have a relationship with mortgage.com that terminates two
years from deployment of the services under which we have exclusive rights to
offer to homebuilders the ability to arrange mortgage loans for their homebuyers
through mortgage.com. We believe this feature will attract homebuilders to the
BuildNet Exchange as well as create an additional revenue stream for us from our
marketing services related to the program.
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SALES AND MARKETING
We plan to begin a limited rollout of the BuildNet Exchange in two cities
in the second quarter of 2000 and to expand to an additional four to six cities
thereafter in the second half of 2000. As a part of this rollout we plan to
BuildNet Enable the back office systems of six of our large strategic
homebuilders: Beazer Homes; D.R. Horton; Kaufman and Broad Home Corp.; Lennar
Corp.; Pulte Home Corp.; and Toll Brothers. Each of these builders, with the
exception of Pulte, currently uses one of our builder management software
products. These larger homebuilders are working with BuildNet to develop
specific rollout plans to conduct business over the BuildNet Exchange in
selected cities. Additionally, we plan to issue our upgraded BuildNet Enabled
software products to our existing base of homebuilder and supplier customers in
those cities and begin training them to utilize the electronic procurement
features of the BuildNet Exchange.
We intend to utilize members of our existing sales force, field engineers,
professional service personnel and technical training specialists to both
upgrade and train our existing base of homebuilders, as well as BuildNet Enable
our large strategic builders and building materials suppliers who will utilize
the BuildNet Exchange. As of March 1, our product development, sales and
marketing organization consisted of approximately 139 persons. We may also
utilize the services of EDS to assist in system integration for builders and
suppliers who are not users of our management software products if needed.
To accomplish our marketing objectives, we are leveraging our existing
customer base and engaging in marketing activities such as educational seminars,
local homebuilder and supplier conferences, speaking engagements, customer
mailings, and web site marketing. To create awareness of the BuildNet brand name
throughout the residential construction industry, we are conducting national and
regional advertising campaigns in leading industry publications and
participating in national and regional industry trade shows and conferences. We
also are conducting comprehensive public relations programs that include
establishing and maintaining relationships with key trade press, business press
and industry analysts.
TECHNOLOGY
The BuildNet Exchange technology is built on existing BuildNet-provided
builder and supplier management systems and incorporates select software
components from third party providers. The BuildNet Exchange employs open
interfaces based on extensible mark-up language software technology (XML) to
enable links to back-office systems of companies that are not users of our
builder and supplier management software products. This approach enables us to
extend into future back-office systems and the ability to expand and evolve to
meet changing business and market place requirements.
The BuildNet Exchange will include the following technology:
- BuildNet Core Services. BuildNet's core services will include network
security and access control, product data services, and transaction
services, based on distributed object design and development methods and
a scalable architecture. These services provide the core business logic
and interaction to the user interface and network transaction
capabilities to connect our BuildNet Enabled products and Internet-based
applications to include Web based services.
- Third-Party Interface. This interface, based on XML, will connect the
BuildNet Exchange into third-party back-office systems, primarily for
suppliers on the BuildNet Exchange. We are working with the primary
supplier management software vendors in the homebuilding industry to
implement this interface and plan to sell it to suppliers as a low-cost
upgrade. We also are designing the BuildNet Enabling software
enhancements and interface toolkit and plan to make it available to
customers who are not using a BuildNet Enabled software product but would
like to integrate their current back-office systems into the BuildNet
Exchange.
- Web Presentation. We plan to provide a standard browser-based
presentation of the BuildNet Exchange for delivery to customers in an
online community. We plan to provide a general platform for the
personalized creation, maintenance and delivery of industry-specific
content. We also plan to design the Web services platform to allow for
the integration of third-party Web-based applications
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and services, such as mortgage origination services. In addition, we plan
for the Web services platform to provide workflow and publishing tools
for Web site owners to manage their own content, and ensure accurate and
timely publication of changes.
The BuildNet Exchange is hosted in the EDS facilities in Plano, Texas,
which provides a world-class, secured, monitored environment with an extremely
high-bandwidth connection to major Internet backbone carriers. Through the use
of EDS's extensive capabilities, we will be able to expand our services to meet
increased customer requirements.
We intend to allow client access through any standard Internet Service
Provider or through a dedicated connection. All services will be designed to use
standard TCP/IP-based communications. We will use high-availability servers with
redundancy. We will compile daily transaction and operational data and uploaded
it into an offline database to allow for statistical analysis of traffic and
other critical business information.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on BuildNet Enabling our
existing line of homebuilder and supplier management software products,
designing and developing the BuildNet Exchange network infrastructure and
creating additional software tools that will enable homebuilders and suppliers
to connect to our online marketplace. We also intend to continue enhancing our
line of builder and supplier management software products and begin development
of next generation systems. As of March 1, 2000, we had 246 employees in our
technology group undertaking our research and development efforts. We expect our
research and development expenditures to increase substantially compared to
prior periods as we continue to develop the BuildNet Exchange, builder and
supplier management software and services for the residential construction
community.
COMPETITION
BuildNet Exchange. The principal market segments of software management
tools or online shopping models that compete with parts of our planned
e-commerce platform include the following: builder and supplier management
systems (ERP), customer relationship management systems (CRM), point of sale and
supply chain e-commerce procurement tools, catalog or product data systems, and
supplier and manufacturer online store front solutions. In addition to
competition within these various segments, established online business to
business e-commerce exchanges could introduce exchanges that would compete with
the BuildNet Exchange. Homebuilders, manufacturers and suppliers, either
individually or through joint ventures, might develop exchanges that would
compete with the BuildNet Exchange. We believe that the principal competitive
factors affecting the business-to-business e-commerce marketplace, include:
- critical mass of homebuilders, suppliers and manufacturers;
- breadth and depth of solutions;
- quality and performance of solutions offered;
- scalability and reliability of the underlying technology and
infrastructure; and
- cost-effectiveness.
Although we believe that we are well positioned to compete favorably with
respect to all the foregoing factors, this marketplace does not yet exist and is
expected to evolve rapidly. Many of the competitors in the individual segments
identified above and other potential competitors, such as established online
exchanges, are also positioned to emerge as competitors in the emerging
business-to business e-commerce marketplace.
Builders and Suppliers Management Software. The market for builder and
supplier management software solutions is intensely competitive and highly
fragmented. Competitors vary in size and in the
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quality of the products and services offered. We believe that the principal
competitive factors in this market are size of reference customer base, breadth
and depth of solution offered, product features, quality and performance, and
customer service and pricing. We believe that we compete favorably with respect
to all these factors. However, we might not be able to maintain our competitive
position against current and potential competitors in this market.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete effectively are dependent on our ability
to develop and maintain the proprietary aspects of our technology. We rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect the proprietary aspects of our technology.
We seek to protect our source code, documentation and other written materials
under trade secret and copyright laws. Finally, we seek to avoid disclosure of
our intellectual property by requiring employees and consultants with access to
our proprietary information to execute confidentiality agreements with us and by
restricting access to our source code.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business operating
results.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results would be
significantly harmed.
EMPLOYEES
As of March 1, 2000, we had 868 full-time employees, of which 246 were in
research and development, 264 were in consulting services, 139 were in sales and
marketing and 219 were in general administration. We plan to significantly
expand our employee base primarily in research and development and sales and
marketing.
PROPERTIES
Our corporate headquarters are in a leased facility comprising
approximately 42,000 square feet located in Research Triangle Park, North
Carolina. We also lease an aggregate of approximately 160,000 square feet for
our operations in Atlanta, Georgia; Buffalo Grove, Illinois; Bloomington,
Minnesota; Colorado Springs, Colorado; Cypress, California; Dallas, Texas; Green
Bay, Wisconsin; Norcross, Georgia; Redmond, Washington; Walnut Creek,
California; and Thornhill, Ontario.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings nor have we
been involved in any such proceedings that have had or may have a significant
effect on the Company's financial position. We are not aware of any material
legal proceedings threatened against us.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information concerning our executive officers
and directors as of March 1, 2000:
NAME AGE POSITION
- ---- --- --------
Keith T. Brown............................. 40 Chairman, Founder, Director
Nathan P. Morton........................... 51 Chief Executive Officer, Director
Bayard M. Atwood, III...................... 51 President, Chief Operating Officer,
Director
Peter B. Drayson........................... 52 Executive Vice President, Alliances,
Mergers and Acquisitions
Stephen L. Holcombe........................ 43 Executive Vice President, Chief Financial
Officer and Secretary
Michael J. Cornell......................... 42 Executive Vice President and President of
NxTrend
David F. Russo............................. 55 Executive Vice President, Human Resources
Steven C. Thompson......................... 41 Senior Vice President, Builder Systems
Peter Abene................................ 53 Senior Vice President and Chief Technology
Officer
Justin Hall-Tipping(1)..................... 42 Director
Joel D. Koblentz(2)........................ 55 Director
Norvell E. Miller, IV(1)................... 42 Director
William W. Neal, III(2).................... 67 Director
Jerry A. Rose.............................. 41 Director
Paul A. Ryder(1)(2)........................ 35 Director
Peter J. Smith............................. 55 Director Nominee
- ---------------
(1) Member of the audit committee
(2) Member of the compensation committee
Keith T. Brown founded BuildNet in October 1996, served as our Chief
Executive Officer through September 1999, has served as our Chairman since
September 1999 and has served as a director since inception. Mr. Brown served as
founder and chief executive officer of Sun Forest Systems, Inc., a construction
software and development marketing company and the predecessor of BuildNet, from
its inception in 1987 to October 1996. Prior to that, Mr. Brown was a general
contractor specializing in custom homes. Mr. Brown has written extensively on
the homebuilding industry and is also a well-recognized industry spokesperson.
Mr. Brown received a B.A. in Architecture and Environmental Design from North
Carolina State University. Mr. Brown serves as a director pursuant to the terms
of a voting agreement that will terminate upon the closing of this offering.
Nathan P. Morton has served as our Chief Executive Officer since September
1999, and served as our Chairman from November 1998 until September 1999. Prior
to that, Mr. Morton served as co-chairman and chief executive officer of
Computer City from July 1997 to October 1998, when the company was sold to
CompUSA, Inc. and as president and chief executive officer of Open Environment
Corp., an enterprise software company, from March 1994 to March 1996. Mr. Morton
also served as a chairman and chief executive officer of CompUSA, Inc. from May
1989 to December 1993, and as senior vice president of operations of Home Depot
from 1984 to 1989. Mr. Morton serves as a director of Consolidated Stores
Corporation and Electrosource, Inc. Mr. Morton received a B.A. from State
University in New York at
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Buffalo. Mr. Morton serves as a director pursuant to the terms of a voting
agreement that will terminate upon the closing of this offering.
Bayard M. Atwood, III has served as our President, Chief Operating Officer
and a director since May 1999. Prior to joining us, Mr. Atwood served in a
number of positions at EDS from June 1974 to April 1999. His last position at
EDS was from February 1998 to May 1999 as the chief operating officer of
Enterprise Solutions, a joint initiative between A. T. Kearney and EDS. In 1989,
Mr. Atwood was promoted by EDS to serve as president of its Advanced Technology
strategic business unit. He served in similar capacities in several other units
until his departure in April 1999. Mr. Atwood holds a B.A. and an M.A. in
Mathematics from Arizona State University. Mr. Atwood serves as a director
pursuant to the terms of a voting agreement that will terminate upon the closing
of this offering.
Peter B. Drayson has served as our Executive Vice President, Alliances,
Mergers and Acquisitions since August 1999. Prior to joining us, Mr. Drayson
served as president and chief executive officer of Reuters Marketing
Information, a division of Reuters, from 1996 to August 1999, where he also
served as managing director of global customers during 1995 and 1996 and
marketing manager of money and capital markets during 1990 to 1995. Mr. Drayson
has also served as a financial advisor for Sanford Bernstein & Company and in
various capacities for International City Holdings over a ten-year period, most
recently as president and chief executive officer of its subsidiary, MKI
Securities Corporation. Mr. Drayson also served as a broker for the Exco Group.
Mr. Drayson received a B.S. in Economics and an M.B.A. from New York University.
Stephen L. Holcombe has served as our Executive Vice President and Chief
Financial Officer since September 1999 and Secretary since March 2000. Prior to
joining us, from 1985 to August 1999, Mr. Holcombe served as an executive vice
president and chief financial officer of Vanguard Cellular Systems, Inc., one of
the largest independent operators of cellular telephone systems in the United
States, where he was responsible for all aspects of the development, financing
and operations of the company. From 1978 to 1985 he served in various positions
with KPMG Peat Marwick, most recently as senior audit manager. Mr. Holcombe
holds a B.S. in Accounting from Wake Forest University.
Michael J. Cornell has served as President and Chief Executive Officer of
NxTrend Technology, Inc., since August 1998. Upon completion of the acquisition
of NxTrend by BuildNet, Mr. Cornell will continue as President of NxTrend and
will also serve as Executive Vice President of BuildNet. From 1993 to 1998, Mr.
Cornell worked for JBA International, advancing from General Manager to
President, North American Operations to President, Americas. Before JBA, Mr.
Cornell was employed by Cimage Corporation in various sales management roles,
including Director of Sales. Mr. Cornell received his B.A. degree from Michigan
State University.
David F. Russo has served as our Executive Vice President, Human Resources
since December 1999. Prior to joining us, Mr. Russo served as the vice president
of human resources of SAS Institute, Inc., from September 1981 to November 1999,
where he was the top level executive in the human resources department. Mr.
Russo received a B.A. in Pre-Law from Duquesne University and a Masters in
Communications from the University of Pittsburgh.
Steven C. Thompson has served us in several capacities since BuildNet's
inception in October 1996, first as Chief Financial Officer from October 1996 to
August 1999, Chief Operating Officer from March 1997 to April 1999, and
currently as Senior Vice President, Builder Systems since August 1999. Prior to
such time, Mr. Thompson served as chief financial officer of Sun Forest Systems,
Inc., predecessor to BuildNet, from March 1996 until October 1996 and as
president and chief executive officer of SMT Inc., a custom manufacturing
company, from July 1995 to February 1996, where he also served as vice president
and chief financial officer from November 1988 to July 1995. From 1981 through
1988 he served in various positions with Touche Ross & Co., now Deloitte &
Touche, most recently as senior audit manager. Mr. Thompson received a B.S. in
Business Administration from the University of North Carolina at Chapel Hill.
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Peter Abene has served as our Senior Vice President and Chief Technology
Officer since September 1999. Prior to that time from February 1986 to September
1999, Mr. Abene served in various positions at Electronic Data Systems, Inc.,
most recently as division vice president for communications and computing for
the Xerox account. Mr. Abene received a B.S. in Industrial Engineering from
North Carolina State University and a M.S. in Electrical Engineering and
Telecommunications from the University of Colorado at Boulder.
Justin Hall-Tipping has served as our director since July 1999. He
currently serves as a managing director of SG Capital Partners LLC, where he has
held such position since August 1998. Mr. Hall-Tipping also currently serves as
a director of the merchant banking group of SG Cowen Securities, formerly
Societe Generale Capital Corporation, where he has held such position since July
1997. Prior to joining SG Capital Partners, Mr. Hall-Tipping served as director
of Data Intelligence Group for Reuters from June 1995 to July 1997 and as chief
executive officer of HeartBeat Corp., a multimedia software company, from 1992
to 1995. Mr. Hall-Tipping has also been a partner in NEPA Venture Fund, which
specializes in start-up and early stage companies, and a vice president of
Capital Commitment in Credit Suisse First Boston's proprietary trading area. Mr.
Hall-Tipping received a B.Sc. with honors in International Finance and Banking
from City University, London and an M.B.A. from Harvard University. Mr.
Hall-Tipping serves as a director at the designation of SG Capital Partners
pursuant to the terms of a voting agreement that will terminate upon the closing
of this offering.
Joel D. Koblentz has served as our director since March 2000. Mr. Koblentz
currently serves as the managing member of Barnard & Co., LLC, a private equity
firm. Mr. Koblentz also serves as a director of various private companies. Mr.
Koblentz holds a B.A. from the University of Michigan and an M.B.A. and M.A. in
Economics from Columbia University. Mr. Koblentz serves as a director pursuant
to the terms of a voting agreement that will terminate upon the closing of this
offering.
Norvell E. Miller, IV has served as our director since August 1998. He
currently serves as a managing director of Southeast Interactive Technology Fund
I, LLC, Southeast Interactive Technology Fund II, LLC and Southeast Interactive
Technology Fund III, LLC, North Carolina-based venture capital firms, where he
has held such position since 1998. Mr. Miller also currently serves as president
of EMS Financial, Inc., where he has held such position since 1981. Mr. Miller
served as co-founder and chief executive officer of Dental Care Partners from
1990 to 1995 and co-founded the Mobius Group in 1989. From 1986 to 1988, Mr.
Miller served as senior vice president of McMillan/Eubanks, Inc. Mr. Miller was
also the founding director of investments for the University of North Carolina
from 1980 to 1986. He also currently serves as a director of several privately
held companies. Mr. Miller is a chartered financial analyst and received an
M.B.A. and B.A. with honors from Duke University. Mr. Miller serves as a
director at the designation of Southeast Interactive Technology Fund pursuant to
the terms of a voting agreement that will terminate upon the closing of this
offering.
William W. Neal, III has served as our director since August 1998. He
currently serves as managing principal of Piedmont Venture Partners Limited
Partnership where he has held such position since July 1996. Prior to joining
Piedmont Venture Partners, Mr. Neal served as president, chief executive officer
and later chairman of Broadway & Seymour, a provider of information technology
solutions to the financial services industry, from July 1989 until July 1996.
Mr. Neal has also served as a general partner with the New York venture capital
and buyout firm of Welsh Carson Anderson & Stowe. Mr. Neal currently serves on
the board of directors of Health Management Systems, Inc., as well as privately
held portfolio companies of Piedmont Venture Partners. Mr. Neal received his
A.B. in Business Administration from Duke University in 1954. Mr. Neal serves as
a director at the designation of Southeast Interactive Technology Fund, GE
Capital Equity Investments and SG Capital Partners pursuant to the terms of a
voting agreement that will terminate upon the closing of this offering.
Jerry A. Rose has served as our director since March 2000. Mr. Rose
currently serves as the general manager of home product services of GE
Appliances, an operating unit of GE, a position he has held since January 1999.
Prior to assuming his current position, Mr. Rose served GE Appliances as the
general manager of sales development from January 1998 to December 1999, the
general manager of product
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management from July 1997 to January 1998 and a marketing manager from June 1995
to June 1997. Mr. Rose received a B.S. degree from Brigham Young University. Mr.
Rose serves as a director at the designation of GE Capital Equity Investments
pursuant to the terms of a voting agreement that will terminate upon the closing
of this offering.
Paul A. Ryder has served as a director since July 1999. Since October 1999,
he has served as managing director, market development, of GE Capital
E-Business. From May 1999 until October 1999, he served as the general manager
for e-commerce of the GE Appliances. From November 1997 to May 1999, Mr. Ryder
served as president of GE Warranty Management, Inc., and from November 1994 to
October 1997 he served as the director of product management, sourcing and
industrial design, each within the GE Appliances Europe Division of General
Electric. Mr. Ryder has served in various other capacities for General Electric
since June 1989. Mr. Ryder received a B.S.M.E. from Worcester Polytechnic
Institute and an M.B.A. from Purdue University.
Peter J. Smith will serve as our director upon the completion of BuildNet's
acquisition of NxTrend. Mr. Smith currently serves as a director of NxTrend. He
has served as chairman of Ansys, Inc., a provider of computer-aided design
analysis software, since June 1995, where he also served as president from March
1994 to March 1999, and chief executive officer from March 1994 to February
2000. Mr. Smith is also a partner in NewcoGen Group, a management firm for early
stage technology companies, and a director of the Pittsburgh Technology Council.
Prior to joining Ansys, Mr. Smith was vice president of European operations for
Digital Equipment Corporation from November 1991 to March 1994. Previously, he
managed Digital's worldwide applications development and marketing activities,
including its engineering systems group. Mr. Smith received his B.S. in
electrical engineering from Northeastern University and an M.B.A. from the
University of Notre Dame. Mr. Smith will serve as a director at the designation
of the former shareholders of NxTrend pursuant to the terms of the merger
agreement. The BuildNet board of directors has an obligation to recommend to
BuildNet's stockholders the election of the former NxTrend stockholders'
director designee so long as the former NxTrend stockholders hold at least 7.5%
of BuildNet's outstanding common stock.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors is currently composed of ten members. Each director
holds office until the next annual meeting of the stockholders or until his
successor is duly elected and qualified. Our certificate of incorporation and
bylaws will provide that, beginning with the first meeting of the board of
directors following this offering, the board of directors will be divided into
three classes as nearly equal as possible, with each class serving staggered,
three-year terms. Our bylaws will provide that directors can be removed only for
cause by holders of at least 66 2/3% of our common stock. Officers are chosen
by, and serve at the discretion of, the board of directors.
The board of directors has created a compensation committee and an audit
committee. The compensation committee makes recommendations to the board of
directors concerning salaries and incentive compensation for our officers and
employees and administers our stock option plans. The members of the
compensation committee are Messrs. Neal, Koblentz and Ryder. The audit committee
makes recommendations to the board of directors regarding the selection of
independent auditors, reviews the results and scope of audits and other
accounting-related services and reviews and evaluates our internal control
functions. The members of the audit committee are Messrs. Miller and Ryder.
DIRECTOR COMPENSATION
Our directors do not receive any compensation for services they provide as
directors. We reimburse travel expenses for attendance at our board meetings.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our bylaws provide for mandatory indemnification of directors and officers
to the fullest extent permitted by Delaware law. Prior to consummation of this
offering, we intend to obtain additional
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directors' and officers' liability insurance and expect to enter into
indemnification agreements with all of our directors and executive officers. In
addition, our certificate of incorporation limits the liability of our directors
to us or our stockholders for breaches of the directors' fiduciary duties to the
fullest extent permitted by Delaware law.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee consists of Messrs. Neal, Koblentz and Ryder. No
member of the compensation committee serves as our officer or employee. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or its compensation
committee.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
the compensation received for services rendered to us by the chief executive
officers who served in 1999 and each of our four other most highly compensated
executive officers for 1999, whose total compensation in 1999 equaled or
exceeded $100,000:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------- SECURITIES
SALARY BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION $ $ OPTIONS COMPENSATION($)
- --------------------------- -------- -------- ------------ ----------------
Nathan P. Morton, Chief Executive
Officer(1).................................. $316,667 $ 0 8,000,000 $16,700
Keith T. Brown, Chairman, Former Chief
Executive Officer(2)........................ 159,041 100,000 0 0
Charles M. Cosby, Vice Chairman(3)............ 163,159 30,000 0 0
Bayard M. Atwood, III, President, Chief
Operating Officer(4)........................ 214,443 0 5,000,000 14,443
Peter B. Drayson, Executive Vice President,
Alliances, Mergers and Acquisitions(5)...... 101,154 0 3,300,000 0
Steven C. Thompson, Senior Vice President,
Builder Systems(6).......................... 143,750 50,000 600,000 0
- ---------------
(1) Mr. Morton received salary at a rate of $200,000 annually from January until
June 1999 when his salary was increased to $400,000 annually upon his
relocation to the Research Triangle Park, North Carolina area. In 1999, Mr.
Morton received option grants to purchase 8,000,000 shares of common stock
and $16,700 in relocation expenses.
(2) In September 1999, Mr. Brown was appointed chairman of BuildNet, and he
receives an annual salary of $175,000.
(3) Through May 1999, Mr. Cosby received salary as president and chief executive
officer of The F.A.S.T. Management Group, Inc. In May 1999, Mr. Cosby was
appointed vice chairman of BuildNet. He resigned as vice chairman in March
2000.
(4) In April 1999, Mr. Atwood was appointed president and chief operating
officer and receives an annual salary of $300,000. In 1999, Mr. Atwood
received option grants to purchase 5,000,000 shares of common stock and
$14,443 in relocation expenses.
(5) In August 1999 Mr. Drayson was appointed executive vice president and
receives an annual salary of $300,000. In 1999, Mr. Drayson received option
grants to purchase 3,300,000 shares of common stock.
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(6) Through July 1999, Mr. Thompson received salary as chief financial officer
and chief operating officer of BuildNet. As of August 1999, Mr. Thompson was
appointed senior vice president and receives an annual salary of $150,000.
In 1999, Mr. Thompson received an option grant to purchase 600,000 shares of
common stock.
The following table sets forth information as to options granted to the
named executive officers during 1999. We have not granted any stock appreciation
rights.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(1)
OPTIONS IN FISCAL PRICE PER EXPIRATION -----------------------------
NAME GRANTED YEAR(2) SHARE($) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ------------ -------------
Nathan P. Morton........... 5,000,000 18.73% $0.055 11/1/08 $ 172,946 $ 438,279
3,000,000 11.24 1.400 12/30/09 2,641,357 6,693,718
Keith T. Brown............. -- -- -- -- -- --
Charles M. Cosby(3)........ -- -- -- -- -- --
Bayard M. Atwood, III...... 3,300,000 12.36 0.055 4/2/09 114,144 289,264
1,700,000 6.37 1.400 12/30/09 1,496,769 3,793,107
Peter B. Drayson........... 2,000,000 7.49 0.055 9/7/09 69,178 175,312
1,300,000 4.87 1.400 12/30/09 1,144,588 2,900,611
Steven C. Thompson......... 600,000 2.25 0.055 8/31/09 20,754 52,594
- ---------------
(1) Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the option term. The 5% and 10% assumed annual rates of compounded
stock price appreciation are mandated by rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
future common stock prices. These amounts represent certain assumed rates of
appreciation in the value of the common stock from the fair market value on
the date of grant. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock and overall stock
market conditions. The amounts reflected in the table may not necessarily be
achieved.
(2) Based on options to purchase an aggregate of 26,696,200 shares of common
stock granted to our employees during 1999.
(3) Mr. Cosby resigned as vice chairman in March 2000.
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The following table sets forth information concerning the shares acquired
and the value realized upon the exercise of stock options for 1999 and the
fiscal year-end number and value of unexercised options with respect to the
named executive officers. We have not granted any stock appreciation rights.
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT DECEMBER 31, 1999(3) AT DECEMBER 31, 1999
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#)(1) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------- -------- ----------- ------------- ----------- -------------
Nathan P. Morton.............. 5,000,000 $ 3,000,000 -- --
Keith T. Brown................ -- -- -- -- --
Charles M. Cosby(4)........... -- -- -- -- --
Bayard M. Atwood, III......... 3,300,000 1,700,000 -- --
Peter B. Drayson.............. 2,000,000 1,300,000 -- --
Steven C. Thompson............ 600,000 000 -- --
- ---------------
(1) The acquired shares include vested and unvested shares as not all options
exercised had vested. Unvested shares are subject to repurchase by BuildNet
at the original exercise price paid per share upon certain conditions prior
to vesting of such shares. As of March 1, 2000, the repurchase right had
lapsed with respect to shares acquired during 1999 as follows: 1,666,667
shares for Mr. Morton, 756,250 shares for Mr. Atwood, 250,000 shares for Mr.
Drayson, and 260,000 shares for Mr. Thompson.
(2) There was no public trading market for the common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of an
assumed offering price of $ per share, less the applicable exercise
price per share, multiplied by the number of shares underlying such options.
(3) Exercisable shares include options to purchase common stock that upon
exercise would be subject to a right of repurchase by BuildNet.
(4) Mr. Cosby resigned as vice chairman in March 2000.
EMPLOYMENT AGREEMENTS
In April 1999, we entered into a five-year employment agreement with Bayard
M. Atwood, III at an annual base salary of $300,000 per year with possible
yearly bonuses awarded at the discretion of our board of directors. Mr. Atwood
is entitled to a seat on the board of directors so long as he remains employed
by us. In addition, we granted Mr. Atwood a stock option to purchase up to an
aggregate of 3,300,000 shares of common stock with an exercise price equal to
the then-current fair market value at the time of the grant. The options vest in
monthly installments over four years, with full acceleration in vesting upon a
change in control of BuildNet. The option grant provides that options for
unvested shares can be exercised subject to repurchase rights that expire in
accordance with the vesting schedule. Mr. Atwood is subject to customary
confidentiality, noncompetition and nonsolicitation provisions during his
employment and for two years after termination of his employment for any reason.
In May 1999, we entered into a four-year employment agreement with Nathan
P. Morton at an annual base salary of $400,000 per year with possible yearly
bonuses awarded at the discretion of our board of directors. The term of the
agreement is automatically extended for successive one-year periods unless
either party gives notice of non-renewal 90 days prior to the beginning of such
renewal term. In addition, we granted Mr. Morton a stock option to purchase up
to an aggregate of 5,000,000 shares of common stock with an exercise price equal
to the then-current fair market value at the time of the grant. The options vest
in monthly installments over four years, with full acceleration in vesting upon
a change in control of BuildNet or upon termination of employment without cause.
The option grant provides that options for unvested shares can be exercised
subject to repurchase rights that expire in accordance with
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the vesting schedule. If Mr. Morton is terminated without cause, we will provide
him salary, bonus and benefits for the remainder of the term of employment. Mr.
Morton is subject to customary confidentiality, noncompetition and
nonsolicitation provisions during his employment and for two years after
termination of his employment for any reason.
In May 1999, we entered into a one-year employment agreement with Keith T.
Brown at an annual base salary of $175,000 per year with possible bonuses of up
to $50,000 per year awarded at the discretion of our board of directors. The
term of the agreement is automatically extended for successive one-year periods
unless either party gives notice of non-renewal 90 days prior to the beginning
of such renewal term. If Mr. Brown is terminated without cause, we will provide
him salary for a period from the effective date of such termination for six
months. Mr. Brown is subject to customary confidentiality, noncompetition and
nonsolicitation provisions during his employment and for six months after
termination of his employment for any reason.
In May 1999, we entered into a one-year employment agreement with Charles
M. Cosby at an annual base salary of $150,000 per year, including a signing
bonus of $65,000, with possible additional yearly bonuses awarded at the
discretion of our board of directors. The term of the agreement may be
automatically extended for successive one-year periods unless either party gives
notice of non-renewal 90 days prior to the beginning of such renewal term. If
Mr. Cosby is terminated without "cause" as defined in the agreement, we will
provide him salary for a period from the effective date of such termination for
six months. Mr. Cosby is subject to customary confidentiality, noncompetition
and nonsolicitation provisions during his employment and for six months after
termination of his employment for any reason so long as he is still paid a
salary by us in accordance with the termination provisions.
In August 1999, we entered into a four-year employment agreement with Peter
B. Drayson at an annual base salary of $300,000 per year with possible yearly
bonuses awarded at the discretion of our board of directors. The term of the
agreement is automatically extended for successive one-year periods unless
either party gives notice of non-renewal 90 days prior to the beginning of such
renewal term. In addition, we granted Mr. Drayson a stock option to purchase up
to 2,000,000 shares of common stock with an exercise price of the then-current
fair market value at the time of the grant. The options vest in monthly
installments over four years, with full acceleration in vesting upon a change in
control of BuildNet or upon termination of employment without cause. The option
grant provides that options for unvested shares can be exercised subject to
repurchase rights that expire in accordance with the vesting schedule. If Mr.
Drayson is terminated without cause, we will provide him salary, bonus and
benefits for the remainder of the term of employment. Mr. Drayson is subject to
customary confidentiality, noncompetition and nonsolicitation provisions during
his employment and for two years after termination of his employment for any
reason.
In August 1999, we entered into a one-year employment agreement with Steven
C. Thompson at an annual base salary of $150,000 per year with possible yearly
bonuses awarded at the discretion of our board of directors. The term of the
agreement is automatically extended for successive one-year periods unless
either party gives notice of non-renewal to the other. In addition, we granted
Mr. Thompson a stock option to purchase up to 600,000 shares of common stock
with an exercise price of the then-current fair market value at the time of the
grant. Options for 120,000 shares were immediately exercisable and options for
the remaining 480,000 shares vest in monthly installments over two years, with
full acceleration in vesting upon a change in control of BuildNet and one-half
of the unvested shares vesting upon termination of employment without cause. The
option grant provides that options for unvested shares can be exercised subject
to repurchase rights that expire in accordance with the vesting schedule. If Mr.
Thompson is terminated without cause, we will provide him salary, bonus and
benefits for the greater of the remainder of the term of employment or six
months. Mr. Thompson is subject to customary confidentiality, noncompetition and
nonsolicitation provisions during his employment and for one year after
termination of his employment for any reason.
In September 1999, we entered into a four-year employment agreement with
Stephen L. Holcombe at an annual base salary of $200,000 per year with possible
yearly bonuses awarded at the discretion of our
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board of directors. The term of the agreement is automatically extended for
successive one-year periods unless either party gives notice of non-renewal 90
days prior to the beginning of such renewal term. In addition, we granted Mr.
Holcombe a stock option to purchase up to 1,440,000 shares of common stock with
an exercise price of the then-current fair market value at the time of the
grant. The options vest in monthly installments over four years, with full
acceleration in vesting upon a change in control of BuildNet or upon termination
of employment without cause. The option grant provides that options for unvested
shares can be exercised subject to repurchase rights that expire in accordance
with the vesting schedule. If Mr. Holcombe is terminated without cause, we will
pay him an amount equal to one half his annual salary, unless he is terminated
without cause upon a sale or merger of BuildNet, in which case we will pay him
an amount equal to his annual salary for the remainder of the term of
employment. Mr. Holcombe is subject to customary confidentiality, noncompetition
and nonsolicitation provisions during his employment and for two years after
termination of his employment for any reason.
In September 1999, we entered into a three-year employment agreement with
David F. Russo commencing on December 1, 1999, at an annual base salary of
$190,000 per year, including a $50,000 bonus payable on December 31, 2000
provided that the chairman of our board of directors and Mr. Russo mutually
determine that certain agreed-upon performance criteria have been met by Mr.
Russo as of such date, with possible yearly bonuses awarded at the discretion of
our board of directors. In addition, we granted Mr. Russo a stock option to
purchase up to 1,000,000 shares of common stock with an exercise price of the
then-current fair market value at the time of the grant. The options vest in
monthly installments over four years, with full acceleration in vesting upon a
change in control of Buildnet. The option grant provides that options for
unvested shares can be exercised subject to repurchase rights that expire in
accordance with the vesting schedule. If Mr. Russo is terminated without cause,
we will provide him salary, bonus and benefits for the remainder of the term of
employment. Mr. Russo is subject to customary confidentiality, noncompetition
and nonsolicitation provisions during his employment and for two years after
termination of his employment for any reason.
In March 2000, conditioned upon closing of the NxTrend merger, we entered
into a three-year employment agreement with Michael J. Cornell at an annual base
salary of $300,000 per year with possible yearly bonuses awarded at the
discretion of our board of directors. In addition, we granted Mr. Cornell a
stock option to purchase up to an aggregate of 1,000,000 shares of common stock
at an exercise price equal to $2.50 per share. One quarter of the options vest
at the start of the term of employment with the remainder vesting in monthly
installments over three years, with full acceleration in vesting upon
termination of employment without cause in connection with a change in control
of BuildNet. Mr. Cornell is subject to customary confidentiality, noncompetition
and nonsolicitation provisions during his employment and for two years after
termination of his employment for any reason.
STOCK OPTION PLANS
BuildNet, Inc. 1997 Stock Plan and 1999 Stock Plan
Our 1997 stock plan was adopted by the board of directors in October 1997.
A total of 2,243,560 shares of common stock have been reserved for issuance
under the 1997 stock plan. Through March 1, 2000, outstanding options to
purchase 994,840 shares of common stock with a weighted average exercise price
of $0.005 were outstanding under the plan, and 1,248,720 shares had been issued
under the plan at an average exercise price of $0.005 per share. No additional
grants shall be made under the 1997 stock plan, and it will terminate in October
2007, unless sooner terminated by the board of directors.
Our 1999 stock plan was adopted by the board of directors and stockholders
in May 1999. A total of 55,000,000 shares of common stock have been reserved for
issuance under the 1999 stock plan. Through March 1, 2000, outstanding options
to purchase 12,346,940 shares of common stock with a weighted average exercise
price of $1.00 were outstanding under the plan, and 14,527,160 shares had been
issued under the plan at an average exercise price of $0.16 per share. The 1999
stock plan will terminate in May 2009, unless sooner terminated by the board of
directors.
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Each of the 1997 and 1999 stock plans provide for grants of "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees (including officers and employee directors) and
grants of nonstatutory options to directors, employees, consultants and
customers. They also allow for the grant of bonus awards of stock and stock
purchase rights to directors, employees, consultants and customers. Each plan is
administered by the compensation committee or by the board of directors. The
exercise price of incentive stock options granted under the stock plans must not
be less than the fair market value of the common stock on the date of grant.
With respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option must be equal to at least 110% of the fair market
value of the common stock on the date of grant, and the term of the option must
not exceed five years. The terms of all other options may not exceed ten years.
The aggregate fair market value of common stock (determined as of the date of
the option grant) for which incentive stock options may for the first time
become exercisable by any individual in any calendar year may not exceed
$100,000.
The board of directors may amend or terminate the plans at any time, except
that stockholder approval may be required for such amendment or termination. No
amendment or termination may adversely affect the rights, with respect to
previous grants, of any optionee without his or her consent. The board of
directors may also select the consultants and employees to whom options or stock
purchase rights may be granted as well as the number of shares of common stock
covered by each award and the terms and conditions, including any vesting
schedule, for each award. The board of directors may accelerate the vesting or
exercisability of any option or stock purchase rights issued under the plans.
In the event of any change in our outstanding common stock by reason of
stock split, reverse stock split or stock dividend of common stock, or any other
increase or decrease in the number of issued shares effected without receipt of
consideration, the plans provide for the proportionate increase or decrease in
the number of shares of our common stock authorized for issuance under the plans
and covered by each outstanding option or stock purchase right, and adjustment
in the purchase price (if any) per share to reflect such subdivision,
combination or stock dividend. In the event of the acquisition of BuildNet by
another entity pursuant to a consolidation, merger or sale of BuildNet's assets,
unless otherwise provided by our board of directors, the board of directors of
the successor entity shall make appropriate and equitable adjustment for the
continuation of options granted pursuant to the plans.
The FAST 1997 Stock Option Plan
The FAST 1997 stock option plan was adopted by the board of directors of
FAST in May 1997. The plan was assumed by us upon the acquisition of FAST in May
1999. A total of 1,230,038 shares of our common stock have been reserved for
issuance under the plan. Through March 1, 2000, outstanding options to purchase
596,602 shares of common stock with a weighted average exercise price of $0.19
were outstanding under the plan, and 633,436 shares had been issued under the
plan at an average exercise price of $0.19 per share. Pursuant to the terms of
the agreement by which we acquired FAST, no additional grants shall be made
under the plan, and it will terminate in May 2007, unless sooner terminated by
the board of directors.
The board of directors may amend or terminate the plan at any time, except
that stockholder approval may be required for such amendment or termination. No
amendment or termination may adversely affect the rights, with respect to
previous grants, of any optionee without his or her consent. The board of
directors may also select the employees, officers, independent contractors and
directors to whom options may be granted as well as the number of shares of
common stock covered by each award and the terms and conditions for each award.
In the event of any change in our outstanding common stock by reason of
stock split, reverse stock split or stock dividend of common stock, or any other
increase or decrease in the number of issued shares effected without receipt of
consideration, the plan provides for the proportionate increase or decrease in
the number of shares of our common stock authorized for issuance under the plan
and covered by each outstanding option or stock purchase right, and adjustment
in the purchase price (if any) per share to
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reflect such subdivision, combination or stock dividend. In the event of the
acquisition of BuildNet by another entity pursuant to a consolidation, merger,
reorganization or sale of BuildNet's assets (other than a merger in which the
holders of BuildNet common stock hold the same proportionate ownership
immediately after the merger, or a reincorporation or the creation of a holding
company), any option granted under the plan shall terminate. If the stockholders
of BuildNet receive capital stock of another corporation in any transaction
involving a merger, all options granted under the plan shall be converted into
such shares of capital stock of the acquiring corporation unless otherwise
determined by the board of directors. In the event of a "change in control" as
defined in the plan, unless otherwise determined by the board of directors prior
to the occurrence of such change in control, any unvested options shall become
immediately exercisable in full.
NxTrend 1999 Amended and Restated Equity Incentive Plan
The NxTrend 1999 amended and restated equity incentive plan was adopted by
the board of directors of NxTrend in October 1999. The plan will be assumed by
us upon completion of the acquisition of NxTrend. A total of 5,336,981 shares of
our common stock will be reserved for issuance under the plan upon our adoption
of the plan. Through March 1, 2000, outstanding options to purchase 5,336,981
shares of common stock with a weighted average exercise price of $0.78 were
outstanding under the plan. Pursuant to the agreement by which we acquired
NxTrend, no additional grants shall be made under the plan, and it will
terminate in October 2009, unless sooner terminated by the board of directors.
The board of directors may amend or terminate the plan at any time, except
that stockholder approval may be required for such amendment or termination. No
amendment or termination may adversely affect the rights, with respect to
previous grants, of any optionee without his or her consent. The board of
directors may also select the consultants and employees to whom options or stock
purchase rights may be granted as well as the number of shares of common stock
covered by each award and the terms and conditions, including any vesting
schedule, for each award. The board of directors may accelerate the vesting or
exercisability of any option or stock purchase rights issued under the plans.
In the event of any change in our outstanding common stock by reason of
stock split, reverse stock split or stock dividend of common stock, or any other
increase or decrease in the number of issued shares effected without receipt of
consideration, the plan provides for the proportionate increase or decrease in
the number of shares of our common stock authorized for issuance under the plan
and covered by each outstanding option or stock purchase right, and adjustment
in the purchase price (if any) per share to reflect such subdivision,
combination or stock dividend. In the event of the acquisition of BuildNet by
another entity pursuant to a consolidation, merger, sale of BuildNet's assets or
other change in control, unless otherwise provided by our board of directors,
the board of directors of the successor entity shall make appropriate and
equitable adjustment for the continuation of options and other stock purchase
rights granted pursuant to the plan. In the event the successor entity refuses
to assume or continue the options and other stock purchase rights granted
pursuant to the plan, then for each current director, employee and consultant,
such options and stock purchase rights held by them shall be accelerated such
that they are fully vested subject to the occurrence of such acquisition. The
options and stock purchase rights held by directors, employees and consultants
shall accelerate and become fully vested if such director, employee or
consultant is terminated without cause or constructively terminated by BuildNet
prior to the acquisition at the request of the successor entity or, within 18
months of such acquisition, such director, officer or consultant is terminated
without cause or resigns as a result of his or her constructive termination by
the successor entity.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sale of Series A Preferred Stock
In October 1997, we issued an aggregate of 116,840 shares of our Series A
preferred stock, at a purchase price of $.8745 per share, to Southeast
Interactive Technology Fund II LLC, a principal stockholder of BuildNet, for an
aggregate purchase price of $102,176. Norvell E. Miller, IV, a director of
BuildNet, is a managing director of Southeast Interactive Technology Fund II
LLC.
Bridge Financings
We have borrowed money from and issued warrants to purchase shares of our
capital stock to the related parties listed in the table below. All these loans
bore interest at 9 1/2% per year, and were converted into 2,700,877 shares of
our Series B preferred stock in May 1999, at a conversion price of $0.51835 per
share, except the loans to Messrs. Brown and Pinto, which were repaid at that
time.
PRINCIPAL PER SHARE
AMOUNT WARRANT WARRANT EXERCISE
DATE NAME, RELATIONSHIP BORROWED SECURITY SHARES PRICE
- ---- ------------------ --------- ------------------ ------- ---------
10/98 Keith T. Brown, a director, officer and
principal stockholder................ $ 60,000 Series B preferred 17,360 $0.51835
stock
Francis J. Pinto, a former director.... $304,128 Series B preferred 88,020 $0.51835
stock
11/98 Southeast Interactive Technology Fund
II LLC, a principal stockholder...... $250,000 common stock 482,280 $0.00050
12/98 Southeast Interactive Technology Fund
II LLC, a principal stockholder...... $250,000 common stock 482,280 $0.00050
4/99 Southeast Interactive Technology Fund
II LLC, a principal stockholder...... $500,000 common stock 270,000 $0.00050
5/99 Southeast Interactive Technology Fund
II LLC, a principal stockholder...... $400,000 common stock 216,000 $0.00050
In November 1999, Southeast Interactive Technology Fund II LLC exercised
its warrant to purchase 216,000 shares of common stock for an aggregate exercise
price of $108.
Sale of Series B Preferred Stock
In May 1999, we issued 33,631,320 shares of our Series B preferred stock,
at a purchase price of $0.51835 per share, to a group of private investors in
the first closing of a private placement for an aggregate purchase price of
$17,432,795. In September 1999, we issued an additional 15,433,480 shares of
Series B preferred stock in a second closing, at a purchase price of $0.51835
per share, for an aggregate purchase price of $7,999,944, and in December 1999,
we issued an additional 19,967,120 shares of Series B preferred stock in a third
closing, at a purchase price of $0.51835 per share, for an aggregate
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purchase price of $10,349,957. Purchasers of Series B preferred stock included
the following related parties:
FIRST SECOND THIRD
CLOSING CLOSING CLOSING AGGREGATE
NUMBER OF NUMBER OF NUMBER OF PURCHASE
NAME, RELATIONSHIP SHARES SHARES SHARES PRICE
- ------------------ --------- --------- --------- -----------
Covestco-Seteura, LLC, a principal stockholder.... 1,556,520 1,003,520 1,298,320 $ 1,999,981
GE Capital Equity Investments, Inc., a principal
stockholder..................................... 9,339,160 6,021,220 7,789,960 $11,999,979
SGC Partners II LLC, a principal stockholder...... 5,836,960 3,763,260 4,868,720 $ 7,499,975
Southeast Interactive Technology Fund II LLC and
affiliated funds, a principal stockholder....... 3,080,380 2,136,680 2,764,320 $ 4,137,148
At the time of the transaction, Mr. Miller, a director of BuildNet, was a
managing director of Southeast Interactive Technology Fund II and affiliated
funds and Mr. Hall-Tipping, a director of BuildNet, was managing director of SGC
Partners II LLC. In addition, in connection with this financing, GE Capital
Equity Investments obtained the right to appoint two members of the board of
directors and SGC Partners obtained the right to appoint one member of the board
of directors.
Series B Preferred Stock Warrant Issuance
In May 1999, we issued a warrant exercisable for an aggregate 5,426,380
shares of Series B preferred stock, at an exercise price of $0.51835 per share,
to GE Capital Equity Investments, a principal stockholder. This warrant becomes
exercisable upon the achievement of sales and marketing objectives by GE
Appliances.
Acquisition of The F.A.S.T Management Group
In May 1999, we acquired The F.A.S.T. Management Group, Inc. and issued to
the shareholders of FAST an aggregate 19,711,780 shares of our common stock.
Sale of Series C Preferred Stock
From October to December 1999, we issued an aggregate 24,322,619 shares of
our Series C preferred stock, at a purchase price of $4.40 per share, to a group
of private investors in a private placement for an aggregate purchase price of
$107,019,800. Purchasers of our Series C preferred stock included the following
related parties:
AGGREGATE
NUMBER OF PURCHASE
NAME, RELATIONSHIP SHARES PRICE
- ------------------ --------- ----------
Covestco-Seteura, LLC, a principal stockholder.............. 681,818 $2,999,999
SGC Partners II LLC, a principal stockholder................ 1,136,363 $4,999,997
Southeast Interactive Technology Fund II LLC and affiliated
funds, a principal stockholder............................ 227,272 $ 999,997
Acquisition of NxTrend Technology, Inc.
We will issue to the stockholders and optionholders of NxTrend an aggregate
25,954,659 shares and options to purchase shares of our common stock pursuant to
an agreement and plan of merger entered into in February 2000. As a result of
this transaction, the BuildNet board of directors has an obligation to recommend
to BuildNet's stockholders the election of the former NxTrend stockholders'
director designee so long as the former stockholders hold at least 7.5% of
BuildNet's outstanding common stock. We expect Peter J. Smith to be that
director designee.
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Loans to Officers
We have loaned money to certain of our officers in order to fund their
exercise of options to purchase shares of our common stock as described in the
table below. The loans bear interest at approximately 6% per year and are
payable in five years. We have the right to repurchase an officer's shares upon
his termination, which right lapses over the original vesting schedule of the
underlying option.
PRINCIPAL
DATE OF AMOUNT SHARES
NAME OF OFFICER LOAN LOANED PURCHASED
- --------------- -------- ---------- ---------
Bayard M. Atwood, III....................................... 8/24/99 $ 181,500 3,300,000
Michael J. Cornell.......................................... 3/ /00 $ 300,000 337,000
Peter B. Drayson............................................ 8/15/99 $ 110,000 2,000,000
Stephen L. Holcombe......................................... 9/28/99 $ 237,600 1,440,000
Nathan P. Morton............................................ 9/20/99 $ 275,000 5,000,000
David F. Russo.............................................. 12/28/99 $1,400,000 1,400,000
Steven C. Thompson.......................................... 8/31/99 $ 33,000 600,000
Payments to Related Parties
In 1998 and 1997, we paid to Phillip Brown, brother of Keith T. Brown,
annual salaries in the amounts of $100,926 and $96,936, respectively, for
services rendered to us.
In December 1999, we hired Kate Hall-Tipping, sister of our director Justin
Hall-Tipping, at an annual salary of $110,000.
Business Relationships
In connection with the sale of Series B preferred stock to GE Capital
Equity Investments, we entered into an Internet development, marketing and
distribution agreement with General Electric by and through its GE Appliances
operating unit, to develop a building supply purchase process over the Internet
utilizing our technological capabilities. GE Capital Equity Investments, a
principal stockholder, is a wholly owned subsidiary of General Electric.
For information regarding the grant of stock options with our executive
officers, please see "Management -- Executive Compensation."
For information regarding noncompetition and employment agreements to our
executive officers, please see "Management -- Employment Agreements."
For information regarding related party transactions of NxTrend, please see
Footnote 12 of the footnotes to the Consolidated Financial Statements of
NxTrend.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 17, 2000 the number of shares of
common stock and the percentage of outstanding shares of common stock that are
beneficially owned by:
- each person that is the beneficial owner of more than 5% of our common
stock;
- each of our directors and our director nominee;
- each named executive officer; and
- all of our current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of common stock
subject to options and warrants that are presently exercisable or exercisable
within 60 days of March 17, 2000 are deemed to be outstanding and beneficially
owned by the person holding such option or warrant for the purpose of computing
the percentage of ownership of that person, but they are not deemed outstanding
for the purpose of computing the percentage of any other person. The applicable
percent ownership for each shareholder after the offering is based on
174,415,233 shares of common stock outstanding as of March 17, 2000, which
includes 94,473,379 shares issued upon conversion of all of our outstanding
shares of preferred stock, the exercise of preferred stock and common stock
warrants to purchase 2,678,760 shares of common stock prior to the offering
together with applicable exercisable warrants and options for that stockholder.
Unless otherwise noted, each of the persons listed below has sole voting and
investment power with respect to his or her shares and the address for each of
the persons listed below as beneficially owning more than five percent of our
outstanding capital stock is: 4813 Emperor Boulevard, Suite 130, Durham, North
Carolina 27703.
PERCENTAGE OF SHARES
NUMBER BENEFICIALLY OWNED
OF SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
Keith T. Brown(1)........................................... 34,447,315 19.45% %
GE Capital Equity Investments, Inc.(2)...................... 28,576,720 15.89
120 Long Ridge Road
Stamford, Connecticut 06927
Justin Hall-Tipping(3)...................................... 15,605,303 8.95
SGC Partners II LLC(4)...................................... 15,605,303 8.95
1221 Avenue of the Americas, 13th Floor
New York, New York 10020
Covestco-Seteura, LLC(5).................................... 11,131,087 6.38
c/o Barnard & Co., LLC
590 Madison Avenue, 37th Floor
New York, New York 10022
Norvell E. Miller, IV(6).................................... 10,462,152 6.00
Southeast Interactive Technology Funds(7)................... 10,462,152 6.00
630 Davis Drive, Suite 220
Morrisville, North Carolina 27713
Nathan P. Morton(8)......................................... 8,000,000 4.51
William W. Neal, III(9)..................................... 6,511,240 3.71
Charles M. Cosby(10)........................................ 7,730,590 4.40
Bayard M. Atwood, III(11)................................... 5,000,000 2.84
Peter B. Drayson(12)........................................ 3,300,000 1.88
Steven C. Thompson(13)...................................... 1,017,200 *
Joel D. Koblentz............................................ 0 *
Jerry A. Rose............................................... 0 *
Paul A. Ryder............................................... 0 * %
Peter J. Smith.............................................. 0 *
---------- -----
All executive officers and directors as a group (14
persons)(14).............................................. 88,489,183 47.67%
- ---------------
* Indicates less than one percent.
(1) Includes (a) 9,225,260 shares of common stock, (b) 17,360 shares issuable
upon conversion of preferred stock, (c) 22,542,855 shares of common stock
for which Mr. Brown has voting power, and
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(d) 2,661,840 shares issuable upon immediately exercisable options. Mr.
Brown disclaims beneficial ownership of shares for which he holds voting
power pursuant to certain voting agreements.
(2) Includes (a) 23,150,340 shares issuable upon conversion of preferred stock
and (b) 5,426,380 shares issuable upon the exercise of immediately
exercisable warrants. GE Capital is a wholly owned subsidiary of General
Electric.
(3) Mr. Hall-Tipping is managing director of SG Capital Partners, LLC, the
general partner of SG Merchant Banking Fund, L.P., sole owner of SGC
Partners II LLC, and, as such, may be deemed to have beneficial ownership
of such shares. Mr. Hall-Tipping disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(4) Includes 15,605,303 issuable upon conversion of preferred stock.
(5) Includes 4,540,178 shares issuable upon conversion of preferred stock.
(6) Mr. Miller is a managing director Southeast Interactive Technology Fund I,
LLC and Southeast Interactive Technology Fund II, LLC, and, as such, may be
deemed to have beneficial ownership of such shares. Mr. Miller disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(7) Includes (a) 8,897,232 shares issuable upon conversion of preferred stock.
The shares are held by Southeast Interactive Technology Fund I, LLC and
Southeast Interactive Technology Fund II, LLC.
(8) Includes 3,333,333 shares of common stock that are subject to repurchase by
BuildNet and 3,000,000 shares issuable upon exercise of options to purchase
common stock that upon exercise would be subject to repurchase by BuildNet.
(9) Includes 5,168,100 shares issuable upon conversion of preferred stock and
860,860 shares issuable upon the exercise of immediately exercisable
warrants held by Piedmont Venture Partners Limited Partnership. Mr. Neal is
managing principal of Piedmont Venture Partners, and, as such, may be deemed
to have beneficial ownership of such shares. Mr. Neal disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(10) Includes 1,295,973 shares issuable upon the exercise of immediately
exercisable options and 6,434,617 shares for which sole voting power is
held by Mr. Brown
(11) Includes 2,543,750 shares of common stock that are subject to repurchase by
BuildNet and 1,700,000 shares issuable upon exercise of options to purchase
common stock that upon exercise would be subject to repurchase by BuildNet.
(12) Includes 1,750,000 shares of common stock that are subject to repurchase by
BuildNet and 1,300,000 shares issuable upon exercise of options to purchase
common stock that upon exercise would be subject to repurchase by BuildNet.
(13) Includes 340,000 shares of common stock that are subject to repurchase by
BuildNet.
(14) Includes the information in the notes above, as applicable.
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DESCRIPTION OF CAPITAL STOCK
Our amended and restated certificate of incorporation, which will become
effective immediately prior to consummation of the offering, authorizes the
issuance of 850,000,000 shares of common stock, $.01 par value per share, and
50,000,000 shares of preferred stock, $.01 par value per share. Immediately
prior to the offering, shares of common stock and no shares of
preferred stock will be issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders generally, including the election of
directors. Holders of common stock will be entitled to receive dividends, if
any, declared from time to time by our board of directors out of funds legally
available for dividends. If BuildNet is liquidated, dissolved or wound-up,
holders of common stock will share proportionately in all assets available for
distribution. However, dividend and distribution rights of holders of common
stock will be subject to the rights of any holders of any series of preferred
stock as described below. The holders of common stock have no preemptive or
conversion rights. The common stock does not have cumulative voting rights. As a
result, the holder or holders of more than half of the shares of common stock
voting for the election of directors can elect all directors being elected at
that time. All shares of common stock outstanding immediately following the
offering will be fully paid and will not be subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the common stock.
PREFERRED STOCK
After this offering, no shares of preferred stock will be outstanding. Our
board of directors is authorized, without further stockholder action, to issue
preferred stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, redemption
rights and terms, including sinking fund provisions, and certain other rights
and preferences, of the preferred stock. Although there is no current intention
to do so, our board of directors may, without stockholder approval, issue shares
of a class or series of preferred stock with voting and conversion rights which
could adversely affect the voting power or divided rights of the holders of
common stock and may have the effect of delaying, deferring or preventing a
change in control.
WARRANTS
As of March 1, 2000, there were warrants outstanding to purchase 2,423,300
shares of common stock and shares of preferred stock convertible into 255,460
shares of common stock that will expire if not exercised prior to the
consummation of this offering, and warrants outstanding to purchase 2,588,500
shares of common stock and shares of preferred stock convertible into 10,426,380
shares of common stock that are not required to be exercised in connection with
and will not expire upon the consummation of this offering.
REGISTRATION RIGHTS
We are party to an investor rights agreement dated May 1999, as amended,
with stockholders who will hold in the aggregate 60,956,080 shares of common
stock upon the completion of this offering. We are also party to an investor
rights agreement, dated as of October 1999, as amended, with stockholders who
will hold in the aggregate 50,277,278 shares of common stock, plus any shares of
common stock issued upon conversion of the NxTrend, UniLink and J.D. Edwards
World Source Company notes payable, upon the completion of this offering. Each
of the investor rights agreements includes the following rights for each group
of stockholders:
- The right to demand that their shares of common stock be registered under
the Securities Act of 1933, as amended, in a manner similar to the
registration of the shares that are offered by this prospectus. Any
combination of stockholders holding at least 15% of the shares of common
stock
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included in each such investor rights agreement may initiate four such
registrations. Holders of a majority of shares of common stock issuable
upon exercise of certain warrants shall have separate rights to demand
registration of their shares of common stock on one occasion. Each such
registration must include common stock with a fair market value in excess
of $5,000,000.
- The right to demand that their shares of common stock be registered under
the Securities Act on Form S-3 or equivalent registration statement once
we are eligible for that form or equivalent registration statement. We
expect to be eligible for that form or equivalent registration statement
one year after this offering. Any combination of the stockholders party
to the investor rights agreement collectively holding at least 15% of the
common stock subject to that agreement may initiate such registrations;
however, only two requests (or four requests under the October 1999
investor rights agreement) can be made within any 12-month period and
each such registration must include common stock with a fair market value
in excess of $500,000.
- The right to have their shares of common stock included in any
registration of common stock by BuildNet under the Securities Act, other
than those effected on Forms S-4 or S-8, subject to underwriter cutbacks
in the event of over subscription and only to the extent that inclusion
will not diminish the number of securities included by BuildNet; provided
that, for all registrations after this offering, the stockholders under
both investors rights agreements will be entitled to include securities
equal to 25% of the securities included in such offering.
Another holder of warrants to purchase 372,840 shares of common stock has
rights to have its shares of common stock included in any registration of common
stock by BuildNet under the Securities Act, other than those effected on Forms
S-4 or S-8, subject to underwriter cutbacks in the event of over subscription
and only to the extent that inclusion will not diminish the number of securities
included by BuildNet.
We are required to bear all customary registration expenses including
registration and filing fees, exchange listing fees, printing expenses, fees and
expenses of counsel for BuildNet, and expenses of one counsel to the holders of
the common stock being registered. The holders of the common stock being
registered shall pay all underwriting discounts, selling commissions and fees
customarily allocable to each holder registering shares.
VOTING RIGHTS
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders generally, including the election of
directors.
Pursuant to the terms of a voting trust agreement dated April 1998, among
Keith T. Brown, certain other stockholders and BuildNet, Mr. Brown possesses all
rights and powers to vote 6,478,000 shares of common stock held by such other
stockholders as trustee pursuant to the terms of the agreement.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS;
ANTI-TAKEOVER EFFECTS
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with protection against hostile takeovers. The takeover statute,
which is codified in Section 203 of the Delaware General Corporate Law, is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquirer to engage in certain transactions with the target company.
In general, Section 203 provides that a person who owns 15% or more of the
outstanding voting stock of a Delaware corporation, referred to as an interested
stockholder, may not consummate a merger or other business combination
transaction with such corporation at any time during the three year period
following the date such person became an interested stockholder. The term
business combination is defined broadly
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to cover a wide range of corporate transactions including mergers, sales of
assets, issuances of stock, transactions with subsidiaries and the receipt of
disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203:
- any business combination if, prior to the date a person became an
interested stockholder, the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
- any business combination involving a person who acquired at least 85% of
the outstanding voting stock in the transaction in which he became an
interested stockholder, with the number of shares outstanding calculated
without regard to those shares owned by the corporation's directors who
are also officers and by certain employee stock plans;
- any business combination with an interested stockholder that is approved
by the board of directors and by a two-thirds vote of the outstanding
voting stock not owned by the interested stockholder; and
- certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not
opposed by a majority of certain continuing members of the board of
directors.
A corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by Section 203. At the present time, our board of directors does
not intend to propose any such amendment.
Certificate of Incorporation and Bylaws
Our amended and restated certificate of incorporation, as it will become
effective immediately prior to the consummation of the offering, provides:
- for the authorization of the board of directors to issue, without further
action by the stockholders, up to 50,000,000 shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof;
- that any action required or permitted to be taken by our stockholders
must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing;
- that special meetings of our stockholders may be called only by the
chairman of the board, the chief executive officer or a majority of the
members of the board of directors;
- for a classified board of directors;
- that vacancies on the board of directors, including newly created
directorships, can be filled only by a majority of the directors then in
office.
Our bylaws, effective immediately prior to the consummation of the
offering, shall include provisions (1) imposing advance notice requirements for
stockholder proposals and director nomination and (2) providing that our
directors may be removed only for cause and only by the affirmative vote of
holders at least 66 2/3% of the outstanding shares of voting stock together as a
single class.
These provisions in our certificate of incorporation and bylaws are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and in the policies formulated by the
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of BuildNet. These provisions
are designed to reduce our vulnerability to an unsolicited proposal for a
takeover that does not contemplate the acquisition of all of our outstanding
shares, or an unsolicited proposal for the restructuring or sale of all or part
of BuildNet. These provisions, however, could discourage potential acquisition
proposals and could delay or prevent a change in control of BuildNet. These
provisions may also have the effect of preventing changes in our management.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is [ ].
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that sales of shares of common
stock or the availability of shares of common stock for sale will have on the
market price of the common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of common stock in the public market, or the
perception that these sales could occur, could adversely affect the market price
of our common stock and could impair our future ability to raise capital through
the sale of our equity securities.
Upon completion of the offering and assuming no exercise of stock options
after March 1, 2000, there will be an aggregate of shares of our
common stock outstanding or shares if the underwriters'
overallotment option is exercised in full, and warrants and options outstanding
for shares. The shares offered by this prospectus,
or shares if the underwriters' overallotment option is exercised
in full, will be freely transferable without restriction or limitation under the
Securities Act of 1933, as amended, unless purchased by our "affiliates" as that
term is defined in Rule 144 under the Securities Act. The remaining
shares outstanding upon completion of the offering will be
"restricted securities" within the meaning of Rule 144 under the Securities Act,
and are subject to restrictions under the Securities Act.
Our directors and officers and security holders holding in the aggregate
shares of and options and warrants to purchase
shares of our common stock will agree not to sell, offer for
sale, or otherwise dispose of any of our common stock for a period of 180 days
from the date of this prospectus without the prior written consent of Credit
Suisse First Boston. In addition, during the 180-day period, we will agree not
to file any registration statement, except for the registration statement on
Form S-8 described below, with respect to our common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of Credit Suisse First Boston.
Subject to these lock-up agreements, the shares of common stock outstanding
upon the completion of this offering, not including the shares
offered by this prospectus, assuming the exercise of outstanding option and
warrants, will be eligible for sale, subject to Rule 144, in the public market
as follows:
Immediately after this offering..................... shares;
180 days after this offering........................ shares;
1 year after this offering.......................... shares; and
2 years after this offering......................... shares.
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are required to be aggregated, who owns shares that were purchased
from us or any of our affiliates at least one year previously, is entitled to
sell in brokers transactions or to market makers, within any three-month period
commencing 90 days after the date of this prospectus, the number of shares of
common stock that does not exceed the greater of (1) one percent of the number
of then outstanding shares, approximately shares immediately
after the offering, or (2) the average weekly reported trading volume during the
four calendar weeks preceding the date on which the required notice of sale is
filed with the SEC. Sales under Rule 144 are generally subject to the
availability of current public information about BuildNet. Any person, or
persons whose shares are aggregated, who owns shares that were purchased from us
or any of our affiliates at least two years previously and who has not been an
affiliate of ours at any time during the 90 days preceding the sale would be
entitled to sell shares under Rule 144(k) without regard to the volume
limitations or manner of sale, public information or notice requirements of Rule
144.
We are party to two investor rights agreements which grant some of our
stockholders the right to demand that we register with the SEC the common stock
they acquired from us in private placements. The registration of this stock
would allow these shareholders to sell the stock publicly without any
limitations on the manner or amount of sale. These two registration rights
agreements cover an aggregate of 111,233,358 shares of our common stock. If
these registration rights were exercised in whole or in part,
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a substantial number of shares of our common stock could be sold at once and the
market price of our common stock could fall.
Any of our employees, officers, directors or consultants who have purchased
or were awarded shares or options to purchase shares pursuant to a written
compensatory plan or contract are entitled to rely on the resale provisions of
Rule 701 under the Securities Act, which permits affiliates and non-affiliates
to sell such shares without having to comply with the holding period
restrictions of Rule 144, in each case commencing 90 days after the date of this
prospectus. In addition, non-affiliates may sell such shares without complying
with the public information, volume and notice provisions of Rule 144. Rule 701
is available for our option holders as to all shares issued
pursuant to the exercise of options granted prior to this offering.
After the offering, BuildNet intends to file a registration statement on
Form S-8 to register all of the shares of common stock reserved
for issuance under our stock incentive plans and not eligible for sale under
Rule 701. Accordingly, shares issued upon exercise of such options will be
freely tradable by holders who are not our affiliates and, subject to the volume
and other limitations of Rule 144, by holders who are our affiliates.
In addition, BuildNet may raise additional equity capital through the sale
of equity securities. Sales of these shares in the public markets may cause
future dilution to our existing stockholders.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, FleetBoston
Robertson Stephens Inc., Salomon Smith Barney Inc. and Thomas Weisel Partners
LLC are acting as representatives, the following respective numbers of shares of
common stock:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Credit Suisse First Boston Corporation......................
FleetBoston Robertson Stephens Inc..........................
Salomon Smith Barney Inc....................................
Thomas Weisel Partners LLC..................................
-------
Total.............................................
=======
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting Discounts and Commissions paid
by us.................................... $ $ $ $
Expenses payable by us..................... $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers and directors and substantially all of our stockholders and
option and warrant holders have agreed that they will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, any shares of
our common stock or securities convertible into or exchangeable or exercisable
for any shares of our common stock, enter into a transaction which would have
the same effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any of the economic
68
70
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "BNET"
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchase of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations.
Thomas Weisel Partners LLC was organized and registered as a broker/dealer
in December 1998. Since December 1998, Thomas Weisel Partners LLC has acted as a
lead or co-manager on numerous public offerings of equity securities. Thomas
Weisel Partners LLC does not have any material relationship with us or any of
our officers, directors or other controlling persons, except with respect to its
contractual relationship with us under the underwriting agreement entered into
in connection with this offering.
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72
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) if required
by the law, that such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against such issuer or persons in Canada or to
enforce a judgment obtained in Canadian courts against the issuer or such
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors about the tax consequences of an investment in the common stock in
their particular circumstances and with respect to the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
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LEGAL MATTERS
The validity of the common stock offered hereby will be passed on for us by
Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina. Attorneys of Wyrick
Robbins Yates & Ponton LLP beneficially own 11,364 shares of our common stock.
Certain legal matters in connection with the offering will be passed on for the
underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The financial statements of
- BuildNet, Inc. as of December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999,
- NxTrend Technology, Inc. as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999,
- The UniLink Group, LLC as of December 31, 1998 and 1999 and for the years
then ended and
- The McCosker Corporation as of December 31, 1998 and for the year then
ended,
included in this prospectus have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
In March 2000, NxTrend Technology, Inc. dismissed Arthur Andersen LLP as
their independent accountants. The former independent accountants' reports did
not contain an adverse opinion, a disclaimer of opinion or any qualifications or
modifications related to uncertainty, audit scope or accounting principles. The
former independent accountants' report does not cover any of NxTrend's financial
statements in this registration statement. There were no disagreements with the
former public accountants on any matter of accounting principles or practices,
financial statement disclosures or auditing scope or procedure with respect to
NxTrend's financial statements up through the time of dismissal that, if not
resolved to the former accountants' satisfaction, would have caused them to make
reference to the subject matter of the disagreement in connection with their
report. In March 2000, in connection with the pending acquisition by BuildNet,
NxTrend retained PricewaterhouseCoopers LLP as their independent public
accountants. Prior to retaining PricewaterhouseCoopers LLP, NxTrend had not
consulted with PricewaterhouseCoopers LLP regarding accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
including exhibits, schedules and amendments, under the Securities Act with
respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all the information included in the registration
statement. For further information about us and the shares of our common stock
to be sold in this offering, please refer to this registration statement.
Complete exhibits have been filed with our registration statement on Form S-1.
You may read and copy our registration statement and any contract,
agreement or other document filed as an exhibit to our registration statement or
any other information from our filings at the Commission's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the
Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information about the public reference rooms. Our filings with the
Commission, including our registration statement, are also available to you on
the Securities and Exchange Commission's Web site, http://www.sec.gov. As a
result of this offering, we will become subject to the information and reporting
requirements of the Securities Exchange
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Act of 1934, and will file periodic reports, proxy statements and other
information with the Commission. Upon approval of our common stock for quotation
on the Nasdaq National Market, these reports, proxy statements and other
information may also be inspected at the offices of Nasdaq Operations, 1735 K
Street N.W., Washington, DC 20006.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each year containing unaudited interim
financial information.
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75
BUILDNET, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
BUILDNET, INC.
Report of Independent 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 Shareholders' 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
NXTREND TECHNOLOGY, INC.
Report of Independent Accounts.............................. F-27
Balance Sheets as of December 31, 1998 and 1999............. F-28
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999....................................... F-29
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998 and 1999.................... F-30
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999....................................... F-31
Notes to Financial Statements............................... F-32
THE UNILINK GROUP, LLC
Report of Independent Accounts.............................. F-46
Balance Sheets as of December 31, 1998 and 1999............. F-47
Statements of Operations for the Years Ended December 31,
1998 and 1999............................................. F-48
Statements of Changes in Members' Capital for the Years
Ended December 31, 1998 and 1999.......................... F-49
Statements of Cash Flows for the Years Ended December 31,
1998 and 1999............................................. F-50
Notes to Financial Statements............................... F-51
THE MCCOSKER CORPORATION
Report of Independent Accounts.............................. F-59
Balance Sheet as of December 31, 1998....................... F-60
Statement of Operations for the Year Ended December 31,
1998...................................................... F-61
Statement of Shareholders' Deficit for the Year Ended
December 31, 1998......................................... F-62
Statement of Cash Flows for the Year Ended December 31,
1998...................................................... F-63
Notes to Financial Statements............................... F-64
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
DATA...................................................... F-69
F-1
76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
BuildNet, Inc.
The -for- common stock split discussed in Note 17 to
the consolidated financial statements has not been consummated as of March ,
2000. When it has been consummated, we will be in a position to furnish the
following audit report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' deficit and
of cash flows present fairly, in all material respects, the financial
position of BuildNet, Inc. and its subsidiaries (the "Company") at 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. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above."
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
February 26, 2000
F-2
77
BUILDNET, INC.
CONSOLIDATED BALANCE SHEETS
PRO FORMA
SHAREHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 259,597 $ 51,874,821
Cash held in escrow................................. -- 25,348,009
Accounts receivable................................. 11,082 2,755,606
Other current assets................................ 168,827 1,549,633
----------- ------------
Total current assets........................ 439,506 81,528,069
Long-term investments................................. -- 29,650,000
Property and equipment, net........................... 439,369 6,522,621
Other assets.......................................... 36,862 17,025,704
----------- ------------
Total assets................................ $ 915,737 $134,726,394
=========== ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current maturities of capital lease obligations..... $ 107,835 $ 758,898
Current maturities of long-term debt................ -- 2,283,000
Accounts payable and accrued liabilities............ 637,151 7,909,733
Deferred revenue.................................... 648,820 3,081,011
----------- ------------
Total current liabilities................... 1,393,806 14,032,642
Capital lease obligations, less current maturities.... 67,865 720,476
Long-term debt, less current maturities............... 4,100,309 2,567,000
Redeemable warrants................................... 250,278 10,458,470
Series B mandatorily redeemable preferred stock
(liquidation preference of $71,565,391)............. -- 36,949,130 $ --
Series C mandatorily redeemable preferred stock
(liquidation preference of $107,019,515)............ -- 102,298,853 --
Subscriptions to purchase mandatorily redeemable
convertible preferred stock......................... -- (3,525,000) --
Commitments (Note 7)
Shareholders' (deficit) equity:
Series A convertible preferred stock, $.01 par
value, 1,268,920 shares designated; 1,061,660 and
1,118,840 shares issued and outstanding at
December 31, 1998 and 1999, respectively; no
shares designated, issued or outstanding pro
forma (unaudited)................................ 10,616 11,188 --
Common stock, $.01 par value, 350,000,000 shares
authorized; 20,042,520 and 54,872,024 shares
issued and outstanding at December 31, 1998 and
1999, respectively; 149,345,403 shares issued and
outstanding pro forma (unaudited)................ 200,425 548,720 1,493,454
Subscriptions to purchase common stock.............. -- -- (3,525,000)
Additional paid-in capital.......................... 1,964,410 37,280,853 170,665,881
Deferred compensation............................... (134,384) (28,912,130) (28,912,130)
Notes receivable from shareholders.................. -- (2,237,100) (2,237,100)
Accumulated deficit................................. (6,937,588) (35,466,708) (35,349,362)
----------- ------------ ------------
Total shareholders' (deficit) equity........ (4,896,521) (28,775,177) $102,135,743
----------- ------------ ------------
Total liabilities and shareholders'
(deficit) equity.......................... $ 915,737 $134,726,394
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
78
BUILDNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
Revenues............................................... $ 4,257,110 $ 4,506,041 $ 14,600,929
Cost of revenues....................................... 1,368,803 1,435,917 9,026,423
----------- ----------- ------------
Gross profit................................. 2,888,307 3,070,124 5,574,506
----------- ----------- ------------
Operating expenses:
General and administrative........................... 1,348,292 1,969,011 8,150,656
Sales and marketing.................................. 1,593,550 2,072,244 4,845,404
Research and development............................. 1,121,898 2,035,275 9,898,478
Stock-based compensation............................. 202,017 22,136 665,782
----------- ----------- ------------
Total operating expenses..................... 4,265,757 6,098,666 23,560,320
----------- ----------- ------------
Operating loss............................... (1,377,450) (3,028,542) (17,985,814)
Interest income........................................ 28,662 38,480 642,925
Interest expense....................................... (178,028) (512,829) (1,017,489)
Other noncash interest (expense) income (Note 14)...... (138,651) 264,037 (10,140,341)
----------- ----------- ------------
Loss before extraordinary item............... (1,665,467) (3,238,854) (28,500,719)
Extraordinary loss on early extinguishment of debt..... -- (106,911) (28,401)
----------- ----------- ------------
Net loss..................................... (1,665,467) (3,345,765) (28,529,120)
Accretion of mandatorily redeemable preferred stock.... -- -- (2,068,378)
Preferred stock dividends.............................. -- -- (167,211)
----------- ----------- ------------
Net loss available to common shareholders.... $(1,665,467) $(3,345,765) $(30,764,709)
=========== =========== ============
Net loss per common share -- basic and diluted......... $ (0.08) $ (0.17) $ (0.84)
Weighted average common shares outstanding -- basic and
diluted.............................................. 20,042,520 20,042,520 36,526,929
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
79
BUILDNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
SERIES A NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- --------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS
--------- ------- ---------- -------- ----------- ------------ ------------
BALANCE AS OF DECEMBER 31, 1996....... 571,740 $ 5,717 20,042,520 $200,425 $ 686,205 $ -- $ --
Conversion of promissory notes into
489,920 shares of Series A preferred
stock................................ 489,920 4,899 -- -- 456,180 -- --
Value of warrants to purchase
securities of the Company issued in
connection with debt................. -- -- -- -- 56,389 -- --
Deferred compensation related to grant
of stock options..................... -- -- -- -- 271,168 (271,168) --
Amortization of deferred
compensation......................... -- -- -- -- -- 202,017 --
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE AS OF DECEMBER 31, 1997....... 1,061,660 10,616 20,042,520 200,425 1,469,942 (69,151) --
Value of warrants to purchase
securities of the Company issued in
connection with debt................. -- -- -- -- 407,099 -- --
Deferred compensation related to grant
of stock options..................... -- -- -- -- 87,369 (87,369) --
Amortization of deferred
compensation......................... -- -- -- -- -- 22,136 --
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE AS OF DECEMBER 31, 1998....... 1,061,660 10,616 20,042,520 200,425 1,964,410 (134,384) --
Value of warrants to purchase
securities of the Company issued in
connection with debt................. -- -- -- -- 59,400 -- --
Exercise of common stock options...... -- -- 14,848,144 148,481 2,130,494 -- (2,237,100)
Exercise of common stock warrants..... -- -- 270,000 2,700 (2,565) -- --
Exercise of Series A preferred stock
warrants............................. 57,180 572 -- -- 49,428 -- --
Issuance of common stock and options
and warrants to purchase common stock
in exchange for shares of the
F.A.S.T. Management Group, Inc....... -- -- 19,711,360 197,114 929,050 -- --
Interest on notes receivable from
shareholders......................... -- -- -- -- 13,288 -- --
Deferred compensation related to grant
of stock options..................... -- -- -- -- 29,443,528 (29,443,528) --
Deferred customer acquisition costs... -- -- -- -- 4,929,409 -- --
Amortization of deferred
compensation......................... -- -- -- -- -- 665,782 --
Dividends paid on preferred stock..... -- -- -- -- (167,211) -- --
Accretion of mandatorily redeemable
preferred stock...................... -- -- -- -- (2,068,378) -- --
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE AS OF DECEMBER 31, 1999....... 1,118,840 $11,188 54,872,024 $548,720 $37,280,853 $(28,912,130) $(2,237,100)
========= ======= ========== ======== =========== ============ ===========
ACCUMULATED
DEFICIT TOTAL
------------ ------------
BALANCE AS OF DECEMBER 31, 1996....... $ (1,926,356) $ (1,034,009)
Conversion of promissory notes into
489,920 shares of Series A preferred
stock................................ -- 461,079
Value of warrants to purchase
securities of the Company issued in
connection with debt................. -- 56,389
Deferred compensation related to grant
of stock options..................... -- --
Amortization of deferred
compensation......................... -- 202,017
Net loss.............................. (1,665,467) (1,665,467)
------------ ------------
BALANCE AS OF DECEMBER 31, 1997....... (3,591,823) (1,979,991)
Value of warrants to purchase
securities of the Company issued in
connection with debt................. -- 407,099
Deferred compensation related to grant
of stock options..................... -- --
Amortization of deferred
compensation......................... -- 22,136
Net loss.............................. (3,345,765) (3,345,765)
------------ ------------
BALANCE AS OF DECEMBER 31, 1998....... (6,937,588) (4,896,521)
Value of warrants to purchase
securities of the Company issued in
connection with debt................. -- 59,400
Exercise of common stock options...... -- 41,875
Exercise of common stock warrants..... -- 135
Exercise of Series A preferred stock
warrants............................. -- 50,000
Issuance of common stock and options
and warrants to purchase common stock
in exchange for shares of the
F.A.S.T. Management Group, Inc....... -- 1,126,164
Interest on notes receivable from
shareholders......................... -- 13,288
Deferred compensation related to grant
of stock options..................... -- --
Deferred customer acquisition costs... -- 4,929,409
Amortization of deferred
compensation......................... -- 665,782
Dividends paid on preferred stock..... -- (167,211)
Accretion of mandatorily redeemable
preferred stock...................... -- (2,068,378)
Net loss.............................. (28,529,120) (28,529,120)
------------ ------------
BALANCE AS OF DECEMBER 31, 1999....... $(35,466,708) $(28,775,177)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
80
BUILDNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(1,665,467) $(3,345,765) $(28,529,120)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash interest expense (income).................... 138,651 (264,037) 10,140,341
Loss on early extinguishment of debt................. -- 106,911 28,401
Loss on disposition of fixed assets.................. -- 15,007 --
Depreciation and amortization........................ 238,469 221,062 2,476,137
Amortization of deferred compensation................ 202,017 22,136 665,782
Amortization of deferred customer acquisition
costs............................................. -- -- 117,346
Changes in operating assets and liabilities:
Accounts receivable............................... (312,345) 349,362 (604,270)
Other assets...................................... (77,867) (53,463) (1,605,110)
Accounts payable.................................. (317,885) 143,306 5,006,028
Deferred revenue.................................. 375,083 (63,401) (1,090,305)
----------- ----------- ------------
Net cash used in operating activities........ (1,419,344) (2,868,882) (13,394,770)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (31,148) (122,341) (2,950,990)
Purchase of investments.............................. -- -- (33,650,000)
Proceeds from sale of investments.................... -- -- 4,000,000
Costs of internal use software capitalized........... -- -- (1,489,512)
Purchase of proprietary software..................... -- -- (150,000)
Cash paid for acquisitions, net of cash acquired of
$436,632.......................................... -- -- (3,312,010)
----------- ----------- ------------
Net cash used in investing activities........ (31,148) (122,341) (37,552,512)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............. 3,367,491 2,114,000 2,000,000
Payments of principal on long-term debt.............. (436,399) (106,864) (2,804,466)
Payments of capital lease obligations................ (51,988) (100,283) (363,850)
Payment of deferred loan costs....................... (259,040) -- --
Payment of dividends................................. -- -- (167,211)
Proceeds from issuance of mandatorily redeemable
convertible preferred stock....................... -- -- 103,856,024
Proceeds from exercise of warrants for common stock
and Series A preferred stock...................... -- -- 42,009
----------- ----------- ------------
Net cash provided by financing activities.... 2,620,064 1,906,853 102,562,506
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................ 1,169,572 (1,084,370) 51,615,224
CASH AND CASH EQUIVALENTS:
Beginning of year.................................... 174,395 1,343,967 259,597
----------- ----------- ------------
End of year.......................................... $ 1,343,967 $ 259,597 $ 51,874,821
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
81
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
BuildNet, Inc. (the "Company"), is headquartered in Research Triangle Park,
North Carolina and is currently a provider of management software to
homebuilders. The Company has designed the BuildNet Exchange to provide
Internet-based procurement, e-commerce and information services for
homebuilders, suppliers and manufacturers. The BuildNet Exchange allows users to
confirm pricing and product specifications, place purchase orders and add both
product and order information automatically to builders' and suppliers'
management systems. In addition, manufacturers can place product information and
catalogs on the BuildNet Exchange for access by homebuilders and suppliers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Pro Forma Shareholders' Equity
The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO is
consummated as presently anticipated, all shares, and warrants to acquire
shares, of the Series A, Series B, and Series C preferred stock will
automatically convert into shares, and warrants to acquire shares, of common
stock on a one-to-one conversion ratio. The unaudited pro forma stockholders'
equity reflects the subsequent conversion of Series A, Series B, and Series C
preferred stock and warrants to acquire such stock into common stock and
warrants to acquire common stock as if such conversion had occurred as of
December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of BuildNet,
Inc. and its wholly-owned subsidiaries, FAST Management Group, Inc, BuildNet
Corporation, Maxwell and Company, Systems Analysis Inc., and BuildNet Financial
Services, Inc. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition and Deferred Revenue
The Company's revenues have historically been derived from software
licenses, software related services, and project development fees. The Company
adopted American Institute of Public Accountants ("AICPA") Statement of Position
("SOP") No. 97-2 "Software Revenue Recognition" effective January 1, 1997. The
Company adopted SOP No. 98-9 "Modification of SOP No. 97-2, Software Revenue
Recognition, with Respect to Certain Transactions," effective January 1, 1998.
The adoption of these statements did not have a material effect on the timing of
the Company's revenue recognition.
Software license revenues from multiple element contracts for which the
Company can separate the software license element from the service elements
included in the initial contract is recognized when there is evidence of an
arrangement, the product has been shipped, fees are fixed and determinable and
collection of the related receivable is probable. Revenues from multiple element
software contracts for which the Company cannot separate the software license
element from the service elements is accounted for by the percentage of
completion method, whereby revenues is recognized based on the estimated stage
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of completion of individual contracts. Software related services revenues
includes professional service revenues and maintenance fees. Professional
service revenues includes system planning and implementation and training, which
are included in deferred revenue until the services are performed. Revenues from
maintenance and support fees represent ongoing customer support and free
unspecified product updates, which are included in deferred revenue and
amortized ratably into revenue over the term of the maintenance period which is
generally twelve months.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales and
marketing expenses also include costs of advertising, trade shows and certain
indirect costs. All costs of advertising the services and products offered by
the Company are expensed as incurred. Advertising expense totaled $215,000,
$158,000 and $554,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Cash Held in Escrow
Cash held in escrow consist of funds held in an interest-bearing deposit
account by the Company's law firm. The funds were proceeds from sale of
mandatorily redeemable preferred stock, the exercise of a warrant for common
stock, and interest earned. The funds held in this account were disbursed to the
Company subsequent to December 31, 1999.
Investments
The Company considers all investments that are not considered cash
equivalents and have a maturity of less than one year from the balance sheet
date to be short-term investments. The Company considers all investments with a
maturity greater than one year from the balance sheet date to be long-term
investments. At December 31, 1999, all investments are considered as
available-for-sale and are carried at fair value with unrealized gains and
losses recognized as a separate component of other comprehensive income.
Interest income includes interest, amortization of investment purchases premiums
and discounts, and realized gains and losses on sales of securities. The cost of
securities sold is based on the specific identification method.
Property and Equipment
Property and equipment is primarily comprised of furniture and fixtures,
office equipment, computer equipment, and leasehold improvements which are
recorded at cost. Depreciation and amortization is charged to operations over
the estimated useful lives of the property which range from three to seven
years, primarily using the straight-line method. A declining-balance method is
used for certain types of office and computer equipment. Property and equipment
includes certain items that are under capital leases. These items are amortized
over the shorter of the lease period or the estimated useful life of the
equipment.
Capitalized Software Costs
Software development costs are required to be capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers.
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's policy is to amortize software development costs on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. To date, the period between
achieving technological feasibility and the general availability of such
software has substantially coincided; therefore software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any costs for software developed internally. The Company has
capitalized purchased software costs resulting from the Company's acquisitions
as discussed in Note 3.
Internal Use Software
Effective January 1, 1999, the Company adopted the provisions of the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("AICPA") Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No.
98-1"). SOP No. 98-1 provides guidance regarding when software developed or
obtained for internal use should be capitalized. Under the provisions of SOP No.
98-1, external direct costs of materials and services consumed in the
development of internal-use computer software, payroll and payroll related costs
for employees directly associated with internal-use computer software projects,
and interest costs incurred while developing internal-use computer software
should be capitalized once the preliminary project stage has been completed,
management has authorized and committed to funding the project, and it is
probable that the project will be completed and that the software will be used
to perform the function intended. Such costs should be capitalized until the
software is ready for its intended use, at which time the costs should be
amortized over their estimated useful life. During the year ended December 31,
1999, the Company capitalized costs of $1,489,512 related to the development of
the BuildNet Exchange, which are included in property and equipment at December
31, 1999. Prior to January 1, 1999, the Company had not incurred significant
expenses beyond the completion of the preliminary project phase.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consists of both identifiable and
unidentifiable assets (goodwill) resulting from acquisitions and is amortized on
a straight-line basis over periods ranging from three to five years. The Company
periodically assesses the recoverability of intangible assets by determining
whether the amortization of the balance over its remaining life can be recovered
through undiscounted future operating cash flows of the related operations (see
Note 3). Goodwill is being amortized over a period of five years because of the
rapid changes in the e-commerce industry. Capitalized software and assembled
workforce is being amortized over a period of three years.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets, certain
identifiable intangible assets, and goodwill in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of " ("SFAS 121"). SFAS
121 requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the estimated future undiscounted cash flows
attributable to such assets or the business to which such assets relate. No
impairments were required to be recognized during the years ended December 31,
1997, 1998 or 1999.
Start-Up Costs
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities," ("SOP No. 98-5") which is effective
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for fiscal years beginning after December 15, 1998. SOP No. 98-5 requires
companies to expense as incurred all preopening, start-up and organizational
costs that are not capitalizable as long-lived assets. The Company adopted SOP
No. 98-5 effective January 1, 1999. The adoption of SOP No. 98-5 had no impact
on the Company's financial condition or results of operations.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1999 and 1998 approximated their fair value
due to the short-term nature of these items. The fair value of the Company's
short-term and long-term debt approximated their carrying values based on the
borrowing rates available to the Company for loans of similar terms as of
December 31, 1999 and 1998. The fair value of the Company's investments at
December 31, 1999, based on market quotes, approximated their carrying values.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between financial reporting and tax basis of the Company's assets
and liabilities and for tax carryforwards at enacted statutory tax rates in
effect for the years in which the differences are excepted to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Credit Risk, Significant Customers and Concentrations
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable and investments. Cash and cash equivalents are deposited with high
credit quality financial institutions which invest primarily in U.S. Government
securities, highly rated commercial paper and certificates of deposit guaranteed
by banks which are members of the Federal Deposit Insurance Corporation. The
counterparties to the agreements relating to the Company's investments consist
primarily of the U.S. Government and various major corporations with high credit
standings.
The Company's trade receivable result primarily from sales to homebuilders
located throughout the United States. The Company routinely assesses its
customers and the industry in which they operate. No single customer accounted
for more than 10% of the Company's revenues during the years ended December 31,
1997, 1998, or 1999. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base and because all customers are located in the United
States. There were no significant individual customer balances as of December
31, 1998 or 1999.
Cash Flows
The Company made cash payments for interest of $178,000, $405,000 and
$917,000 during the years ended December 31, 1997, 1998 and 1999, respectively.
The Company also acquired property and equipment through the assumption of
capital lease obligations amounting to $70,351, $201,333 and $1,472,903 during
the years ended December 31, 1997, 1998 and 1999, respectively. During the year
ended December 31, 1999, interest accrued on notes receivable, which were issued
to shareholders in 1999, has been recorded as additional paid-in capital.
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Stock-Based Compensation
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma disclosures
of net loss as if the fair value method had been applied in measuring
compensation expense. Under the intrinsic value method of accounting for stock-
based compensation, when the exercise price of options granted to employees is
less than the estimated fair value of the underlying stock on the date of the
grant, deferred compensation is recognized and is amortized to compensation
expense over the applicable vesting period. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") which requires net
income to be disclosed on a pro forma basis had compensation cost been
determined based on the fair value of the options granted on the date of grant.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS No. 131 are effective for the year
ended December 31, 1998. The Company has determined that it does not have any
separately reportable operating segments as of December 31, 1998 or 1999.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive income, as
defined, includes all changes in equity during a period from non-owner sources.
The Company had no items of other comprehensive income for the years ended
December 31, 1997, 1998 or 1999.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under
the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per
common share ("Basic EPS") is computed by dividing net income (loss) available
to common shareholders by the weighted average number of common shares
outstanding. Diluted net income (loss) per common share ("Diluted EPS") is
computed by dividing net income (loss) available to common shareholders by the
weighted average number of common shares and dilutive potential common share
equivalents then outstanding. Potential common shares consist of shares issuable
upon the exercise of stock options and warrants and shares issuable upon
conversion of convertible preferred stock. The calculation of the net loss per
share available to common shareholders for the years ended December 1997, 1998
and 1999 does not include 827,849, 2,727,861 and 35,078,796 potential shares of
common stock equivalents, respectively, as their impact would be anti-dilutive.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes several
existing standards. SFAS No. 133, as amended by SFAS No. 137, is effective for
all
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not expect that the adoption of SFAS No. 133 will have a material impact on the
consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides specific
guidance, among other things, as to the recognition of revenue related to
up-front non-refundable fees and services charges received in connection with a
contractual arrangement. We have applied the provisions of SAB 101 for the year
ended December 31, 1999. The adoption of SAB 101 did not have a material impact
on our financial condition or results of operations.
Reclassifications
Certain balances previously reported have been reclassified to conform to
the 1999 presentation with no effect on previously reported net loss or
accumulated shareholders' deficit.
3. ACQUISITIONS
Between May 1999 and August 1999, the Company acquired four businesses
which were also providers of back office management and productivity based
integrated software for the home building industry, and purchased a proprietary
software system for the subcontractor segment of the homebuilding industry.
Collectively, these entities and proprietary software are referred to as the
"1999 Acquisitions".
On May 19, 1999, the Company acquired all of the outstanding shares of The
F.A.S.T. Management Group, Inc. ("FAST"). The aggregate purchase price of
$4,653,554 consisted of 19,711,360 shares of the Company's common stock with an
estimated fair value of $1,084,126 based on a per share value of $0.06; options
to purchase 1,283,313 and 16,520 shares of the Company's common stock at an
exercise price of $0.18 and $0.62, respectively, with an aggregate fair value of
$42,040 as determined by the Black-Scholes pricing model; the assumption of
liabilities of $3,423,545; and transaction fees of $103,843. The Company also
issued warrants to purchase 372,840 shares of the Company's common stock to
former warrant holders of FAST with exercise prices between $0.10 and $0.09
which expire between 2002 and 2005. The Company did not assign any value to the
warrants, as the value of the warrants calculated using the Black-Scholes
pricing model was determined to be de minimis.
On May 22, 1999, the Company acquired all of the assets of the McCosker
Corporation ("McCosker"). The aggregate purchase price of $8,062,694 consisted
of cash of $2,554,393; a promissory note for $2,750,000 which bears interest of
8% per annum and is payable in two equal annual installments beginning on May
21, 2000; the assumption of liabilities of $2,718,289; and transaction fees of
$40,012.
On June 21, 1999, the Company acquired all of the outstanding shares of
Systems Analysis Inc. ("Systems Analysis"). The aggregate purchase price of
$1,275,789 consisted of cash of $625,000; a promissory note for $625,000 which
bears interest of 8% per annum and is payable in three equal annual installments
beginning on June 21, 2000; the assumption of liabilities of $4,807; and
transaction fees of $20,982.
On August 27, 1999, the Company acquired all of the outstanding shares of
Maxwell & Company ("Maxwell"). The aggregate purchase price of $2,166,802
consisted of cash of $529,211; a promissory note for $1,600,000; the assumption
of liabilities of $26,545; and transaction fees of $11,046. The $1,600,000
promissory note bears interest of 8% per annum and is payable in five
installments with the final payment being due no later than August 2002. These
payments may be accelerated upon the achievement of specified milestones.
On September 15, 1999, the Company purchased the Site Trak Software system,
which is an integrated software system for the subcontractor segment of the
homebuilding industry, in exchange for
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash of $150,000 and a promissory note for $150,000 which bears interest of 8%
per annum and is payable in two equal annual installments beginning in September
2000.
The 1999 Acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the respective purchase prices have been allocated,
based on the Company's estimates of fair value, to the tangible assets acquired
and liabilities assumed and to the identifiable intangible assets on the
acquisition dates. The purchase price in excess of identified tangible and
intangible assets and liabilities assumed was allocated to goodwill. The Company
has recorded identifiable intangibles and goodwill on the 1999 Acquisitions, as
follows:
ESTIMATED ESTIMATED
FAIR USEFUL
VALUE LIFE
----------- ---------
Purchased software.......................................... $ 1,491,805 36 months
Assembled workforce......................................... 2,031,801 36 months
Goodwill.................................................... 9,442,767 60 months
-----------
$12,966,373
===========
The following unaudited pro forma consolidated financial information gives
effect to the 1999 Acquisitions as if they had occurred on January 1, 1998, by
consolidating the results of operations of the 1999 Acquisitions with the
results of the Company for the years ended December 31, 1998 and 1999. The pro
forma amounts do not purport to be indicative of the results of operations that
would have been achieved had the transactions been in effect as of the beginning
of 1998 and should not be construed as being representative of future results of
operations.
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues................................................... $21,065,540 $ 22,122,160
Net loss................................................... (7,973,008) (31,034,325)
Net loss available to common shareholders.................. (7,973,008) (33,269,914)
Net loss per common share.................................. (0.20) (0.85)
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
1998 1999
------- ----------
Current trade accounts receivable........................... $11,082 $3,091,580
Less: Allowance for doubtful accounts....................... -- (335,974)
------- ----------
$11,082 $2,755,606
======= ==========
Write-offs of accounts receivable were $74,749 for the year ended December
31, 1999. There were no significant write-offs during the years ended December
31, 1997 or 1998.
5. LONG-TERM INVESTMENTS
The Company's investments at December 31, 1999, consist of student loan
bonds which are collateralized by the U.S. government and underwritten by a
major financial institution. The maturity dates of these bonds are in excess of
one year from December 31, 1999 and, accordingly, they have been classified as
long-term investments. However, the Company has the option to sell these bonds
back to the financial institution at par value approximately every 28 days. Due
to the nature of these bonds, the cost
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis at December 31, 1999 approximates their fair value. Accordingly, the
Company has not recorded any unrealized gain or loss on these investments.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998 and
1999:
1998 1999
---------- -----------
Furniture and fixtures...................................... $ 133,678 $ 380,902
Office equipment............................................ 355,441 773,225
Computer equipment.......................................... 582,572 4,958,514
Internal use software....................................... -- 1,489,512
Leasehold improvements...................................... 95,683 233,464
---------- -----------
1,167,374 7,835,617
Less accumulated depreciation and amortization.............. (728,005) (1,312,996)
---------- -----------
$ 439,369 $ 6,522,621
========== ===========
The net book values of assets acquired under capital leases consisted of
the following at December 31, 1998 and 1999:
1998 1999
-------- ----------
Total asset under capital lease............................. $184,931 $1,586,467
Less: accumulated depreciation.............................. (19,544) (302,885)
-------- ----------
Net book value.............................................. $165,387 $1,283,582
======== ==========
7. LEASE OBLIGATIONS
The Company leases its office facilities and certain equipment under
operating and capital lease agreements. Future minimum lease payments under
noncancelable operating and capital leases at December 31, 1999 are as follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ ---------- ----------
2000........................................................ $1,956,737 $ 909,164
2001........................................................ 1,327,794 617,764
2002........................................................ 950,069 158,890
2003........................................................ 787,188 11,282
2004........................................................ 641,215 --
Thereafter.................................................. 935,478 --
---------- ----------
Total minimum lease payments...................... $6,598,481 1,697,100
==========
Less amount representing interest........................... (217,726)
----------
Present value of capital lease obligations.................. 1,479,374
Less current maturities..................................... (758,898)
----------
Capital lease obligations, less current maturities.......... $ 720,476
==========
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$302,739, $398,000 and $962,000, respectively.
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. OTHER ASSETS
Other assets are comprised of the following:
DECEMBER 31,
---------------------
1998 1999
------- -----------
Goodwill.................................................... $ -- $ 9,442,767
Capitalized software........................................ -- 1,491,805
Assembled workforce......................................... -- 2,031,801
Deferred customer acquisition costs......................... -- 5,632,603
Other....................................................... 36,862 181,981
------- -----------
36,862 18,780,957
Less accumulated amortization............................... -- (1,755,253)
------- -----------
$36,862 $17,025,704
======= ===========
During the year ended December 31, 1999, the Company recognized expense of
$217,632 related to the amortization of capitalized software, which is recorded
as cost of software and related services in the consolidated statements of
operations. Accumulated amortization of capitalized software costs is $217,632
at December 31, 1999. Prior to 1999, the Company did not have any capitalized
software.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
DECEMBER 31,
---------------------
1998 1999
-------- ----------
Accounts payable............................................ $360,552 $6,355,586
Accrued personnel costs..................................... 132,327 978,989
Accrued interest............................................ -- 191,166
Other accrued expenses...................................... 144,272 383,992
-------- ----------
$637,151 $7,909,733
======== ==========
10. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 consisted of the following:
1998 1999
----------- -----------
Promissory note due May 2001, interest of 8%................ $ -- $ 2,750,000
Promissory note due on the earlier of August 2002 or the
completion of specified milestones, interest of 8%........ -- 1,325,000
Promissory note due June 2002, interest of 8%............... -- 625,000
Promissory note due September 2001, interest of 8%.......... -- 150,000
Promissory notes, repaid in October 1999.................... 2,000,000 --
Promissory notes, converted to Series B preferred stock
in May 1999............................................... 3,114,000 --
----------- -----------
5,114,000 4,850,000
Less debt discount........................................ (1,013,691) --
Less current maturities................................... -- (2,283,000)
----------- -----------
$ 4,100,309 $ 2,567,000
=========== ===========
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BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended December 31, 1997, 1998 and 1999, the Company
entered into numerous debt agreements which were issued with warrants for the
Company's stock that were immediately exercisable or which became exercisable
depending on when the note was repaid, or when the Company's next round of
equity financing occurred.
Upon the issuance of the Series B Convertible Mandatorily Redeemable
Preferred Stock in May 1999 and the repayment of other notes during 1999, the
number of warrants, exercise price and equity instrument that could be purchased
under the terms of these warrants became fixed.
During the year ended December 31, 1997, the Company issued notes payable
in the aggregate amount of $3,200,000 which bore interest between 10% and 13.5%
per annum (the "1997 Notes"). In connection with the 1997 Notes, the Company
ultimately issued: (i) warrants to certain lenders to purchase 142,940 shares of
the Company's Series A preferred stock at an exercise price of $0.87 per share;
(ii) warrants to purchase 1,607,980 shares of the Company's common stock at an
exercise price of $0.0005 per share, which contain provisions whereby the
Company may be required to repurchase the warrants beginning May 31, 2006 (see
Note 13); and (iii) warrants to purchase 146,460 shares of the Company's common
stock at an exercise price of $1.1265 per share to an investment advisor. The
Company did not record any expense on the warrants paid to the lenders and
investment advisor, as the value of these warrants according to the
Black-Scholes pricing model was determined to be de minimus. The Company
recorded debt discount of $1,300,586, which consisted of $959,011 for the
estimated fair value of 1,607,980 warrants issued with the 1997 Notes and cash
expenditures related to the financing of $341,575. During 1997, the Company
issued 229,200 shares of Series A preferred stock in exchange for certain 1997
Notes with a principal balance of $200,000 and related accrued interest. During
1998, the Company revised the terms of a 1997 Note with a principal balance of
$1,000,000 (see discussion below). During the year ended December 31, 1999, the
Company repaid the remaining $2,000,000 principal balance of the 1997 Notes.
During the year ended December 31, 1998, the Company issued notes payable
in the aggregate amount of $2,114,000 which bore interest between 9.5% and 10%
per annum. The Company also revised the terms of a 1997 Note with a principal
balance of $1,000,000, which resulted in a loss on the early extinguishment of
debt of $106,911. This loss on the early extinguishment of debt is recorded as
an extraordinary item in the consolidated statement of operations. Collectively,
the notes issued in 1998 and the $1,000,000 1997 Note which was revised in 1998
are referred to as the "1998 Notes". In connection with the 1998 Notes, the
Company ultimately issued: (i) warrants to purchase 105,380 shares of the
Company's Series B mandatorily redeemable preferred stock at an exercise price
of $0.52 per share; and (ii) warrants to purchase 2,054,520 shares of the
Company's common stock at an exercise price of $0.0005 per share, of which
607,680 warrants contain provisions whereby the Company may be required to
repurchase the warrants beginning May 31, 2006 (see Note 13). During the year
ended December 31, 2008, the Company recorded debt discount of $422,099 for the
estimated fair value of the warrants issued with the 1998 Notes.
Between February and May 1999, the Company issued notes payable in the
aggregate amount of $2,000,000 which bore interest at 9.5% per annum (the "1999
Notes"). In connection with the 1999 Notes, the Company ultimately issued
warrants to purchase 1,080,000 shares of the Company's common stock at an
exercise price of $0.0005 per share. During the year ended December 31, 1999,
the Company recorded debt discount of $59,400 for the estimated fair value of
the warrants issued with the 1999 Notes.
In connection with the sale of Series B preferred stock in May 1999 (see
Note 11), certain 1998 Notes with principal balances of $2,750,000 and the 1999
Notes and related accrued interest were converted into 9,471,187 shares of the
Company's Series B preferred stock. At the time of the conversion, these notes
had an aggregate outstanding principal balance which totaled $4,750,000 and
accrued interest of $159,420. Proceeds from the sale of Series B preferred stock
were also used to repay the remaining
F-16
91
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 Notes with aggregate principal balances of $364,000 in May and June 1999,
at which time the Company recorded a loss on the early extinguishment of debt of
$28,401. This loss on the early extinguishment of debt is recorded as an
extraordinary item in the consolidated statement of operations. The Company also
paid $315,000 to the holders of the certain 1998 Notes in exchange for waiving
their right to receive warrants that would have been earned as result of the
notes being outstanding on April 24, 1999. This payment was recorded by the
Company as additional interest expense.
The Company's long-term debt as of December 31, 1999 consisted solely of
debt incurred in connection with acquisitions of businesses and proprietary
software (see Note 3).
Maturities of long-term debt as of December 31, 1999 were as follows:
2000........................................................ $2,283,000
2001........................................................ 2,008,666
2002........................................................ 558,334
----------
$4,850,000
==========
11. CAPITAL STOCK
In October 1999, the Company declared a twenty-for-one stock split for all
common and preferred shareholders. All share and per share amounts have been
retroactively adjusted to reflect this transaction.
On October 29, 1999, the Company's Articles of Incorporation were amended
to authorize 500,000,000 shares of stock with a par value of $0.01, of which
350,000,000 shares were designated as common stock. The Company designated
150,000,000 shares of preferred stock, of which 1,268,920 shares were designated
Series A convertible preferred stock (the "Series A preferred"), 74,563,680
shares were designated Series B convertible preferred stock (the "Series B
preferred"), which are mandatorily redeemable, 25,000,000 shares were designated
as Series C convertible preferred stock (the "Series C preferred"), which were
also mandatorily redeemable, and 49,167,400 shares were undesignated. At all
times, the Company shall reserve a number of shares of unissued common stock for
the purpose of effecting the conversion of all issued and outstanding shares of
preferred stock and the exercise of all outstanding warrants and options to
purchase the Company's common stock.
During the year ended December 31, 1997, the Company issued 489,920 shares
of Series A preferred stock in exchange for the conversion of promissory notes
and accrued interest which totaled $461,079 (see Note 10).
In May 1999, the Company issued 19,711,360 shares of common stock and
1,279,453 options and 372,840 warrants to purchase the Company's common stock to
the former stockholders, option holders, and warrant holders of FAST (see Note
3).
Between August and December 1999, employee stock options to purchase
13,340,000 shares of common stock with exercise prices ranging between $0.06 and
$1.40 were exercised by certain officers of the Company in exchange for full
recourse promissory notes in the amount of $2,237,100. The notes are due between
August 2003 and December 2003 and bear interest between 5.9% and 6.2%.
Rights, Preferences, and Terms of Capital Stock
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of common and preferred stock.
F-17
92
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends
The holders of all series of the Company's preferred stock are entitled to
receive non-cumulative dividends, when, as, and if declared by the board of
directors. In the event that the Company declares any dividends or other
distributions for holders of common stock or for holders of any series of
preferred stock, the holders of shares of all series of preferred stock shall be
entitled to receive the same dividend or distribution on an as converted basis.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company,
holders of Series A preferred stock shall be entitled to receive on a pro rata
basis with holders of Series B and Series C preferred stock based on their
respective liquidation values, an amount equal to $0.875 per share, adjusted for
any stock splits or dividends, plus any accrued but unpaid dividends. Holders of
Series B preferred stock shall be entitled to receive, on a pro rata basis with
holders of Series A and Series C preferred stock based on their respective
liquidation values, an amount equal to the greater of $0.51835 per share,
adjusted for any stock splits or dividends, plus any accrued but unpaid
dividends, times a multiple as defined in the Company's Articles of
Incorporation (the "Series B Multiple") or the amount the holders of Series B
preferred stock would have received if their shares had been converted into
common stock immediately prior to the liquidation, dissolution, or winding up of
the Company. The Series B Multiple is initially equal to two, and shall increase
upon the violation of certain covenants. As of December 31, 1999, the Company
had not violated any covenants, and the Series B Multiple was therefore two.
Holders of Series C preferred stock shall be entitled to receive, on a pro rata
basis with holders of the Series A and Series B preferred stock based on their
respective liquidation values, the greater of an amount equal to $4.40 per
share, adjusted for any stock splits or dividends, plus any accrued but unpaid
dividends or the amount the holders of Series C preferred stock would have
received if their shares had been converted into common stock immediately prior
to the liquidation, dissolution, or winding up of the Company. After all
payments have been made to the holders of Series A, Series B, and Series C
preferred stock, any remaining assets will be distributed on a pro rata basis to
the holders of common stock.
The following is a summary of the liquidation values for the Series A,
Series B, and Series C preferred shares as of December 31, 1999:
Series A preferred stock.................................... $ 978,985
Series B mandatorily redeemable preferred stock............. 71,565,391
Series C mandatorily redeemable preferred stock............. 107,019,515
------------
Total............................................. $179,563,891
============
Voting
Holders of Series A, Series B and Series C preferred shares have voting
rights on an as if converted basis.
Conversion
Each share of Series A, Series B and Series C preferred stock, at the
option of the holder, is convertible into shares of common stock of the Company
at a one to one ratio, subject to certain adjustments as defined. Conversion is
automatic for holders of Series A, Series B and Series C preferred stock upon
the sale of the Company's common stock pursuant to an underwritten public
offering with gross proceeds of at least $18,000,000 at a minimum per share
price of $8.80.
F-18
93
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. MANDATORILY REDEEMABLE PREFERRED STOCK
In May 1999, the Company sold 24,160,125 shares of Series B preferred in a
private placement transaction for $0.52 per share which resulted in net proceeds
of $12,148,156 and issued 9,471,187 shares of Series B preferred in exchange for
the cancellation of notes payable and accrued interest with an aggregate
carrying value of $4,500,072. In connection with the initial sale of Series B
preferred, the Company issued warrants to purchase 212,000 shares of the
Company's common stock at an exercise price of $0.0005 which expire in 2009 and
warrants to purchase 20,000 shares of the Company's common stock at an exercise
price of $1.1265 which expire in 2003. The Company did not record issuance cost
related to the value of these warrants as the value of the warrants using the
Black-Scholes pricing model was determined to be de minimis. Certain holders of
Series B were obligated to purchase an additional 35,400,608 shares of Series B
on or before the achievement of certain milestones by the Company. These
additional shares were purchased by those holders of Series B preferred between
September and December 1999, resulting in net proceeds of $18,318,894. Proceeds
of the Series B private placement are net of related offering costs of $405,823.
Between October and December 1999, the Company issued 24,322,619 shares of
Series C preferred stock in a private placement transaction for $4.40 per share
which resulted in net proceeds of $102,295,218, of which $73,845,034 was
received by the Company prior to December 31, 1999, $24,925,184 was being held
in escrow by the Company's attorneys at December 31, 1999 and was disbursed to
the Company subsequent to December 31, 1999, and $3,525,000 was received by the
Company's attorneys and disbursed to the Company subsequent to December 31,
1999. Proceeds of the Series C private placement are net of related offering
costs of $4,680,994.
Upon any request by any holder of Series B preferred shares at any time
after May 31, 2004, the Company must redeem the Series B preferred at a price
equal to $0.51835 per share, adjusted for any stock splits or dividends, plus
any accrued but unpaid dividends, times the Series B Multiple. Upon any request
by any holder of Series C preferred shares at any time after May 31, 2004, the
Company must redeem the Series C preferred at a price equal to $4.40 per share,
adjusted for any stock splits or dividends, plus any accrued but unpaid
dividends. The carrying value of both the Series B preferred and the Series C
preferred is being accreted up to the redemption value through the initial
redemption date. As a result, the Company recorded charges of $2,068,378 to
shareholders' equity during the year ended December 31, 1999.
The following table summarizes the Company's outstanding shares and
carrying value of mandatorily redeemable convertible preferred stock at December
31, 1999:
SHARES CARRYING
OUTSTANDING VALUE
----------- ------------
Series B preferred.......................................... 69,031,920 $ 36,949,130
Series C preferred.......................................... 24,322,619 102,298,853
---------- ------------
93,354,539 $139,247,983
========== ============
Upon the closing of the Series B preferred private placement, the Series A
preferred shareholders were paid $167,211 based on the antidilution rights of
the Series A preferred shares.
13. STOCK COMPENSATION
In October 1997, the Company adopted the 1997 BuildNet Stock Plan (the
"1997 Plan") which provided for the grant of up to 3,100,000 incentive stock
options and non-qualified stock options. In May 1999, the Company adopted the
1999 BuildNet Stock Plan (the "1999 Plan") which provided for the grant of up to
30,000,000 incentive stock options and non-qualified stock options, and
determined that no
F-19
94
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional options were to be issued under the 1997 plan. In connection with the
Company's purchase of FAST (see Note 3), the Company also assumed options
outstanding under the FAST stock option plan (the "FAST Plan"). Under the 1997
Plan, the 1999 Plan and the FAST Plan (collectively, the "Plans"), incentive
stock options could be granted to employees of the Company and non-qualified
stock options may be granted to directors, employees and consultants. Incentive
stock options granted under the Plans must be for periods not to exceed ten
years, except for options granted to shareholders who own greater than 10% of
the outstanding stock, which must be for periods not to exceed five years.
Options granted under the Plans generally vest over four to five years. Certain
options issued under the 1999 Plan include acceleration clauses whereby the
vesting of the options will accelerate upon the achievement of specified
milestones by the Company. The Company records expense for options granted to
consultants based on the fair value of the options as determined under the
Black-Scholes pricing model.
The Company continues to apply Accounting Principles Board Opinion No. 25
and related interpretations in accounting for the Plans. The Company recognized
$202,017, $22,136 and $665,782 in noncash compensation expense related to
amortization of deferred compensation expense during the years ended December
31, 1997, 1998 and 1999, respectively. Had compensation cost for the Plans been
determined based on the fair value at the grant dates for awards under the Plans
consistent with the method of SFAS No. 123, the Company's net loss for the years
ended December 31, 1997, 1998 and 1999 would have been increased to the pro
forma amounts indicated below:
1997 1998 1999
---------- ---------- -----------
Net loss available to common shareholders:
As reported..................................... $1,665,467 $3,345,765 $30,764,709
Pro forma....................................... 1,665,659 3,347,060 34,111,769
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: risk-free interest of 6.25%, 5.50% and 6.25% during
the years ended December 31, 1997, 1998 and 1999, respectively; expected lives
of five years; dividend yields of 0%; and volatility features of 0%.
A summary of changes under the Plans during the years ended December 31,
1997, 1998 and 1999 is presented below:
1997 1998 1999
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ----------- --------
Outstanding at beginning
of year................. -- $ -- 1,396,480 $0.10 2,271,780 $0.10
Granted with exercise
price below fair value
of underlying stock..... 1,396,480 0.10 919,680 0.10 15,709,800 0.79
Granted with exercise
price equal to fair
value of underlying
stock................... -- -- -- 12,286,233 0.48
Exercised................. -- -- -- (14,848,144) 0.15
Forfeited................. -- 0.10 (44,380) 0.10 (478,415) 0.08
--------- ----- --------- ----- ----------- -----
Outstanding at end of
year.................... 1,396,480 $0.10 2,271,780 $0.10 14,941,254 $0.75
========= ===== ========= ===== =========== =====
Options exercisable at end
of year................. 918,260 $0.10 1,042,820 $0.10 2,555,123 $0.11
========= ===== ========= ===== =========== =====
F-20
95
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options at December 31, 1999:
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF
OPTIONS CONTRACTUAL EXERCISABLE OPTIONS
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE
- ------------------------ ----------- ----------- ----------- -----------
$0.005 -- $0.1815.......................... 7,731,734 9.2 $0.12 2,551,323
$0.62...................................... 16,520 8.9 0.62 3,800
$1.10 -- $1.40............................. 7,193,000 9.9 1.40 --
---------- --- ----- ---------
14,941,254 9.5 $0.75 2,555,123
========== === ===== =========
The weighted average fair value of options granted during the years ended
December 31, 1997, 1998 and 1999 was $0.22, $0.06 and $1.18, respectively.
During 1999, the Company issued the following stock options with exercise
prices below the fair market value of the underlying common stock:
WEIGHTED
SHARES AVERAGE DEFERRED
UNDERLYING EXERCISE COMPENSATION
MONTH OF GRANT OPTIONS PRICE RECORDED
- -------------- ---------- -------- ------------
August 1999.......................................... 3,273,900 $0.06 $ 286,000
September 1999....................................... 1,440,000 0.17 1,346,400
October 1999......................................... 3,411,800 0.17 3,224,628
December 1999........................................ 8,193,000 1.40 24,586,500
-----------
$29,443,528
===========
Accordingly, $29,443,528 was recorded as deferred compensation in
shareholders' equity and is being amortized over the option vesting period.
F-21
96
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. WARRANTS
The Company had the following warrants to purchase the Company's capital
stock exercisable at December 31, 1999:
EXERCISE
NUMBER OF TYPE OF PRICE PER EXPIRATION
SHARES WARRANTS SHARE DATE
- --------- -------------------------------- --------- --------------------------------
2,469,040 Non-redeemable warrants for $0.0005 Earlier of 2008 through 2009, or
common stock close of an initial public
offering
200,760 Non-redeemable warrants for 0.0857 2005
common stock
172,080 Non-redeemable warrants for 0.1000 2002
common stock
166,460 Non-redeemable warrants for 1.1265 Earlier of 2002 through 2003, or
common stock close of an initial public
offering
2,215,660 Redeemable warrants for common 0.0005 2007 through 2009
stock
150,080 Non-redeemable warrants for 0.8745 Earlier of 2001 through 2002, or
Series A convertible preferred close of an initial public
stock offering
105,380 Non-redeemable warrants for 0.5184 Earlier of 2008, or close of an
Series B preferred stock initial public offering
1,356,600 Non-redeemable warrants for 0.5184 2004
Series B preferred stock
- ---------
6,836,060
=========
See Notes 10 and 12 for a description of the terms of the warrants
summarized above that were issued in connection with debt and equity financing
transactions.
The redeemable warrants for 2,215,660 shares of common stock included in
the above summary are being carried at their redemption value of $9,748,903 at
December 31, 1999. Warrants for 105,380 shares of Series B preferred stock
included in the above summary are being accreted to the redemption value of the
Series B preferred stock through the redemption date of the Series B (see Note
12), less the exercise price of the warrants. The carrying value of the warrants
for Series B preferred stock as of December 31, 1999 is $6,373. At December 31,
1998, the carrying value of redeemable warrants of $250,277 consisted of the
fair value of the warrants for 2,215,660 shares of common stock discussed above,
and $128,416 for the fair value of additional warrants that were forfeited
during 1999 because the related debt was extinguished prior to the end of its
term. Because the redeemable common stock warrants and the warrants for Series B
preferred stock were initially issued in connection with debt, any changes to
the carrying value of these warrants is being recorded as interest expense
(income). The Company recorded interest expense (income) of $0, ($708,734) and
$9,504,999 during the years ended December 31, 1997, 1998 and 1999,
respectively, as result of changes in the carrying value of these warrants.
In connection with the sale of Series B preferred stock in May 1999 (see
Note 12), the Company entered into a warrant agreement with a holder of Series B
preferred stock, whereby the shareholder has the right to earn up to 5,426,380
warrants to purchase the Company's Series B preferred stock at an exercise price
of $0.51835 per share upon the achievement of certain sales and marketing
objectives, as defined in the warrant agreement. As of December 31, 1999,
1,356,600 warrants had been earned under this agreement based on the achievement
of objectives related to the signing of contracts with specific
F-22
97
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
homebuilding industry manufacturers. Accordingly, the Company recorded
$5,632,603 in deferred customer acquisition costs based on the estimated fair
value of these warrants using the Black-Scholes pricing model. Deferred customer
acquisition costs are being amortized as a sales and marketing expense over the
term of the manufacturer contracts and are included in other assets. For the
year ended December 31, 1999, $117,346 was amortized as a sales and marketing
expense.
15. EMPLOYEE BENEFIT PLANS
In connection with the acquisition of McCosker during the year ended
December 31, 1999 (see Note 3), the Company assumed a 401(k) plan for all
qualified former employees of McCosker (the "McCosker Plan"). McCosker employees
may elect to contribute up to 15% of eligible compensation during any individual
plan year. Matching contributions to the McCosker Plan are made at the
discretion of the Board of Directors. The Company has not made any contributions
to the McCosker Plan during the year ended December 31, 1999.
In connection with the acquisition of FAST during the year ended December
31, 1999 (see Note 3), the Company assumed a 401(k) plan for all qualified
employees of FAST (the "FAST Plan"). FAST employees may elect to contribute up
to 15% of eligible compensation during any individual plan year. The Company is
obligated to provide a 25% matching contribution for an employee's contribution
up to 2% of an employee's eligible salary. Matching contributions may also be
made at the discretion of the Board of Directors. During the year ended December
31, 1999, the Company made contributions to the FAST Plan of $9,500.
At December 31, 1999, the Company has a 401(k) plan covering substantially
all employees of the Company that are not covered under the McCosker Plan or the
FAST Plan (the "BuildNet Plan"). Employees may elect to contribute up to 15% of
eligible compensation during any individual plan year. Matching contributions to
the BuildNet Plan are made at the discretion of the Board of Directors. The
Company has not made any contributions to the BuildNet Plan during the years
ended December 31, 1997, 1998 or 1999.
16. INCOME TAXES
No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses since inception.
F-23
98
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1999 and 1998 consisted of the following:
1998 1999
----------- ------------
Domestic net operating loss carryforwards.................. $ 1,901,439 $ 11,765,648
Stock-based compensation................................... 86,938 345,161
Accrued compensation....................................... 22,554 --
Deferred revenue........................................... -- 145,444
Bad debt................................................... 10,849 53,991
Fixed assets............................................... 10,469 160,536
Other reserves............................................. 20,087 13,213
----------- ------------
Total deferred tax assets........................ 2,052,336 12,483,993
Valuation allowance for deferred assets.......... (2,052,336) (12,229,548)
----------- ------------
Deferred tax assets.............................. $ -- $ 254,445
=========== ============
Acquired intangibles....................................... -- 254,445
----------- ------------
Total deferred tax liabilities................... -- 254,445
----------- ------------
Net deferred tax asset (liability)............... $ -- $ --
=========== ============
During 1999, the Company acquired the stock of FAST, Systems Analysis, and
Maxwell. These acquisitions were accounted for using the purchase method of
accounting. The purchase price of these companies was in excess of the carryover
tax basis of the assets acquired, resulting in the recognition of a deferred tax
liability of $592,264. Since the acquired companies and the Company may elect to
file a consolidated return on an ongoing basis, the future taxable difference
may be offset by the Company's future deductible differences, primarily its net
operating loss carryforwards. Therefore, the Company's valuation allowance
against its deferred tax asset and its investments in the acquired subsidiaries
was reduced by $592,264.
At December 31, 1998 and 1999, the Company provided a full valuation
allowance against its net deferred tax assets since realization of these
benefits could not be reasonably assured. The increase in valuation allowance
resulted primarily from the additional net operating loss carryforward
generated.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of $30,335,000. These net operating loss carryforwards begin
to expire in 2011. The utilization of the federal net operating loss
carryforwards may be subject to limitation under the rules regarding a change in
stock ownership as determined by the Internal Revenue Code.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
1997 1998 1999
----------------- ------------------- -------------------
United States Federal tax at
statutory rate............ $(566,259) 34.0% $(1,137,560) 34.0% $(9,660,004) 40.1%
State taxes (net of Federal
benefit).................. (82,441) 5.0 (162,511) 4.9 (1,328,657) 5.5
Change in valuation
reserves.................. 598,399 (35.9) 1,338,721 (40.0) 10,769,476 (44.7)
Nondeductible goodwill...... -- -- -- -- 168,623 (0.7)
Nondeductible merger
expenses.................. -- -- -- -- 64,455 (0.3)
Other....................... 50,301 (3.0) (38,650) 1.2 (13,893) 0.1
--------- ----- ----------- ----- ----------- -----
Provision for income
taxes..................... $ -- $ -- $ --
--------- ----- ----------- ----- ----------- -----
F-24
99
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS
Stock Split
On , 2000, the Board of Directors approved a
-for- common stock split to be effective prior to
the effective date of the Company's planned initial public offering. All share
and per share information has been retroactively restated to reflect the effect
of this stock split.
Strategic Relationships
In the first quarter of 2000, the Company issued to homebuilders and
suppliers warrants to purchase 500,000 shares of our common stock at an exercise
price of $4.40 per share and 600,000 shares of Series C preferred stock at an
exercise price of $4.40 per share. The warrants become exercisable as the
homebuilders and suppliers achieve these milestones, related to the promotion
and adoption of the BuildNet Exchange. As the homebuilders and suppliers achieve
milestones, the Company will record a non-cash charge as sales and marketing
expense when these warrants become exercisable, based on the fair market value
of the warrants. In addition, the homebuilders and suppliers can earn warrants
to purchase up to an additional 2,500,000 shares of the Company's common stock
at an exercise price of $4.40 per share and 4,400,000 shares of the Company's
Series C preferred stock at an exercise price of $4.40 per share based on the
homebuilders' and suppliers volume of transactions through the BuildNet
Exchange. The Company will record a non-cash charge as sales and marketing
expense when these warrants become exercisable, based on the fair market value
of the warrants on the date that they become exercisable. All of the warrants
issued to the homebuilders and suppliers will expire three years from their
respective dates of issuance.
Acquisitions
On January 18, 2000, the Company purchased substantially all the assets and
assumed certain liabilities of The UniLink Group, LLC ("UniLink") in exchange
for a convertible note payable in the amount of $27,000,000 with interest of 8%
per annum. Principal and accrued interest on the note may be paid at any time on
or before January 18, 2002. The note payable is convertible into the Company's
common stock at the option of the holder at any time prior to the maturity date
or the date the note is repaid, if earlier. Conversion is mandatory upon the
expiration of any lock up period to which certain of the Company's investors are
subject following an initial public offering of the Company's common stock. The
note shall be converted at a rate of $4.40 per share of common stock, adjusted
for any stock splits or dividends, and is collateralized by the assets that were
purchased. The assets acquired included software products and systems for the
electronic processing of electronic commerce transactions in the electrical,
plumbing, appliances and heating, ventilation and air conditioning markets and
for the electronic processing of warranty claims. In connection with this
purchase, the Company entered into an agreement with the former owners of
UniLink whereby the Company will process warranty transactions in the consumer
electronic industry for a company owned by the former Unilink owners in exchange
for a fee of seventy five percent of the amount charged by the former owners of
UniLink to those customers.
On January 31, 2000, the Company purchased the homebuilder software module
of the World Software System software product from J.D. Edwards World Source
Company ("J.D. Edwards") in exchange for cash of $650,000 and a note payable in
the amount of $5,850,000 with interest of 8% per annum. Principal and accrued
interest payable on this note are due on January 25, 2001. J.D. Edwards has the
option to convert the note payable into shares of the Company's common stock at
the closing of the Company's initial public offering. The conversion price shall
be the per share price paid by investors in such public offering of the
Company's common stock. The note payable is collateralized by the software
product that was purchased.
F-25
100
BUILDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 21, 2000, the Company entered into a definitive agreement to
purchase all of the outstanding capital stock and stock options of NxTrend
Technology, Inc. ("NxTrend") in exchange for an aggregate amount of 25,954,659
shares of the Company's common stock and options to purchase the Company's
common stock and notes payable of $32,500,000. NxTrend is a provider of
enterprise-wide software solutions that address the critical business
information requirements of durable goods wholesale distributors. The notes
payable carry an interest rate of 8% per annum and are payable in four equal
installments beginning on the one year anniversary of the closing of the
transaction and each six month anniversary thereafter. Upon the closing of an
underwritten initial public offering of the Company's common stock, the holders
of the notes payable will have the option to convert principal of up to
$4,400,000 of their notes payable into the Company's common stock at a
conversion price equal to the per share price paid for the Company's common
stock in such public offering. In addition, the remaining principal balance of
the notes will be payable in full on the seventh day following such public
offering. The Company also committed to issue new employment options to purchase
up to 1,000,000 shares of the Company's common stock to employees of NxTrend.
This transaction is subject to regulatory approval.
Stock Option Plan
On March 16, 2000, the Company's board of directors approved an increase in
the number of stock options available under the 1999 Plan to 55,000,000.
F-26
101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
NxTrend Technology, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of NxTrend Technology, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 15 on February 21, 2000, the Company entered into a
definitive agreement to be acquired by BuildNet, Inc.
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
February 21, 2000
F-27
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NXTREND TECHNOLOGY, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,266,303 $ 403,025
Accounts receivable, net of allowance for doubtful
accounts of $435,000 and $547,200, respectively........ 15,647,578 14,406,122
Other current assets...................................... 961,574 644,894
----------- -----------
Total current assets.............................. 17,875,455 15,454,041
Property and equipment, net................................. 2,177,672 1,903,655
Other assets, net........................................... 2,583,278 476,173
Deferred income taxes -- noncurrent......................... 1,023,685 1,745,829
----------- -----------
Total assets...................................... $23,660,090 $19,579,698
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 8,767,796 $ 5,856,480
Deferred revenue.......................................... 9,699,925 11,109,423
Note payable -- current portion........................... 4,669,020 4,634,320
Capital lease obligation -- current portion............... 73,171 95,604
----------- -----------
Total current liabilities......................... 23,209,912 21,695,827
----------- -----------
Other long-term liabilities................................. 175,074 --
Note payable, net of current portion........................ 5,284,320 --
Capital lease obligation, net of current portion............ 165,251 97,311
Series A and B mandatorily redeemable convertible preferred
stock, $1,000 par value; aggregate liquidation and
redemption preference of $32,500,000 as of December 31,
1998 and 1999; 32,500 shares authorized, issued and
outstanding as of December 31, 1998 and 1999.............. 32,500,000 32,500,000
Commitments(Note 13)
Stockholders' deficit:
Common stock, $0.01 par value; 10,000,000 shares
authorized; 1,603,565 and 1,671,207 shares outstanding
as of December 31, 1998 and 1999, respectively......... 16,035 16,712
Additional paid-in capital................................ 1,994,626 2,129,548
Deferred compensation..................................... -- (56,723)
Accumulated deficit....................................... (39,685,128) (36,802,977)
----------- -----------
Total stockholders' deficit....................... (37,674,467) (34,713,440)
----------- -----------
Total liabilities and stockholders' deficit....... $23,660,090 $19,579,698
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-28
103
NXTREND TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
Revenues................................................ $49,601,489 $57,881,453 $59,583,778
Cost of revenues........................................ 25,500,261 30,020,245 31,243,221
----------- ----------- -----------
Gross profit.................................. 24,101,228 27,861,208 28,340,557
----------- ----------- -----------
Operating expenses:
Research and development.............................. 5,010,041 5,794,549 7,297,882
Sales and marketing................................... 5,390,270 6,320,161 9,262,672
General and administrative............................ 5,916,798 7,151,854 6,875,631
Stock-based compensation.............................. -- 1,166,000 1,157
Purchased in-process research and development......... 230,000 -- --
----------- ----------- -----------
Total operating expenses...................... 16,547,109 20,432,564 23,437,342
----------- ----------- -----------
Operating income.............................. 7,554,119 7,428,644 4,903,215
Other income (expense):
Interest income....................................... 78,031 103,443 241,885
Interest expense...................................... (1,624,488) (1,343,063) (663,336)
Other, net............................................ 115,193 305,380 52,966
----------- ----------- -----------
Total other income (expense).................. (1,431,264) (934,240) (368,485)
----------- ----------- -----------
Income before income taxes.................... 6,122,855 6,494,404 4,534,730
Provision for income taxes.............................. (2,008,671) (2,908,931) (1,652,579)
----------- ----------- -----------
Net income.................................... $ 4,114,184 $ 3,585,473 $ 2,882,151
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-29
104
NXTREND TECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- ---------- ------------ ------------ ------------
BALANCES, DECEMBER 31, 1996....... 1,281,690 $12,816 $ 307,606 $(47,384,785) $ -- $(47,064,363)
Issuance of common stock in
exchange for acquisition of
assets........................ 105,556 1,056 833,946 -- -- 835,002
Stock options exercised......... 78,120 782 47,261 -- -- 48,043
Net income...................... -- -- -- 4,114,184 -- 4,114,184
--------- ------- ---------- ------------ -------- ------------
BALANCES, DECEMBER 31, 1997....... 1,465,366 14,654 1,188,813 (43,270,601) -- (42,067,134)
Restricted common stock
repurchased................... (40,053) (401) (9,613) -- -- (10,014)
Stock options exercised......... 178,252 1,782 248,966 -- -- 250,748
Stock-based compensation........ -- -- 566,460 -- -- 566,460
Net income...................... -- -- -- 3,585,473 -- 3,585,473
--------- ------- ---------- ------------ -------- ------------
BALANCES, DECEMBER 31, 1998....... 1,603,565 16,035 1,994,626 (39,685,128) -- (37,674,467)
Stock options exercised......... 67,642 677 77,042 -- -- 77,719
Stock-based compensation........ -- -- 57,880 -- (57,880) --
Amortization of deferred
compensation.................. -- -- -- -- 1,157 1,157
Net income...................... -- -- -- 2,882,151 -- 2,882,151
--------- ------- ---------- ------------ -------- ------------
BALANCES, DECEMBER 31, 1999....... 1,671,207 $16,712 $2,129,548 $(36,802,977) $(56,723) $(34,713,440)
--------- ------- ---------- ------------ -------- ------------
The accompanying notes are an integral part of these financial statements.
F-30
105
NXTREND TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $4,114,184 $3,585,473 $2,882,151
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 3,372,121 2,959,734 2,964,580
Provision for bad debt................................... 177,801 111,000 112,200
Deferred income tax provision (benefit).................. (817,419) (538,679) (572,797)
Stock-based compensation................................. -- 566,460 1,157
Write off of purchased in-process research and
development........................................... 230,000 -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (2,405,416) (2,153,794) 1,129,256
Other assets.......................................... 236,455 853,568 296,009
Accounts payable and accrued liabilities.............. 114,081 2,698,520 (2,611,316)
Deferred revenue...................................... 826,649 1,587,568 1,409,498
Other long term liabilities........................... -- 175,074 (175,074)
---------- ---------- ----------
Net cash provided by operating activities........ 5,848,456 9,844,924 5,435,664
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (627,005) (1,309,857) (723,153)
Purchase of computer software............................ (806,196) -- --
Payments for acquisitions, net of cash acquired of
$158,108.............................................. (2,197,792) -- --
Payments for covenant not to compete..................... (500,000) (500,000) (300,000)
Proceeds from disposal of assets......................... 50,000 82,642 11,019
Repayments on note receivable............................ -- 47,500 --
---------- ---------- ----------
Net cash used in investing activities............ (4,080,993) (1,679,715) (1,012,134)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit................... 2,750,000 1,250,000 --
Payments of revolving line of credit..................... (500,000) (2,850,000) (650,000)
Payments of term loan.................................... (4,147,000) (6,049,660) (4,669,020)
Proceeds from exercise of common stock options........... 47,261 250,748 77,719
Principal payments for capital lease..................... (48,188) (77,411) (45,507)
---------- ---------- ----------
Net cash used in financing activities............ (1,897,927) (7,476,323) (5,286,808)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents....... (130,464) 688,886 (863,278)
Cash and cash equivalents, beginning of period............. 707,881 577,417 1,266,303
---------- ---------- ----------
Cash and cash equivalents, end of period................... $ 577,417 $1,266,303 $ 403,025
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-31
106
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
NxTrend Technology, Inc., a Delaware corporation, (the "Company"), is a
provider of enterprise-wide software solutions that address the critical
business information requirements of durable goods wholesale distributors. The
Company develops, licenses and supports proprietary management and accounting
software products, which are marketed under their trademarks, "Strategic
Exchange" or "SX", "Trend", "SHIMS" and "WDS-II." The Company also provides
business consulting services, implementation services, modification services and
training for its customers. In connection with its software license
arrangements, the Company also sells, installs and supports third-party software
and computer equipment. The Company operates primarily in the United States, and
also has operations in Canada. The Company's products and services are marketed
primarily through the Company's direct sales force and, to a significantly
lesser degree, independent resellers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities as well as disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers cash on hand, demand deposits in banks, and all
highly liquid investments with original maturities of three months or less to be
cash and cash equivalents.
Inventories
Inventories consist primarily of computer equipment and third-party
software and are stated at the lower of cost (average cost method) or market.
Software Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," capitalization of software development costs commences upon the
establishment of technological feasibility of the product. The Company's
software products are deemed to be technologically feasible at the point a
working model of the software product is developed, which is generally at or
near the point the Company commences field testing of the software. Through
December 31, 1999, for the products developed by the Company, the period from
field testing to the general customer release of the software has been brief
and, accordingly, the Company has not capitalized any qualifying software
development costs in the accompanying financial statements. The Company has
capitalized the estimated fair value of software products that have been
acquired (see Note 3).
Internal Use Software
Effective January 1, 1999, the Company adopted the provisions of the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("AICPA") Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No.
98-1"). SOP No. 98-1 provides guidance regarding when software developed or
obtained for internal use should be capitalized. Under the provisions of SOP No.
98-1, external direct costs of
F-32
107
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
materials and services consumed in the development of internal-use computer
software, payroll and payroll related costs for employees directly associated
with internal-use computer software projects, and interest costs incurred while
developing internal-use computer software should be capitalized once the
preliminary project stage has been completed, management has authorized and
committed to funding the project, and it is probable that the project will be
completed and that the software will be used to perform the function intended.
Such costs should be capitalized until the software is ready for its intended
use, at which time the costs should be amortized over their estimated useful
life.
Start-Up Costs
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities," ("SOP No. 98-5") which is effective for fiscal years beginning
after December 15, 1998. SOP No. 98-5 requires companies to expense as incurred
all preopening, start-up and organizational costs that are not capitalizable as
long-lived assets. The Company adopted SOP No. 98-5 effective January 1, 1999.
The adoption of SOP No. 98-5 had no impact on the Company's financial condition
or results of operations.
Property and Equipment
Property and equipment is primarily comprised of furniture and computer
equipment which are recorded at cost and depreciated using the straight-line
method over their estimated useful lives which range from three to five years.
Property and equipment includes certain equipment under capital leases. These
items are depreciated over the shorter of the lease period or the estimated
useful life of the equipment. Maintenance and repairs are expensed as incurred.
Intangible Assets
The purchase price paid in excess of net tangible assets acquired, goodwill
and non-compete payments to a stockholder are being amortized using the
straight-line method over periods of three and four years, respectively. The
deferred debt issuance costs are being amortized over the term of the debt.
Licensed software and purchased software are being amortized using the
straight-line method over a period of three years.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment,
goodwill and other intangible assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of " ("SFAS No. 121"). SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the estimated future undiscounted cash flows
attributable to such assets or the business to which such assets relate. No
impairments were required to be recognized during the years ended December 31,
1997, 1998 and 1999.
Revenue Recognition
The Company's revenue is derived from software licenses as well as support
and maintenance, training and consulting services. The Company adopted American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") No. 97-2, "Software Revenue Recognition," as amended effective January
1, 1998. The Company adopted the provisions of SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions,"
effective January 1, 1999. These adoptions did not have a material effect on the
timing of the Company's revenue recognition or cause changes to its revenue
recognition policies.
F-33
108
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from software licenses and related sales of hardware are
recognized when there is evidence of an arrangement, the product has been
shipped, fees are fixed and determinable and collection of the related
receivable is probable. Support and maintenance revenues are deferred and
recognized ratably over the service period. When software and services are sold
under one contract, revenue is allocated to each element based on their
respective fair values, with these fair values being determined using the price
charged when that element is sold separately. Consulting and training services
revenue, which is also included in services revenue, is deferred and recognized
as the services are performed.
Cost of Revenues
Cost of revenues includes the cost of media, product packaging, third-party
software license fees, other production costs and salaries, benefits and
allocated overhead costs related to consulting, training and customer support
personnel.
Other Income, Net
For the years ended December 31, 1997, 1998 and 1999, other income was
primarily comprised of referral fees paid by third-party hardware and software
vendors as well as transaction gains and losses resulting from the Company's
foreign operations.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") which states that no compensation expense is
recognized for stock options or other stock-based awards to employees that are
granted with an exercise price equal to or above the estimated fair value per
share of the Company's common stock on the grant date. In the event that stock
is granted with an exercise price below the estimated fair market value of the
Company's common stock at the grant date, the difference between the fair market
value of the Company's common stock and the exercise price of the stock option
is recorded as deferred compensation. Deferred compensation is amortized to
compensation expense over the vesting period of the stock option. The Company
has adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which requires net income to be disclosed on a pro forma basis based on the fair
value of the options granted at the date of the grant.
Sales and Marketing Expenses
Sales and marketing expenses consist of costs, including salaries and sales
commissions, of all personnel involved in the sales process. Sales and marketing
expenses also include costs of advertising, trade shows and certain indirect
cost.
Advertising Costs
All costs of advertising the services and products offered by the Company
are expensed as incurred. Advertising expense totaled $245,937, $326,739, and
$934,878 for the years ended December 31, 1997, 1998 and 1999, respectively.
Research and Development Costs
Research and development expenses include all direct costs, primarily
salaries for Company personnel and outside consultants and allocated overhead
costs, related to the development of new products and
F-34
109
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
significant enhancements to existing products and are charged to operations as
incurred until such time as technological feasibility is achieved.
Income Taxes
Deferred income tax assets and liabilities are recorded for the expected
future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax basis of assets, liabilities
and tax carryforwards. Deferred tax assets are recognized for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits which,
more likely than not, based on current circumstances, are not expected to be
realized. Income tax provision for a particular period is the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and cash
equivalents. The Company's customers generally operate as wholesale distributors
of durable goods; accordingly, the Company's accounts receivable are
concentrated among wholesale distributors. The Company performs initial and
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral. The Company retains title or a security interest in all
third-party hardware until the full purchase price of the hardware has been
paid. As of December 31, 1998 and 1999, no single customer accounted for more
than ten percent of the Company's accounts receivable balance. For the years
ended December 31, 1997, 1998 and 1999, one customer accounted for approximately
0.5%, 10.1% and 4.6% of the Company's revenue, respectively. The Company's cash
equivalents are primarily invested in money market securities. The Company
maintains the majority of its cash balances with financial institutions in the
form of demand deposits and money market accounts.
Fair Market Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and long-term obligations. The carrying amounts for
cash, cash equivalents, accounts receivable and accounts payable approximate
fair market value because of the short maturity of these instruments. The
carrying amount of the long-term obligation approximates its fair market value.
Cash Flows
The Company made cash payments for interest of $1,485,960, $1,187,030 and
$604,262 during the years ended December 31, 1997, 1998 and 1999, respectively.
The Company made cash payments for taxes of $2,133,000, $3,291,000 and
$3,075,277 during the years ended December 31, 1997, 1998 and 1999,
respectively.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $11,080, $0 and $55,130 during the years
ended December 31, 1997, 1998 and 1999, respectively.
Comprehensive Income
Effective January 1, 1998, the company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive
F-35
110
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
income, as defined, includes all changes in equity during a period from
non-owner sources. The Company had no items of other comprehensive income for
the years ended December 31, 1997, 1998 and 1999.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB"),
"Revenue Recognition in Financial Statements." SAB 101 provides specific
guidance, among other things, as to the recognition of revenue related to
up-front non-refundable fees and services charges received in connection with a
contractual arrangement. We have applied the provisions of SAB 101 for the year
ended December 31, 1999. The adoption of SAB 101 did not have a material impact
on our financial condition or results of operations.
3. ACQUISITIONS
Between January and February of 1997, the Company acquired certain assets
of three companies. Collectively, these entities are referred to as the "1997
Acquisitions".
In January 1997, the Company acquired certain assets of Systemetrix
Corporation ("Systemetrix"), a Canadian company. The aggregate purchase price of
$1,455,072 consisted of $250,000 of cash and 55,556 shares of the Company's
common stock with an estimated fair value of $250,002 based on a per share value
of $4.50, the assumption of certain liabilities totaling $925,651 and
transaction fees of $29,419.
In January 1997, the Company acquired certain assets of Saber Systems
("Saber"). The aggregate purchase price of $2,011,551 consisted of $1,100,000 of
cash and 50,000 shares of the Company's common stock with an estimated fair
value of $225,000 based on a per share value of $4.50, the assumption of certain
liabilities totaling $656,000 and transaction costs of $30,551.
In February 1997, the Company acquired certain assets of Goretek Data
Systems ("Goretek"). The aggregate purchase price of $2,057,305 consisted of
$1,000,000 of cash, the assumption of certain liabilities totaling $966,721 and
transaction costs of $90,584.
As a result of the acquisitions of Systemetrix and Goretek, the Company
incurred one-time charges to earnings totaling $230,000 related to the estimated
value of the purchased in-process research and development costs. The remaining
purchase price was allocated to tangible assets, goodwill and purchased
software. In each acquisition, the purchase price was allocated to the assets
acquired and liabilities assumed based on the Company's estimates of fair value
at the respective acquisition dates. The fair value assigned to intangible
assets acquired in each acquisition was based on valuations prepared by an
independent third-party appraisal of the purchased in-process research and
development and developed technology of Systemetrix and Goretek. The total
purchase price for each acquisition exceeded the amounts allocated to tangible
and intangible assets acquired less liabilities assumed by $1,517,480. This
excess of the purchase price over the fair values of assets acquired less
liabilities assumed was allocated to goodwill.
The Saber acquisition has also been accounted for using the purchase method
of accounting and, accordingly, the recognized purchase price has been
allocated, based on the Company's estimates of fair value, to the tangible
assets acquired and liabilities assumed and to the identifiable intangible
assets on the acquisition dates. The purchase price in excess of identified
tangible and intangible assets and liabilities assumed was allocated to
goodwill.
F-36
111
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recorded identifiable intangibles and goodwill on the 1997
Acquisitions as follows:
ESTIMATED
FAIR
VALUE
----------
Purchased software.......................................... $ 420,000
In-process research and development......................... 230,000
Goodwill.................................................... 2,739,092
----------
$3,389,092
==========
A total of $230,000 of the purchase price for these acquisitions represents
purchased in-process research and development that had not yet reached
technological feasibility and had no alternative future use. Accordingly, this
amount was immediately expensed in the statement of operations upon consummation
of each acquisition. The value assigned to in-process research and development,
based on a valuation prepared by an independent third-party appraisal company,
was determined by identifying research projects, all of which related to either
add-ons or enhancements of Systemetrix and Goretek's existing products, in areas
for which technological feasibility had not been established. The value of the
in-process projects was adjusted to reflect the relative value and contributions
of the required research and development. In doing so, consideration was given
to the stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development costs already incurred, and
the projected cost to complete the projects. The discount rate included a factor
that takes into account the uncertainty surrounding successful development of
the purchased in-process research and development.
The Company has included the operations of Systemetrix and Saber into its
statements of operations from January 2, 1997, the effective dates of both
transactions. The Company has included the operations of Goretek into its
statements of operations from February 1, 1997, the effective date of the
transaction.
4. OTHER ASSETS
Other assets consist of intangible assets, deposits and notes receivable.
Intangible assets and their respective amortizable lives were as follows at
December 31:
LIFE
1998 1999 (IN YEARS)
----------- ----------- ----------
Goodwill.......................................... $ 2,739,092 $ 2,743,777 3
Purchased software................................ 806,273 806,273 3
Loan fees......................................... 527,060 542,060 5
Software handbook................................. 456,000 456,000 3
Non-compete agreements............................ 2,500,000 2,500,000 4
Other............................................. 150,000 150,000 2
----------- -----------
7,178,425 7,198,110
Less -- accumulated amortization.................. (4,791,769) (6,839,356)
----------- -----------
$ 2,386,656 $ 358,754
=========== ===========
Total amortization expense was $2,290,249, $2,203,205 and $2,047,587 in
1997, 1998 and 1999, respectively.
F-37
112
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deposits and notes receivable included in other assets were as follows at
December 31:
1998 1999
-------- --------
Deposits.................................................... 156,122 117,419
Notes receivable............................................ 40,500 --
-------- --------
$196,622 $117,419
======== ========
During 1998, the Company also entered into an employment agreement with an
executive that included a payment of $150,000 of compensation upon commencement
of employment. Such amount is required to be repaid to the Company should the
executive terminate his relationship with the Company prior to his two-year
employment anniversary. The balance has been recorded as an other intangible
asset and is being amortized over a two year period.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
Office furniture, fixtures and equipment.................... $ 4,963,627 $ 5,650,350
Less: accumulated depreciation.............................. (2,785,955) (3,746,695)
----------- -----------
Property and equipment, net................................. $ 2,177,672 $ 1,903,655
=========== ===========
6. OTHER CURRENT ASSETS
Other current assets were comprised of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Inventories................................................. $304,166 $135,966
Prepaid expenses............................................ 289,018 289,885
Deferred income taxes -- current portion.................... 368,390 219,043
-------- --------
$961,574 $644,894
======== ========
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities were comprised of the following:
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
Accounts payable............................................ $5,437,093 $3,461,979
Accrued liabilities......................................... 2,622,113 1,685,088
Income taxes payable........................................ -- 378,174
Customer deposits........................................... 408,590 331,239
Payable to shareholder...................................... 300,000 --
---------- ----------
$8,767,796 $5,856,480
========== ==========
F-38
113
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. FINANCING FACILITIES
The Company has a financing facility (the "Facility") including a term loan
("Term Loan") of $25,000,000 and a revolving credit line ("Revolving Loan"). The
Revolving Loan provides for a maximum outstanding balance of $10,000,000. The
Facility expires on December 31, 2000, or earlier, based on certain provisions
included in the Facility. Additionally, the principal balance may be prepaid
without penalty. Interest accrues on the Term Loan and the outstanding balance
of the Revolving Loan at variable rates based on the terms of the Facility. For
the year ended December 31, 1999, the weighted average interest rate was 7.22%
and 7.19% on the Term Loan, and the outstanding balance of the Revolving Loan,
respectively. Principal payments are due quarterly with interest due monthly.
Under certain conditions, based primarily on its earnings, the Company may be
required to make certain prepayments of Term Loan principal. As of December 31,
1998 and 1999, $8,803,340 and $4,134,320, respectively, were outstanding under
the Term Loan and $1,150,000 and $500,000, respectively, were outstanding under
the Revolving Loan. Borrowings under the Facility are collateralized by
substantially all of the assets of the Company.
The Facility requires the Company to maintain, among other restrictions, a
minimum interest coverage ratio, a minimum debt service coverage ratio, and a
maximum ratio of total indebtedness for borrowed money to earnings. The Company
was in compliance with the covenants as of December 31, 1999. As of December 31,
1999, all future principal payments under the Facility are due in 2000.
9. MANDATORILY REDEEMABLE PREFERRED STOCK
The Company has authorized 26,000 shares of Series A mandatorily redeemable
preferred stock (the "Series A Shares") and 6,500 shares of Series B mandatorily
redeemable preferred stock (the "Series B Shares"). The shares of Series A and
Series B mandatorily redeemable preferred stock have a par value of $1,000 per
share.
Dividends. The Series A and Series B stockholders (the "Holders") are not
entitled to receive dividends unless dividends are declared on shares of common
stock, in which case the Holders shall receive a distribution on each
outstanding share of Series A and Series B mandatorily redeemable preferred
stock on an as if converted basis.
Conversion. Each of the Series A and Series B Shares can be converted at
the election of two-thirds of the Holders of each class. The Series A shares
convert into a total of 5,200,000 shares of common stock and 15,500 shares of
Senior Redeemable Preferred Stock, as defined below. The Series B shares convert
into a total of 1,130,000 shares of common stock, 3,875 shares of Senior
Redeemable Preferred Stock and 2,625 shares of Junior Redeemable Preferred
Stock, as defined below.
In the case of an initial public offering, each of the Series A and Series
B Shares will be automatically converted into shares of common stock as
described above. In addition, payments of $15,500,000 and $6,500,000 would be
made to the Series A stockholders and the Series B stockholders, respectively,
rather than issuing Senior Redeemable Preferred Stock and Junior Redeemable
Preferred Stock.
Voting Rights. The Holders of the Series A and Series B Shares vote as a
single class and have one vote for each common share into which such shares
could then be converted, as described above. In addition, the Holders of the
Series A Shares are entitled to elect two directors to the Company's Board of
Directors.
Redemption. The Company could be required to redeem the Series A and
Series B Shares upon receipt of written request from Holders, voting together as
a single class, of shares representing at least 66 2/3% of the aggregate number
of shares of common stock issuable upon conversion. Redemption may first be made
by the Holders on March 31, 2001 and on the first and second anniversaries
thereof. There is no
F-39
114
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
limit to the amount of shares that may be redeemed at these dates. The
redemption price is equal to the liquidation value of the shares plus any
declared but unpaid dividends.
Carrying value. The Series A and Series B Shares have been recorded at
$32,500,000, the total net proceeds received by the Company upon issuance. The
redemption price was equal to the net proceeds at December 31, 1997, 1998 and
1999.
Liquidation. Upon a liquidation, merger, sale, change in control of the
Company or redemption or repurchase of shares representing a majority of the
voting power of the outstanding shares of capital stock of the Company, the
holders of Series A Preferred are entitled to a senior liquidation preference,
in parity with holders of Series B Preferred and Senior Redeemable Preferred and
in priority to holders of Junior Redeemable Preferred and common stock, in the
amount of $596 per share (approximately $15,500,000 at December 31, 1998 and
1999), or if proceeds are insufficient, to share ratably with holders of Series
B Preferred and Senior Redeemable Preferred. If the liquidation preferences due
to holders of Series A and B Preferred and Senior Redeemable Preferred are paid
in full, the holders of Series A Preferred receive a junior liquidation
preference of the greater of $404 per share (approximately $10,500,000 at
December 31, 1998 and 1999) or the ratable share of amounts payable to holders
of all shares of the Company's capital stock, on an as-if-converted to common
stock basis, once the holders of Series B Preferred have received their
liquidation preference amounts. Upon a liquidation, merger, sale, change in
control of the Company or redemption or repurchase of shares representing a
majority of the voting power of the outstanding shares of capital stock of the
Company, the holders of Series B Preferred are entitled to liquidation
preferences, in parity with holders of Series A Preferred and Senior Redeemable
Preferred, and in priority to holders of Junior Redeemable Preferred and common
stock, in the amount of $596 per share (approximately $3,875,000 at December 31,
1998 and 1999), or if proceeds are insufficient, to share ratably with holders
of Series A Preferred and the Senior Redeemable Preferred. If the senior
liquidation preferences due to the holders of Series A Preferred (approximately
$15,500,000 at December 31, 1998 and 1999) and Series B Preferred (approximately
$3,875,000 at December 31, 1998 and 1999) and Senior Redeemable Preferred ($0 at
December 31, 1998 and 1999), are paid in full and the junior liquidation
preference due the holders of Series A Preferred (approximately $10,500,000 at
December 31, 1998 and 1999) is paid in full, the holders of Series B Preferred
receive $404 per share (approximately $2,625,000 at December 31, 1998 and 1999),
or if proceeds are insufficient, to shares ratably with the holders of Junior
Redeemable Preferred shareholders. Holders of Series B Preferred are also
entitled to share in residual distributions, if any, on an as-if-converted to
common stock basis. Upon liquidation, holders of Senior Redeemable Preferred are
entitled to $1,000 per share on parity with senior liquidation amounts due to
holders of Series A and B Preferred. Upon liquidation, holders of Junior
Redeemable Preferred are entitled to $1,000 per share after holders of Series A
and B Preferred and Senior Redeemable Preferred have received their total
liquidation preference.
Senior Mandatorily Redeemable Preferred Stock
Senior Redeemable Preferred has no voting rights. Dividends will accrue at
the rate of $50 per share per annum, cumulatively, from and after the date upon
which two-thirds of the shares of Series A Preferred have been converted. Senior
Redeemable Preferred must be redeemed in the amount of $19,375,000 immediately
upon a qualified initial public offering, or in equal installments on March 31,
2001, 2002 and 2003. If funds are insufficient to redeem the Senior Redeemable
Preferred, the unpaid redemption amount bears interest at the greater of 12% or
5% over a prime rate.
Junior Mandatorily Redeemable Preferred Stock
Junior Redeemable Preferred has no voting rights. Dividends will accrue at
the rate of $50 per share, cumulatively, from and after the date upon which
two-thirds of the shares of Series A Preferred have been
F-40
115
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
converted. Junior Redeemable Preferred must be redeemed in the amount of
$2,625,000 immediately upon a qualified initial public offering or in equal
installments on March 31, 2004, 2005 and 2006. However, no redemption can be
made of Junior Redeemable Preferred until all amounts due Series A and B
Preferred and Senior Redeemable Preferred have been paid by the Company. If
funds are insufficient to redeem the Junior Redeemable Preferred, the unpaid
redemption amount bears interest at the greater of 12% or 5% over a prime rate.
10. STOCK COMPENSATION
1999 Amended and Restated Equity Incentive Plan
The Company adopted the 1999 Amended and Restated Equity Incentive Plan (as
amended, the "Plan") was adopted by the Board of Directors. The Plan provides
for the grant of incentive stock options to employees (including officers and
employee-directors), nonstatutory stock options (as defined by the Internal
Revenue Code and regulations), and restricted stock awards for issuance to
employees, directors and consultants. The purchase price of shares subject to an
incentive stock option or nonqualified stock option will be the fair market
value of the Company's common stock on the date the option is granted. If the
grantee owns more than 10% of the total combined voting power of all classes of
stock on the date of grant, the purchase price of the shares subject to a
nonqualified stock option shall be at least 110% of the fair value at the date
of grant and the exercise term will be up to five years from the date of grant.
All incentive options granted under the Plan are exercisable up to 10 years from
the date of grant. Options issued to consultants are charged to expense based on
the fair value as determined by the Black-Scholes model. As of December 31,
1999, there were 4,154,930 shares of common stock reserved for issuance under
the Plan, of which 664,246 shares are available for future grants under the
Plan.
All outstanding options vest over a one to nine-year period. Prior to
December 15, 1998, the vesting of a portion of these options could be
accelerated if certain conditions were met. After December 15, 1998, the vesting
provisions related to unvested options, which could have been accelerated upon
meeting certain future performance-based goals, were accelerated such that the
remaining unvested options will vest over a period of one to four years.
On January 20, 1998, upon approval by the Board of Directors, the Company
exchanged certain outstanding options for common stock whose exercise price was
in excess of the fair market value of the Company's common stock for new options
for common stock having an exercise price of $2.50 per share, the then-current
estimated fair value.
The Company had issued 1,281,690 shares of restricted common stock under
the Plan. The holder of such shares of restricted common stock, who is a former
executive officer and currently a director of the Company, entered into a stock
restriction and repurchase agreement under which the Company had the right to
repurchase unvested common stock at the original issuance price upon termination
of this individual's employment with the Company. Under the original grant,
restrictions on these shares of common stock were to lapse over a nine-year
period, which period was subject to acceleration under certain conditions. At
August 24, 1998, the date the former executive officer terminated employment
with the Company, a total of 291,813 shares remained restricted under the terms
of the grant. Of those shares, the Company's Board of Directors approved the
removal of restrictions with respect to 251,760 shares and the remaining 40,053
shares were forfeited and repurchased for $0.25 per share. Due to the vesting of
the 251,760 shares, the Company recognized approximately $566,000 of
compensation expense in its results of operations for 1998.
F-41
116
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to account for its stock-based employee and
director compensation plans under APB No. 25 and related interpretations. For
purposes of the pro forma disclosures presented below, the Company has computed
the fair values of all options granted under the Company's Plan during 1998 and
1999, using the Black-Scholes pricing model and the following weighted average
assumptions:
1998 1999
--------- ---------
Risk-free interest rate..................................... 5.3% 5.3%
Expected dividend yield..................................... 0% 0%
Expected lives outstanding.................................. 4.0 years 2.9 years
Expected volatility......................................... 0% 7.38%
To estimate lives of options for this valuation, it was assumed that
options will be exercised upon becoming fully vested. All options are initially
assumed to vest. Cumulative compensation costs recognized in pro forma net
income or loss with respect to options that are forfeited prior to vesting are
adjusted as a reduction of pro forma compensation expense in the period of
forfeiture. The total fair value of options granted under the Plan was computed
to be approximately $498,000 and $93,000 for the years ended December 31, 1998
and 1999, respectively. These amounts are amortized ratably over the vesting
periods of the options or recognized at date of grant if no vesting period is
required. Pro forma stock-based compensation, net of the effect of forfeitures,
was $(111,0000), $68,000 and $(27,000) for 1997, 1998 and 1999, respectively.
A summary of stock options under the Plan as of December 31, 1998 and 1999
and changes during the years then ended is presented below:
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
Outstanding at beginning of year............... 939,380 $ 2.20 1,714,272 $ 1.87
Granted...................................... 1,210,108 2.51 393,375 3.27
Cancelled.................................... (256,964) 6.39 (114,047) 1.75
Exercised.................................... (178,252) 1.41 (68,567) 1.67
--------- ---------
Outstanding at end of year..................... 1,714,272 1.87 1,925,033 2.19
========= =========
Weighted average fair value of options
granted...................................... 0.41 0.24
The following table summarizes information about the options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
NUMBER WEIGHTED --------------------
OUTSTANDING AVERAGE WEIGHTED WEIGHTED
AT REMAINING AVERAGE NUMBER AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE SHARES PRICE
- ------------------------ ------------ ----------- -------- -------- ---------
$0.61............................... 446,250 6.35 $ 0.61 323,608 $ 0.61
1.00............................... 39,563 6.64 1.00 31,390 1.00
2.41............................... 25,000 6.83 2.41 18,750 2.41
2.50............................... 1,112,645 8.56 2.50 428,922 2.50
3.50............................... 301,575 9.57 3.50 -- --
--------- ----- ------ ------- ------
1,925,033 8.14 $ 2.19 802,670 $ 1.68
========= ===== ====== ======= ======
As determined in accordance with APB No. 25 and related interpretations, no
compensation expense was recorded in 1998 or 1999 for grants under the Company's
stock option plan.
F-42
117
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had accounted for its stock option plan in accordance with
SFAS No. 123, the Company's net income and pro forma net income would have been
reported as follows:
1997 1998 1999
---------- ---------- ----------
Net income:
As reported...................................... $4,114,184 $3,585,473 $2,882,151
Pro forma........................................ 4,003,184 3,653,473 2,855,151
11. INCOME TAXES
The net deferred tax asset has been presented as follows at December 31,
1998 and 1999:
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
Current deferred tax asset.................................. $ 368,390 $ 219,043
Noncurrent deferred tax asset............................... 1,023,685 1,745,829
---------- ----------
$1,392,075 $1,964,872
========== ==========
Income before income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
Domestic........................................... $5,878,243 $5,896,397 $3,610,544
Foreign............................................ 244,612 580,512 924,186
---------- ---------- ----------
$6,122,855 $6,476,909 $4,534,730
========== ========== ==========
Components of the Company's income tax provision are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
Current provision:
United States Federal............................ $2,319,346 $2,719,495 $1,486,447
State............................................ 413,153 508,021 387,696
Foreign.......................................... 92,953 220,595 351,231
---------- ---------- ----------
$2,825,452 $3,448,111 $2,225,374
========== ========== ==========
Deferred provision (benefit):
United States Federal............................ $ (712,511) $ (454,924) $ (491,795)
State............................................ (104,270) (84,256) (81,000)
Foreign.......................................... -- -- --
---------- ---------- ----------
(816,781) (539,180) (572,795)
---------- ---------- ----------
Income tax provision..................... $2,008,671 $2,908,931 $1,652,579
========== ========== ==========
F-43
118
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the company's deferred tax assets and liabilities
at December 31, 1998 and 1999 consist of the following:
1998 1999
---------- ----------
Acquired intangible assets.................................. $1,280,814 $1,498,319
Bad debts................................................... 141,301 139,729
Deferred revenue............................................ 40,002 40,002
Fixed assets................................................ 27,941 46,979
Stock-based compensation.................................... -- 212,422
Accruals.................................................... 187,273 55,193
Other....................................................... 65,960 41,407
---------- ----------
Total deferred tax assets......................... $1,743,291 $2,034,051
---------- ----------
Noncompete agreement........................................ 273,438 39,063
Acquired intangible assets.................................. 77,776 30,116
---------- ----------
Total deferred tax liabilities.................... 351,214 69,179
---------- ----------
Net deferred tax asset (liability)................ $1,392,077 $1,964,872
========== ==========
The following is a reconciliation of the statutory U.S. Federal income tax
rate to the Company's effective income tax rate:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
United States Federal tax at statutory rate................. 34.0% 34.0% 34.0%
State taxes (net of Federal benefit)........................ 3.3 3.9 3.5
Expenses not deductible..................................... 0.7 3.3 0.6
Tax credits and other....................................... (1.4) 1.3 (1.7)
---- ---- ----
Provision for income taxes.................................. 36.6% 42.5% 36.4%
==== ==== ====
12. RELATED PARTY TRANSACTIONS
For the period from August 5, 1998 through December 31, 1998, the Company
purchased computer equipment for resale of approximately $2,066,000 from a
computer equipment dealer in which a stockholder and director of the Company is
a stockholder and director. During the same period, the Company also supplied
consulting services to this related party totaling $10,000. As of December 31,
1998, amounts payable to and receivable from this related party are $1,499,000
and $33,000, respectively.
The Company has entered into non-compete agreements with a former officer
of the Company. As part of the agreement, the Company paid $500,000, $500,000
and $0 in 1997, 1998 and 1999, respectively, to the officer, who remains a
stockholder and director of the Company. These non-compete agreements have been
amortized over the term of the agreements.
During 1998, the Company entered into an agreement with a former executive
officer of the Company, and who is currently a stockholder and director, in
which $600,000 of severance compensation was to be paid to this individual. The
Company paid $300,000 in 1998 and 1999. These severance payments were charged to
compensation expense during 1998.
F-44
119
NXTREND TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. LEASE COMMITMENTS
The Company leases certain equipment under various noncancelable capital
leases and leases its office space and certain equipment under operating leases.
Future minimum lease payments required under the leases at December 31, 1999
were as follows:
CAPITAL OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
- ----------------------- -------- -----------
2000...................................................... $109,363 $ 2,795,735
2001...................................................... 101,013 2,365,418
2002...................................................... -- 2,166,814
2003...................................................... -- 1,782,334
2004...................................................... -- 1,504,271
Thereafter................................................ -- 2,919,850
-------- -----------
Total minimum lease payments...................... 210,376 $13,534,422
===========
Amount representing interest................................ (17,461)
--------
Present value of minimum lease payments..................... 192,915
Less current maturities..................................... (95,604)
--------
Long term maturities of capital lease obligation............ $ 97,311
========
Rent expense recognized under operating leases totaled $1,369,517,
$1,419,511 and $2,027,622 for the years ended December 31, 1997, 1998 and 1999,
respectively.
14. PROFIT SHARING PLAN
The Company maintains a profit sharing plan, including a qualified deferral
arrangement as described in Section 401(k) of the Internal Revenue Code,
covering substantially all full-time employees who meet certain minimum age and
employment requirements. Under the plan, the Company may declare a profit
sharing contribution of up to 15% of a participant's compensation, and/or a
discretionary match of a percentage of participant deferrals. Company
contributions for profit sharing and discretionary match of $391,309, $90,899
and $448,447 were authorized for the years ended December 31, 1997, 1998 and
1999, respectively.
15. SUBSEQUENT EVENT
On February 21, 2000, the Company entered into a definitive agreement under
which BuildNet, Inc. ("BuildNet") will purchase all of the outstanding capital
stock and stock options of the Company in exchange for, in the aggregate,
25,954,659 shares of BuildNet's common stock and stock options to purchase
BuildNet's common stock and notes payable of $32,500,000. The notes payable
carry an interest rate of 8% per annum and are payable in four equal
installments beginning on the one year anniversary of the closing date of the
transaction and each six month anniversary thereafter. Upon the closing of an
underwritten initial public offering of BuildNet common stock, the holders of
the notes payable will have the option to convert principal of up to $4,400,000
of their notes payable into BuildNet common stock at a conversion price equal to
the per share price paid for BuildNet's common stock in such public offering. In
addition, the remaining principal balance of the notes will be payable in full
on the seventh day following closing of such public offering. BuildNet also
committed to issue new stock options to purchase up to 1,000,000 shares of
BuildNet's common stock to the Company's employees. This transaction is subject
to regulatory approval.
F-45
120
REPORT OF INDEPENDENT ACCOUNTANTS
The Members and Board of Managers of
The UniLink Group, LLC
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in members' capital and of cash flows present fairly,
in all material respects, the financial position of The UniLink Group, LLC (the
"Company") at December 31, 1998 and 1999, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 10, substantially all of the assets of the Company
were acquired by BuildNet, Inc. on January 18, 2000.
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
February 16, 2000
F-46
121
THE UNILINK GROUP, LLC
BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 1,500,249
Accounts receivable, trade................................ -- 39,471
Note receivable from KPI.................................. -- 340,000
Prepaid expenses and other current assets................. 1,768 19,940
----------- -----------
Total current assets.............................. 1,768 1,899,660
Property and equipment, net................................. 22,206 358,078
Goodwill, net............................................... -- 79,495
Other assets................................................ -- 12,299
----------- -----------
Total assets...................................... $ 23,974 $ 2,349,532
=========== ===========
LIABILITIES AND MEMBERS' (DEFICIENCY) CAPITAL
Current liabilities:
Accounts payable.......................................... $ 26,942 $ 578,260
Accrued expense........................................... 75,847 196,327
Notes payable to members, current portion................. 1,976,013 383,454
Deferred revenue.......................................... -- 113,142
----------- -----------
Total current liabilities......................... 2,078,802 1,271,183
Notes payable to members, net of current portion............ -- 331,266
----------- -----------
Total liabilities................................. 2,078,802 1,602,449
Members' (deficiency) capital accounts:
Members' capital.......................................... 248,707 7,325,751
Deferred compensation..................................... -- (789,109)
Accumulated deficit....................................... (2,303,535) (5,789,559)
----------- -----------
Total members' (deficiency) capital............... (2,054,828) 747,083
----------- -----------
Total liabilities and members' (deficiency)
capital......................................... $ 23,974 $ 2,349,532
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-47
122
THE UNILINK GROUP, LLC
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
Revenues.................................................... $ 101,758 $ 208,188
Cost of revenues............................................ 124,889 283,463
----------- -----------
Gross loss........................................ (23,131) (75,275)
----------- -----------
Operating expenses:
Research and development.................................. 277,403 967,741
Sales and marketing....................................... 199,463 983,819
General and administrative................................ 434,769 1,282,611
Stock-based compensation.................................. -- 17,135
----------- -----------
Total operating expenses.......................... 911,635 3,251,306
----------- -----------
Operating loss.................................... (934,766) (3,326,581)
----------- -----------
Interest income (expense):
Interest income........................................... -- 10,162
Interest expense.......................................... (102,329) (169,605)
----------- -----------
Interest income (expense), net.................... (102,329) (159,443)
----------- -----------
Net loss.......................................... $(1,037,095) $(3,486,024)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-48
123
THE UNILINK GROUP, LLC
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL (DEFICIENCY)
MEMBERS' DEFERRED ACCUMULATED
CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------------ ----------- -----------
BALANCE AS OF DECEMBER 31, 1997.............. $ 248,707 $ -- $(1,266,440) $(1,017,733)
Net loss................................... -- -- (1,037,095) (1,037,095)
---------- --------- ----------- -----------
BALANCE AS OF DECEMBER 31, 1998.............. 248,707 -- (2,303,535) (2,054,828)
Conversion of promissory notes into
membership units........................ 2,495,923 -- -- 2,495,923
Issuance of membership units in exchange
for shares of TPG....................... 270,217 -- -- 270,217
Sale of membership units................... 3,308,550 -- -- 3,308,550
Deferred compensation related to grant of
membership unit options................. 806,244 (806,244) -- --
Amortization of deferred compensation...... -- 17,135 -- 17,135
Value of warrants to purchase membership
units of the Company issued in
connection with debt.................... 196,110 -- -- 196,110
Net loss................................... -- -- (3,486,024) (3,486,024)
---------- --------- ----------- -----------
BALANCE AS OF DECEMBER 31, 1999.............. $7,325,751 $(789,109) $(5,789,559) $ 747,083
========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-49
124
THE UNILINK GROUP, LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(1,037,095) $(3,486,024)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 26,259 47,840
Provision for doubtful accounts........................... -- 6,168
Amortization of debt discount............................. -- 27,376
Noncash compensation expense.............................. -- 17,135
Changes in operating assets and liabilities:
Accounts receivable.................................... -- 140,217
Prepaid expenses and other assets...................... 833 (10,521)
Accounts payable....................................... 26,472 547,215
Accrued expenses....................................... 15,847 (61,988)
Deferred revenue....................................... (75,000) 113,142
----------- -----------
Net cash used in operating activities............. (1,042,684) (2,659,440)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (7,555) (276,023)
Cash acquired in purchase of TPG............................ -- 215,496
TPG acquisition costs....................................... -- (17,762)
Loan to KPI................................................. -- (340,000)
----------- -----------
Net cash used in investing activities............. (7,555) (418,289)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from membership units issued....................... -- 3,382,300
Proceeds from issuance of notes payable..................... 1,050,029 1,305,931
Payments of principal on notes payable...................... -- (109,783)
Net increase (decrease) in book overdraft................... 210 (470)
----------- -----------
Net cash provided by financing activities......... 1,050,239 4,577,978
----------- -----------
Net (decrease) increase in cash and cash
equivalents..................................... -- 1,500,249
Cash and cash equivalents, beginning of period.............. -- --
----------- -----------
Cash and cash equivalents, end of period.................... $ -- $ 1,500,249
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-50
125
THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Background
The UniLink Group, LLC (the "Company") was formed in June 1995 and is
located in Atlanta, Georgia. The Company specializes in the processing of
electronic commerce transactions in the electrical, plumbing, appliance and
heating, ventilation and air conditioning markets. The Company provides an
electronic link between the manufacturer's computer system and the supplier's
accounting system to process and exchange key documents. The link is provided
either through the internet or through Electronic Data Interchange where
suppliers have such translation software.
Organization
The Company, incorporated under the laws of the State of Georgia, is a
limited liability company ("LLC"). Under the terms of the Company's operating
agreement, the members holding at least 66% of the outstanding units have the
option to terminate the Company at any time.
Allocation of Profits and Losses
Under the terms of the Company's operating agreement, profits are allocated
to each member: (i) in proportion and to the extent that aggregate net losses
allocated to each member during prior years exceeds aggregate net profits
allocated; then (ii) in proportion and to the extent of the aggregate net losses
allocated to each member during prior years; and (iii) to all members in
proportion to their respective sharing ratio, defined as the ownership
percentage of each member. Losses are allocated to each member: (i) to Unilink
investors to the extent of the capital contributions of UniLink investors in the
Company, and thereafter to each member in proportion to the net profit allocated
to them during prior years; then (ii) in proportion to, and to the extent of,
the positive balance in each members' capital account; and finally (iii) to all
members based on their respective sharing ratio.
Distributions
The Company's operating agreement states that distributions shall be made
at such times and in such amounts as determined by the managers of the Company
in their sole discretion. Distributions are to be made to the members pro-rata,
in accordance with the positive balances in the capital accounts of the members.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues are derived from services provided to customers for
development of e-commerce and from fees on e-commerce transactions.
Service revenues are recognized ratably over the service period upon the
completion of the implementation of e-commerce services. Transaction fees are
recognized as the transactions take place.
F-51
126
THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cost of Revenues
Cost of revenues primarily consists of salaries and consultant fees for the
implementation of e-commerce connections and maintaining systems necessary to
support e-commerce transaction systems.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales and
marketing expenses also include costs of advertising, trade shows and certain
indirect costs. All costs of advertising the services and products offered by
the Company are expensed as incurred. Advertising expense totaled $16,568 and
$68,975 for the years ended December 31, 1998 and 1999, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Property and Equipment
Property and equipment primarily consists of furniture and computer
equipment that are recorded at cost and depreciated using the straight-line
method over their estimated useful lives which range from three to five years.
Expenditures for repairs and maintenance are charged to expense as incurred.
Internal Use Software
Effective January 1, 1999, the Company adopted the provisions of the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("AICPA") Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No.
98-1"). SOP No. 98-1 provides guidance regarding when software developed or
obtained for internal use should be capitalized. Under the provisions of SOP No.
98-1, external direct costs of materials and services consumed in the
development of internal-use computer software, payroll and payroll related costs
for employees directly associated with internal-use computer software projects,
and interest costs incurred while developing internal-use computer software
should be capitalized once the preliminary project stage has been completed,
management has authorized and committed to funding the project, and it is
probable that the project will be completed and that the software will be used
to perform the function intended. Such costs should be capitalized until the
software is ready for its intended use, at which time the costs should be
amortized over their estimated useful life. To date the Company had not incurred
significant expenses beyond the completion of the preliminary project phase.
Accordingly, no costs have been capitalized. As of December 31, 1998, the
Company had not incurred significant expenses beyond the completion of the
preliminary project phase. Accordingly, no costs have been capitalized.
Goodwill
Goodwill consists of unidentifiable intangible assets resulting from
acquisition and is amortized on a straight-line basis over periods ranging from
three to five years. The Company periodically assesses the recoverability of
intangible assets by determining whether the amortization of the balance over
its remaining life can be recovered through undiscounted future operating cash
flows of the related operations (see Note 3). Goodwill is being amortized over a
period of five years because of the rapid changes in the e-commerce industry. As
of December 31, 1999, goodwill reported on the Company's balance sheet is net of
accumulated amortization of $4,099.
F-52
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THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment, and
other assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of " ("SFAS 121"). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
estimated future undiscounted cash flows attributable to such assets or the
business to which such intangible assets relate. No impairments were required to
be recognized during the years ended December 31, 1998 and 1999.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1998 and 1999 approximated their fair value
due to the short-term nature of these items. The fair value of the Company's
short-term and long-term debt approximated their carrying values based on the
borrowing rates available to the Company for loans of similar terms as of
December 31, 1998 and 1999.
Income Taxes
There is no provision for income taxes in the financial statements of the
Company as the Company is not subject to income tax. Each member is individually
liable for its own tax payments.
Credit Risk, Significant Customers and Concentrations
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions which invest primarily in U.S. Government securities,
highly rated commercial paper and certificates of deposit guaranteed by banks
which are members of the Federal Deposit Insurance Corporation.
The Company's accounts receivable result primarily from sales to
manufacturers and distributors in the heating, ventilation and air conditioning
industry in the United States. The Company routinely assesses its customers and
the industry in which they operate. Revenue and receivables from significant
customers as a percentage of total reported as of and during the years ended
December 31, 1998 and 1999 were as follows:
1998 1999
---- ----
Revenue:
Customer A................................................ 74% 46%
Customer B................................................ 15% 10%
Receivables:
Customer A................................................ -- 66%
Customer B................................................ -- 13%
Cash Flows
The Company made cash payments for interest $102,329 and $119,729 during
the years ended December 31, 1998 and 1999, respectively.
F-53
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THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), which states that no compensation expense
is recognized for stock options or other stock-based awards to employees that
are granted with an exercise price equal to or above the estimated fair value
per share of the Company's stock on the grant date. In the event that stock is
granted at an exercise price below the estimated fair market value of the
Company's stock at the grant date, the difference between the fair market value
of the Company's stock and the exercise price of the stock option is recorded as
deferred compensation. Deferred compensation is amortized to compensation
expense over the vesting period of the stock option. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which requires net
income to be disclosed on a pro forma basis based on the fair value of the
options granted at the date of the grant.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
is required to be adopted for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. During the years ended December 31, 1998 and 1999, there
were no such items.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities", ("SFAS No. 133"). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes several
existing standards. 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 expect that the adoption of SFAS No. 133 will have a material impact on
its financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides specific
guidance, among other things, as to the recognition of revenue related to
up-front non-refundable fees and services charges received in connection with a
contractual arrangement. We have applied the provisions of SAB 101 for the year
ended December 31, 1999. As a result of the adoption of SAB 101, $140,642 of
revenue was deferred in 1999.
3. ACQUISITION
On September 30, 1999 the Company purchased all of the outstanding shares
of The Palmer Group ("TPG"). The aggregate purchase price of $608,486 consisted
of 77,205 of the Company's membership units with an estimated fair value of
$270,217 based on a per share value of $3.50, an additional payable of $109,783,
the assumption of liabilities of $210,724 and transaction fees of $17,762.
The acquisition of TPG has been accounted for using the purchase method of
accounting and, accordingly, the total purchase price has been allocated, based
on the Company's estimates of fair value, to the tangible and identifiable
intangible assets acquired and liabilities assumed on the acquisition date. The
F-54
129
THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchase price in excess of tangible and identifiable intangible assets and
liabilities assumed was allocated to goodwill. As a result of this acquisition,
the Company recorded goodwill of $83,594.
4. ACCOUNTS RECEIVABLE, TRADE
Trade accounts receivable consists of the following at December 31:
1998 1999
------- -------
Current trade accounts receivable........................... $ -- $45,639
Less: Allowance for doubtful accounts....................... -- (6,168)
------- -------
$ -- $39,471
======= =======
During 1999, the Company acquired certain trade receivable, net of
allowances for doubtful accounts, in conjunction with the acquisition of TPG
(see Note 3). The provision for doubtful accounts was $6,168 for the year ended
December 31, 1999.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1998 1999
-------- ---------
Furniture and equipment..................................... $ 3,569 $ 209,793
Computer equipment.......................................... 45,978 368,564
-------- ---------
49,547 578,357
Less: accumulated depreciation.............................. (27,341) (220,279)
-------- ---------
$ 22,206 $ 358,078
======== =========
6. OPERATING LEASE
The Company leases its office facilities under a noncancelable operating
lease agreement entered into during 1999. Future minimum annual lease payments
under this lease are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000........................................................ $ 97,439
2001........................................................ 97,439
2002........................................................ 97,439
2003........................................................ 40,600
--------
Total minimum lease payments...................... $332,917
========
Rent expense totaled $18,161 and $43,999 for 1998 and 1999, respectively.
F-55
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THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE TO MEMBERS
Long-term debt at December 31, 1998 and 1999 consisted of the following:
1998 1999
----------- ---------
Convertible promissory notes; interest generally at 8% per
annum; due at various dates from January 1999 to December
1999...................................................... $ 862,500 $ --
Convertible loan from founder............................... 1,113,513 36,021
Collateralized convertible promissory note due August 27,
2001; interest of prime rate plus 2%...................... -- 500,000
Promissory note, interest at 12% per annum, due on demand... -- 250,000
Promissory notes, interest at 9% per annum, due October
2003...................................................... -- 97,433
----------- ---------
1,976,013 883,454
Less current portion........................................ (1,976,013) (383,454)
Less debt discount.......................................... -- (168,734)
----------- ---------
$ -- $ 331,266
=========== =========
During 1998 and 1997 the Company issued various convertible promissory
notes amounting to $862,500 that were converted to common membership units
during 1999 as follows:
88,400 units at $1.24 per unit.............................. $110,000
60,000 units at $1.67 per unit.............................. 100,000
1,450 units at $1.72 per unit............................... 2,500
236,500 units at $1.82 per unit............................. 430,000
52,632 units at $1.90 per unit.............................. 100,000
40,000 units at $3.00 per unit.............................. 120,000
--------
Total loan converted.............................. $862,500
========
The convertible loan from founder carries interest of 12%, is not
collateralized and is due on demand. During 1999, the majority of this note was
converted into membership units as follows:
Loan balance at December 31, 1998........................... $1,113,513
Additional loans during 1999................................ 555,931
Conversions during 1999:
444,444 units at $2.25 per unit........................... (1,000,000)
211,141 units at $3.00 per unit........................... (633,423)
----------
Loan balance at December 31, 1999........................... $ 36,021
==========
On August 27, 1999, the Company issued $500,000 in a convertible note that
was due August 27, 2001 and bore an interest of prime rate plus 2% per annum
(10.5% as of December 31, 1999). This note is convertible at a price of $3.00
per unit any time on or before the maturity date. If on, or prior to the
conversion date, the Company sells or issues any units at a price below $3.00,
the conversion will then be at this reduced price. In connection with the note,
the Company also issued 166,667 detachable warrants to purchase additional
membership units at a price of $3.00 per unit. The warrants are exercisable at
any time through August 2002. The Company recorded a debt discount of $196,110
related to these warrants.
On November 1, 1999 the Company issued a promissory note payable of
$250,000 to one of the Company's members. The note bears interest of 12% and is
payable on demand. The note is collateralized by the assets of the Company's
founder.
F-56
131
THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
In 1999, the Company started a retirement plan qualified under Section
401(k) of the Internal Revenue Code. Participants may elect to contribute a
portion of their annual compensation to the plan. The Company did not make any
contributions to the plan during the year ended December 31, 1999.
9. STOCK COMPENSATION
In April 1999, the Company adopted the 1999 unit incentive plan (the
"Plan") which provides for the grant of up to 996,000 units. The plan provides
for the grants of unit options, restricted unit awards and unit appreciation
rights to the managers, officers, key employees and consultants of the Company.
No restricted unit awards or unit appreciation rights were granted during the
year.
Options granted under the Plan are exercisable up to ten years from the
date of grant and vest over a period of four years from the date of grant.
The Company continues to apply Accounting Principles Board Opinion No. 25
and related interpretations in accounting for the Plan. The Company recognized
$17,135 in noncash compensation expense related to amortization of deferred
compensation expense during the year ended December 31, 1999. Had compensation
cost for the Plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS No. 123, the Company's
net loss for the years ended December 31, 1998 and 1999 would have been
increased to the pro forma amounts indicated below:
1998 1999
----------- -----------
Net loss available to common shareholders:
As reported............................................... $(1,037,095) $(3,486,024)
Pro forma................................................. (1,043,588) (3,545,386)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: risk-free interest of 6%; expected lives of five
years; dividend yields of 0%; and volatility features of 0%.
A summary of stock options under the plan as of December 31, 1998 and 1999
and change during the years then ended is presented below:
1998 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICE OPTIONS OPTIONS
---------- -------- ---------- --------
Outstanding at beginning of year.............. -- $ -- 75,000 $2.00
Granted..................................... 75,000 2.00 992,000 3.44
Cancelled................................... -- -- (71,000) 3.03
------ -------
Outstanding at end of year.................... 75,000 2.00 996,000 3.36
====== =======
Weighted average fair value of options
granted..................................... 0.52 0.83
F-57
132
THE UNILINK GROUP, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------
NUMBER WEIGHTED
OUTSTANDING AVERAGE WEIGHTED WEIGHTED
AT REMAINING AVERAGE SHARES AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE UNDERLYING EXERCISE
EXERCISE PRICE 1999 LIFE PRICE OPTIONS PRICE
- -------------- ------------ ----------- -------- ---------- --------
$2.00............................... 75,000 8.33 $2.00 18,750 $2.00
3.00............................... 352,000 9.43 3.00 -- --
3.50............................... 471,000 9.92 3.50 -- --
5.00............................... 98,000 9.92 5.00 -- --
------- ---- ------
996,000 9.63 $3.36 18,750 $2.00
======= ==== ======
10. SUBSEQUENT EVENTS
Acquisition of KeyPrestige, Inc.
On January 10, 2000, the Company acquired all of the outstanding shares of
KeyPrestige, Inc. ("KPI") in exchange for cash of $1,082,387, 371,429 of the
Company's membership units and a promissory note for $1,000,000 which bears
interest of 8% per annum, payable upon the first anniversary of the acquisition
date. The acquisition of KPI will be accounted for using the purchase method of
accounting.
Acquisition of the Company by BuildNet, Inc.
On January 18, 2000, BuildNet, Inc. ("BuildNet") purchased substantially
all of the assets and assumed certain liabilities of the Company in exchange for
a convertible note in the amount of $27,000,000 with interest of 8% per annum.
Principal and accrued interest on the note may be paid at any time on or before
January 18, 2002. The note payable is convertible into BuildNet's common stock
at the option of the holder at any time prior to the maturity date or the date
the note is repaid, if earlier. Conversion is mandatory upon the expiration of
any lock up period to which certain of BuildNet's investors are subject
following an initial public offering of BuildNet's common stock. The note shall
be converted at a rate of $4.40 per share of BuildNet's common stock, adjusted
for any stock splits or dividends, and is collateralized by the Company's assets
that were purchased.
F-58
133
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
The McCosker Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of The McCosker Corporation (the
"Company") at December 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on the
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 9, substantially all of the assets of the Company were
acquired by BuildNet, Inc. on May 21, 1999.
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
August 12, 1999
F-59
134
THE MCCOSKER CORPORATION
BALANCE SHEET
DECEMBER 31,
1998
------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 168,964
Accounts receivable, net.................................. 1,510,938
Prepaid expenses and other current assets................. 76,112
----------
Total current assets.............................. 1,756,014
Property and equipment, net................................. 390,799
----------
Total assets...................................... $2,146,813
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 676,120
Accrued expenses.......................................... 283,090
Deferred revenue.......................................... 1,627,836
Due to affiliates......................................... 1,718,018
----------
Total current liabilities......................... 4,305,064
----------
Commitments (Notes 7 and 8)
Shareholders' deficit:
Common stock, no par value; 2,943,000 shares authorized,
issued and outstanding................................. 2,943,000
Accumulated deficit....................................... (5,101,251)
----------
Total shareholders' deficit....................... (2,158,251)
----------
Total liabilities and shareholders' deficit....... $2,146,813
==========
The accompanying notes are an integral part of these financial statements.
F-60
135
THE MCCOSKER CORPORATION
STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31,
1998
------------
Revenues.................................................... $10,457,542
Cost of revenues............................................ 7,498,630
-----------
Gross profit...................................... 2,958,912
-----------
Operating expenses:
Selling, general and administrative....................... 1,720,501
Research and development.................................. 2,146,683
-----------
Total operating expenses.......................... 3,867,184
-----------
Operating loss.................................... (908,272)
Interest and other income................................... 26,244
Interest expense............................................ (196,126)
-----------
Net loss.......................................... $(1,078,154)
===========
The accompanying notes are an integral part of these financial statements.
F-61
136
THE MCCOSKER CORPORATION
STATEMENT OF SHAREHOLDERS' DEFICIT
COMMON STOCK
---------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ---------- ----------- -----------
Balance as of December 31, 1997................ 2,943,000 $2,943,000 $(4,023,097) $(1,080,097)
Net loss............................. -- -- (1,078,154) (1,078,154)
--------- ---------- ----------- -----------
Balance as of December 31, 1998................ 2,943,000 $2,943,000 $(5,101,251) $(2,158,251)
========= ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-62
137
THE MCCOSKER CORPORATION
STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
1998
------------
Cash flows from operating activities:
Net loss.................................................. $(1,078,154)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 99,113
Provision for doubtful accounts........................ 39,179
Interest accrued on due to affiliate................... 51,088
Changes in operating assets and liabilities:
Accounts receivable.................................. (180,258)
Other assets......................................... (38,860)
Accounts payable..................................... 113,891
Accrued expenses..................................... (50,237)
Deferred revenue..................................... 632,435
-----------
Net cash used in operating activities............. (411,803)
-----------
Cash flows from investing activities:
Purchases of property and equipment....................... (275,293)
-----------
Net cash used in investing activities............. (275,293)
-----------
Cash flows from financing activities:
Borrowings from affiliates................................ 1,666,930
Repayment of borrowings from affiliates................... (832,828)
-----------
Net cash provided by financing activities......... 834,102
-----------
Net increase in cash and cash equivalents......... 147,006
Cash and cash equivalents:
Beginning of year......................................... 21,958
-----------
End of year............................................... $ 168,964
===========
Supplemental disclosures:
Cash paid for interest.................................... $ 2,404
===========
The accompanying notes are an integral part of these financial statements.
F-63
138
THE MCCOSKER CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
The McCosker Corporation (the "Company") was incorporated on November 5,
1992, and is a developer of integrated back office software systems designed for
the homebuilder segment of the residential construction industry. The Company is
located in Walnut Creek, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition and Deferred Revenue
The Company's revenues are derived from software licenses and software
related services. The Company adopted American Institute of Public Accountants
("AICPA") Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition," effective January 1, 1997. The Company adopted SOP No. 98-9,
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions," effective January 1, 1998. The adoption of these
statements did not have a material effect on the timing of the Company's revenue
recognition.
Revenue includes fees for software licenses, related professional services,
and maintenance and support services. Revenue from software contracts is
accounted for principally by the percentage of completion method, whereby
revenue is recognized based on the estimated stage of completion of individual
contracts. Professional service revenue includes system planning and
implementation and training, which is recognized as the services are performed.
Revenue from maintenance and support fees represent the ongoing customer support
and free product updates, which are included in deferred revenue and amortized
ratably into revenue over the term of the maintenance period.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales and
marketing expenses also include costs of advertising, trade shows and certain
indirect costs. All costs of advertising the services and products offered by
the Company are expensed as incurred. Advertising expense totaled $76,447 for
the year ended December 31, 1998.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
remaining maturity at the date of purchase of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
of property and equipment is charged to operations over their estimated useful
lives, primarily using accelerated methods.
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THE MCCOSKER CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated useful lives are as follows:
Furniture and fixtures...................................... 7 years
Computer equipment.......................................... 3 - 5 years
Automobiles................................................. 3 - 5 years
Expenditures for repairs and maintenance are charged to expense as
incurred. Upon retirement or sale, the cost of assets disposed and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
Research and Development Expenses
Costs incurred in the research and development of the Company's products
are expensed as incurred.
Capitalized Software Costs
Software development costs are required to be capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. The Company's policy is
to amortize software development costs on a product-by-product basis at the
greater of the amount computed using (a) the ratio of current gross revenues for
a product to the total of current and anticipated future gross revenues or (b)
the straight-line method over the remaining estimated economic life of the
product. To date, the achievement of technological feasibility and the general
availability of such software have substantially coincided; therefore software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has not capitalized any costs for software developed
internally.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable at December 31, 1998 approximated their fair value due to the
short-term nature of these items. The fair value of the Company's amounts due to
affiliate at December 31, 1998 approximated their carrying values, as the
interest rates on the amounts due to affiliate approximated market rates.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and
intangible assets in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," ("SFAS No. 121"). SFAS No. 121 requires recognition
of impairment of long-lived assets in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets or
the business to which such assets relate. No impairments were required to be
recognized during the years ended December 31, 1998.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable and investments. Cash and cash equivalents are deposited with high
credit quality financial institutions which invest primarily in U.S. Government
securities, highly rated commercial paper and certificates of deposit guaranteed
by banks which are members of the Federal Insurance Corporation.
The Company's accounts receivable result primarily from sales to
homebuilders located throughout the United States. The Company routinely
assesses its customers and the industry in which they operate. No single
customer accounted for more than 10% of the Company's revenues during the years
ended
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THE MCCOSKER CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base and because all customers are located in the United
States. There were no significant individual customer balances as of December
31, 1998.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS No. 131 are effective for the year
ended December 31, 1998. The Company has determined that it does not have any
separately reportable operating segments as of December 31, 1998.
Income taxes
The Company was incorporated as a Sub-Chapter S corporation under the
Internal Revenue Code. All income of the Company accrues directly to the
stockholders and all income taxes are paid by the stockholders at the individual
level of taxation; therefore, the Company pays no federal or state income taxes.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive income, as
defined, includes all changes in equity during a period from non-owner sources.
The Company had no items of other comprehensive income for the years ended
December 31, 1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes several
existing standards. 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 expect that the adoption of SFAS No. 133 will have a material impact on
the consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998:
Computer equipment.......................................... $ 624,359
Furniture and fixtures...................................... 180,993
Automobiles................................................. 28,846
---------
834,198
Less accumulated depreciation............................... (443,399)
---------
$ 390,799
=========
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THE MCCOSKER CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1998:
Accounts receivable......................................... $1,756,641
Less: Allowance for doubtful accounts....................... (245,703)
----------
$1,510,938
==========
Write-offs of accounts receivable were $198,160 for the year ended December
31, 1998.
5. EMPLOYEE BENEFIT PLANS
The Company provides its employees a retirement plan qualified under
Section 401(k) of the Internal Revenue Code of 1986, as amended, covering
substantially all full-time employees who meet certain minimum age and
employment criteria. The Company may make contributions to the plan at its
discretion. The Company did not make contributions to the plan during the year
ended December 31, 1998.
6. DUE TO AFFILIATES
The Company receives cash advances from an affiliated company (the
"Affiliated Company") to help fund operations. The advances bear interest at a
rate of 8% per annum. The Affiliated Company is owned by a former officer of the
Company, who is related to the Company's current President and Chief Executive
Officer. At December 31, 1998, the due to affiliate balance was made up of the
following amounts:
Short-term cash advance from affiliate...................... $1,666,930
Accrued interest on cash advance............................ 51,088
----------
Total due to affiliate balance.................... $1,718,018
==========
During the year ended December 31, 1998, the Company received cash advances
from and made payments to this affiliate of $1,666,930 and $832,828,
respectively.
7. LEASE OBLIGATIONS
The Company leases its office facilities and certain equipment under
operating lease agreements. Future lease payments under noncancelable operating
leases, exclusive of related party rental payments discussed in Note 8, at
December 31, 1998 were as follows:
YEAR ENDING DECEMBER 31,
1999........................................................ $ 133,120
2000........................................................ 111,422
2001........................................................ 53,457
2002........................................................ 38,527
2003........................................................ 36,239
Thereafter.................................................. 1,298,554
----------
Total minimum lease payments...................... $1,671,319
==========
Rent expense for the year ended December 31, 1998 was $142,810.
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THE MCCOSKER CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company rents office space from a company owned by the Company's
majority shareholder. During 1997, the Company received a rent concession which
was recorded as deferred rent and is being amortized over the remaining life of
the lease. As of December 31, 1998, future minimum payments under this rental
agreement were as follows:
1999........................................................ $ 360,000
2000........................................................ 360,000
2001........................................................ 360,000
2002........................................................ 360,000
2003........................................................ 360,000
Thereafter.................................................. 1,290,000
----------
$3,090,000
==========
During the year ended December 31, 1998, the Company recognized rent
expense of $297,888 related to this agreement.
9. SUBSEQUENT EVENTS
On May 21, 1999 (the "closing date"), BuildNet, Inc. ("BuildNet") purchased
substantially all of the assets of the Company in exchange for a cash payment of
$2,554,393 and a promissory note for $2,750,000. Under the terms of this note,
BuildNet will make two equal payments of $1,375,000, plus 8% interest, on the
first and second anniversary of the closing date.
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UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited pro forma combined statement of operations data for the year
ended December 31, 1999 combine the historical statements of operations of
BuildNet, NxTrend, UniLink, McCosker, FAST, Systems Analysis, Maxwell and Key
Prestige, as if the acquisitions by BuildNet of NxTrend, UniLink, McCosker,
FAST, Systems Analysis, and Maxwell and the acquisition by BuildNet of Key
Prestige had been completed on January 1, 1999.
The information in the pro forma combined statement of operations for the
year ended December 31, 1999 has been derived from the audited statements of
operations for the year ended December 31, 1999 of BuildNet, NxTrend and UniLink
included elsewhere in this prospectus, the unaudited statements of operations of
McCosker, FAST, Systems Analysis, and Maxwell for the periods during 1999 prior
to dates of acquisition, and the unaudited statements of operations of Key
Prestige for the year ended December 31, 1999.
The acquisitions the Company made were accounted for using the purchase
method of accounting. The purchase method of accounting allocates the aggregate
purchase price to the assets acquired and liabilities assumed based upon their
respective fair values. The excess of purchase price over the fair value of
tangible and identifiable intangible assets acquired, net of liabilities
assumed, has been reflected as goodwill. Management believes that the
preliminary allocations set forth herein are reasonable; however, in some cases
the final allocations will be based upon the Company's valuations and other
studies that are not yet complete. As a result, the allocations set forth herein
are subject to revision as additional information becomes available, and such
revised allocations could differ from those set forth herein.
The unaudited pro forma combined statement of operations are based upon
currently available information and assumptions and estimates which management
believes are reasonable. This statement is presented for comparative purposes
only and does not purport to be indicative of the actual results of operations
that might have occurred or expected future results. You should read the
unaudited pro forma combined financial data in conjunction with our consolidated
financial statements and the related notes and the audited financial statements
and the related notes of the companies we acquired included elsewhere in this
prospectus.
The pro forma net loss per common share assumes the following:
- the conversion of all outstanding shares of the Company's preferred
stock into shares of the Company's common stock upon closing of this
offering;
- the assumed exercise of warrants to purchase 2,890,960 shares of the
Company's common stock that will expire if not exercised prior to the
consummation of this offering;
- the issuance, and reservation for issuance upon exercise of
outstanding options, of 25,954,659 shares of the Company's common
stock and notes payable in the aggregate amount of $32.5 million to
the former stockholders of NxTrend Technology, Inc. in connection with
the Company's pending acquisition of NxTrend, the assumed conversion
of $4.4 million of the principal of the notes payable into
shares of common stock (assuming a conversion price
equal to the midpoint of the range set forth on the front cover page
of this prospectus);
- the issuance of a note payable in the amount of $27 million in
connection with the Company's acquisition of The UniLink Group, LLC
and the assumed conversion of the principal balance of this note
payable into 6,136,363 shares of the Company's common stock; and
- the issuance of a note payable in the amount of $5.9 million in
connection with the Company's purchase of software from J.D. Edwards
World Source Company and the assumed conversion of this note payable
into shares of the Company's common stock (assuming a
conversion price equal to the midpoint of the range set forth on the
front cover page of this prospectus).
F-69
144
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
SYSTEMS
CONSOLIDATED NXTREND UNILINK MCCOSKER FAST ANALYSIS MAXWELL
BUILDNET (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ --------- --------- ----------- ----------- ----------- -----------
Revenues............. $ 14,601 $59,584 $ 208 $4,625 $2,003 $ 265 $627
Cost of revenues
(A)................. 8,559 31,243 283 3,337 737 74 100
-------- ------- ------- ------ ------ ----- ----
Gross profit...... 6,042 28,341 (75) 1,288 1,266 191 527
-------- ------- ------- ------ ------ ----- ----
Selling, general, and
administrative(A)... 11,776 14,091 2,262 1,006 1,360 79 184
Research and
development (A)..... 9,831 7,298 968 884 269 295 173
Stock based
compensation........ 666 1 17 -- -- -- --
Amortization of
intangible assets... 1,755 2,048 4 -- 66 -- --
-------- ------- ------- ------ ------ ----- ----
Total
operating
expenses..... 24,028 23,438 3,251 1,890 1,695 374 357
-------- ------- ------- ------ ------ ----- ----
Operating loss....... (17,986) 4,903 (3,326) (602) (429) (183) 170
Net interest
(expense) income.... (10,515) (368) (160) (75) (31) 3 (6)
-------- ------- ------- ------ ------ ----- ----
(Loss) income before
income taxes and
extraordinary
item................ (28,501) 4,535 (3,486) (677) (460) (180) 164
Provision for income
taxes............... -- (1,653) -- -- -- -- --
-------- ------- ------- ------ ------ ----- ----
(Loss) income before
extraordinary
item................ $(28,501) $ 2,882 $(3,486) $ (677) $ (460) $(180) $164
Extraordinary loss... (28) -- -- -- -- -- --
-------- ------- ------- ------ ------ ----- ----
Net (loss) income.... $(28,529) $ 2,882 $(3,436) $ (677) $ (460) $(180) $164
======== ======= ======= ====== ====== ===== ====
Net loss per common
share - basic and
diluted.............
Weighted average
common shares
outstanding.........
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------
PRO FORMA PRO FORMA
KEY PRESTIGE ADJUSTMENTS COMBINED
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ----------- -----------
Revenues............. $3,893 $ -- $ 85,806
Cost of revenues
(A)................. 1,503 -- 45,836
------ -------- --------
Gross profit...... 2,390 -- 39,970
------ -------- --------
Selling, general, and
administrative(A)... 2,030 -- 32,788
Research and
development (A)..... -- -- 19,718
Stock based
compensation........ -- 684
Amortization of
intangible assets... -- 38,523(B) 42,396
------ -------- --------
Total
operating
expenses..... 2,030 38,523 95,586
------ -------- --------
Operating loss....... 360 (38,523) (55,616)
Net interest
(expense) income.... (6) --) (11,158)
------ -------- --------
(Loss) income before
income taxes and
extraordinary
item................ 354 (38,523) (66,774)
Provision for income
taxes............... (135) -- (1,788)
------ -------- --------
(Loss) income before
extraordinary
item................ $ 219 $(38,523) $(68,562)
Extraordinary loss... -- -- (28)
------ -------- --------
Net (loss) income.... $ 219 $(38,523) $(68,590)
====== ======== ========
Net loss per common
share - basic and
diluted.............
Weighted average
common shares
outstanding.........
- ---------------
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following pro forma adjustments were made to our consolidated statements of
operations to arrive at our unaudited pro forma combined statement of operations
data:
(A) Cost of revenues; selling, general and administrative expenses; and research
and development expenses are shown exclusive of amortization of intangible
assets, which are presented on a separate line.
(B) We recorded additional amortization of intangible assets and goodwill
related to the acquisitions of NxTrend, UniLink, McCosker, FAST, Systems
Analysis, Maxwell and Key Prestige for all 12 months of 1999.
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145
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 the
underwriting discount, payable by the registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
SEC registration fees....................................... $60,720
NASD fees................................................... 23,500
Nasdaq National Market listing fees......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... *
Miscellaneous and registrant's costs........................ *
-------
Total............................................. $ *
=======
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of BuildNet may and, in
certain cases, must be indemnified by BuildNet against, in the case of a
non-derivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorneys' fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorneys' fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
BuildNet. This indemnification does not apply, in a derivative action, to
matters as to which it is adjudged that the director, officer, employee or agent
is liable to BuildNet, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
BuildNet's' certificate of incorporation, as amended, provides that no
director of BuildNet shall be liable to BuildNet or its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by the DGCL.
BuildNet's certificate of incorporation, as amended, also provides that
BuildNet shall indemnify to the fullest extent permitted by Delaware law any and
all of its directors and officers, or former directors and officers, or any
person who may have served at BuildNet's request as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise.
Reference is made to the underwriting agreement to be filed as Exhibit 1.1
hereto, pursuant to which the Underwriters have agreed to indemnify officers and
directors of BuildNet against certain liabilities under the Securities Act.
BuildNet intends to purchase additional directors and officers liability
for indemnification of directors and officers.
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 19, 1997, BuildNet, Inc., a North Carolina corporation and
predecessor of the Registrant, issued a convertible promissory note in the
principal amount of $100,000 and a stock purchase warrant exercisable for 28,580
shares of Series A preferred stock, at an exercise price of $0.8745 per share,
to one accredited investor. This warrant expires on the earliest to occur of
September 30, 2001, the acquisition of the Registrant, or the closing of the
Registrant's initial public offering. These issuances were made by BuildNet
North Carolina in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
On July 23, 1997, BuildNet North Carolina issued a convertible promissory
note in the principal amount of $100,000 and a stock purchase warrant
exercisable for 114,360 shares of Series A preferred stock, at an exercise price
of $0.8745 per share, to one accredited investor. This warrant expires on the
earliest to occur of July 31, 2002, the acquisition of the Registrant, or the
closing of the Registrant's initial public offering. These issuances were made
by BuildNet North Carolina in reliance upon the exemption from registration
under Section 4(2) of the Securities Act.
On October 8, 1997, BuildNet North Carolina issued 116,840 shares of Series
A preferred stock to one accredited investor for an aggregate purchase price of
$100,000 pursuant to the terms of a Series A preferred stock purchase agreement,
as amended. The shares of Series A preferred stock were issued by BuildNet North
Carolina in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
On October 8, 1997, BuildNet North Carolina issued stock purchase warrants
exercisable for an aggregate 759,540 shares of common stock, at an exercise
price of $0.0005 per share, to two accredited investors pursuant to the terms of
a credit facility. The warrants expire on October 8, 2007 and were issued by
BuildNet North Carolina in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
On October 8, 1997, BuildNet North Carolina issued a stock purchase warrant
exercisable for 146,460 shares of common stock, at an exercise price of $1.1265
per share, to one accredited investor. This warrant expires on the earliest to
occur of October 8, 2002, the acquisition of the Registrant or the closing of
the Registrant's initial public offering. The warrant was issued by BuildNet
North Carolina in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
On December 30, 1997, BuildNet North Carolina issued 373,080 shares of
Series A preferred stock to three accredited investors for an aggregate purchase
price of $358,903 pursuant to the terms of loan conversion and stock issuance
agreements. The shares of Series A preferred stock were issued by BuildNet North
Carolina in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
On April 24, 1998, BuildNet North Carolina issued convertible promissory
notes in the aggregate principal amount of $2,000,000 and a stock purchase
warrant exercisable for 607,680 shares of common stock, at an exercise price of
$0.0005 per share, to one accredited investor pursuant to the terms of a credit
facility. This warrant expires on April 24, 2008, and these issuances were made
by BuildNet North Carolina in reliance upon the exemption from registration
under Section 4(2) of the Securities Act.
On October 6, 1998, BuildNet North Carolina issued convertible promissory
notes in the aggregate principal amount of $364,128 and stock purchase warrants
exercisable for an aggregate 105,128 shares of Series B preferred stock, at an
exercise price of $0.51835 per share, to two accredited investors. These
warrants expire on the earliest to occur of September 30, 2008, the acquisition
of the Registrant or the closing of the Registrant's initial public offering.
These issuances were made by BuildNet North Carolina in reliance upon the
exemption from registration under Section 4(2) of the Securities Act.
On October 8, 1998, BuildNet North Carolina issued a stock purchase warrant
exercisable for 608,440 shares of common stock, at an exercise price of $0.0005
per share, to one accredited investor pursuant to the terms of a credit
facility. This warrant expires on October 8, 2008 and was issued by BuildNet
North Carolina in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
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147
On November 12, 1998, BuildNet North Carolina issued convertible promissory
notes in the aggregate principal amount of $500,000 and stock purchase warrants
exercisable for an aggregate 964,560 shares of common stock, at an exercise
price of $0.0005 per share, to two accredited investors. These warrants expire
on the earliest to occur of November 15, 2008, the acquisition of the Registrant
or the closing of the Registrant's initial public offering. These issuances were
made by BuildNet North Carolina in reliance upon the exemption from registration
under Section 4(2) of the Securities Act.
On December 14, 1998, BuildNet North Carolina issued a convertible
promissory note in the principal amount of $250,000 and a stock purchase warrant
exercisable for 482,280 shares of common stock, at an exercise price of $0.0005
per share, to one accredited investor. This warrant expires on the earliest to
occur of November 15, 2008, the acquisition of the Registrant or the closing of
the Registrant's initial public offering. These issuances were made by BuildNet
North Carolina in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
On February 22, 1999, BuildNet North Carolina issued a convertible
promissory note in the principal amount of $500,000 and a stock purchase warrant
exercisable for 270,000 shares of common stock, at an exercise price of $0.0005
per share, to one accredited investor. This warrant expires on the earliest to
occur of February 15, 2009, the acquisition of the Registrant or the closing of
the Registrant's initial public offering. These issuances were made by BuildNet
North Carolina in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
On April 9, 1999, BuildNet North Carolina issued convertible promissory
notes in the aggregate principal amount of $1,000,000 and stock purchase
warrants exercisable for an aggregate 540,000 shares of common stock, at an
exercise price of $0.0005 per share, to two accredited investors. These warrants
expire on the earliest to occur of February 15, 2009, the acquisition of the
Registrant or the closing of the Registrant's initial public offering. These
issuances were made by BuildNet North Carolina in reliance upon the exemption
from registration under Section 4(2) of the Securities Act.
On May 10, 1999, BuildNet North Carolina issued convertible promissory
notes in the aggregate principal amount of $500,000 and stock purchase warrants
exercisable for an aggregate 270,000 shares of common stock, at an exercise
price of $0.0005 per share, to three accredited investors. These warrants expire
on the earliest to occur of February 15, 2009, the acquisition of the Registrant
or the closing of the Registrant's initial public offering. These issuances were
made by BuildNet North Carolina in reliance upon the exemption from registration
under Section 4(2) of the Securities Act.
On May 19, 1999, BuildNet North Carolina issued 19,711,360 shares of common
stock to five individual investors and one institutional investor pursuant to an
agreement and plan of merger, in exchange for all of the outstanding capital
stock of The F.A.S.T. Management Group, Inc. The issuance of such common stock
was made by BuildNet North Carolina in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
Between May and December 1999, BuildNet North Carolina issued an aggregate
69,031,920 shares of Series B preferred stock to 15 accredited investors for an
aggregate purchase price of $35,782,696 pursuant to the terms of a Series B
preferred stock purchase agreement, as amended. These shares of Series B
preferred stock were issued by BuildNet North Carolina in reliance upon the
exemption from registration under the Securities Act provided by Rule 506 of
Regulation D thereunder.
On May 21, 1999, BuildNet North Carolina issued a stock purchase warrant
exercisable for up to 5,426,380 shares of Series B preferred stock, at an
exercise price of $0.51835 per share, to one accredited investor. This warrant
expires on the earliest to occur of May 21, 2009, the acquisition of the
Registrant or the closing of the Registrant's initial public offering. This
warrant was issued by BuildNet North Carolina in reliance upon the exemption
from registration under Section 4(2) of the Securities Act.
On May 21, 1999, BuildNet North Carolina issued a stock purchase warrant
exercisable for 240,000 shares of common stock, at an exercise price of $0.0005
per share, to one accredited investor pursuant to the terms of a credit
facility. This warrant expires on May 21, 2004 and was issued by BuildNet North
Carolina in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
II-3
148
On May 21, 1999, BuildNet North Carolina issued a stock purchase warrant
exercisable for 212,200 shares of common stock, at an exercise price of $0.0005
per share, to one accredited investor. This warrant expires on the earliest to
occur of May 21, 2009, the acquisition of the Registrant or the closing of the
Registrant's initial public offering. This warrant was issued by BuildNet North
Carolina in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
On July 21, 1999, BuildNet North Carolina issued a stock purchase warrant
exercisable for 20,000 shares of common stock, at an exercise price of $1.1265
per share, to one accredited investor. This warrant expires on the earliest to
occur of April 24, 2003, the acquisition of the Registrant or the closing of the
Registrant's initial public offering. This warrant was issued by BuildNet North
Carolina in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
Between October and December 1999, BuildNet North Carolina issued an
aggregate 24,322,619 shares of Series C preferred stock to 157 accredited
investors for an aggregate purchase price of $107,019,524 pursuant to the terms
of a Series C preferred stock purchase agreement. These shares of Series C
preferred stock were issued by BuildNet North Carolina in reliance upon the
exemption from registration under the Securities Act provided by Rule 506 of
Regulation D thereunder.
On January 18, 2000, BuildNet North Carolina issued a convertible
promissory note in the principal amount of $27,000,000 to one accredited
investor. This convertible promissory note is convertible into shares of common
stock of the Registrant at a conversion price of $4.40 per share and was issued
by BuildNet North Carolina in reliance upon the exemption from registration
under Section 4(2) of the Securities Act.
On January 31, 2000, BuildNet North Carolina issued a convertible
promissory note in the principal amount of $5,850,000 to one accredited
investor. This convertible promissory note is convertible into shares of common
stock of the Registrant at a conversion price per share equal to the public
offering price set forth on the cover page of the prospectus and was issued by
BuildNet North Carolina in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
In February 2000, BuildNet North Carolina issued stock purchase warrants
exercisable for an aggregate 5,000,000 shares of Series C preferred stock, at an
exercise price of $4.40 per share, to six accredited investors. These warrants
expire three years from their issue date and were issued by BuildNet North
Carolina in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
Upon consummation of the NxTrend merger, BuildNet North Carolina will issue
25,954,659 shares of common stock to 43 investors pursuant to the agreement and
plan of merger, in exchange for all of the outstanding capital stock of NxTrend
Technology, Inc. The issuance of such common stock will be made by BuildNet
North Carolina in reliance upon the exemption from registration under the
Securities Act provided by Rule 506 of Regulation D thereunder.
In March 2000, BuildNet North Carolina issued stock purchase warrants
exercisable for an aggregate of 2,000,000 shares of common stock and 1,000,000
shares of Series C preferred stock, all at an exercise price of $4.40 per share,
to nine accredited investors. These warrants expire three years from their issue
date and were issued by BuildNet North Carolina in reliance upon the exemption
from registration under Section 4(2) of the Securities Act.
Since March 1, 1997 the Registrant has issued, assumed, and in connection
with the NxTrend merger, will assume, options to purchase an aggregate of
36,207,474 shares of common stock pursuant to the Registrant's stock plans at an
average exercise price of $0.53 per share. The Registrant has also issued an
aggregate of 16,409,316 shares of common stock to various employees upon the
exercise of options granted pursuant to the Registrant's stock plans for an
aggregate consideration of $2,434,211, at an average exercise price of $0.15 per
share. These grants of options, and the sales of common stock upon the exercise
of these options, were made in reliance on the exemptions from registration
under the Securities Act provided by Rule 701 thereunder.
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The following table sets forth information regarding these grants.
YEAR OF GRANT OR ASSUMPTION PLAN SECURITIES UNDERLYING OPTION AVERAGE EXERCISE PRICE
--------------------------- ---- ---------------------------- ----------------------
1997 1997 Plan 1,396,480 $0.005
1998 1997 Plan 919,680 0.005
1999 1999 Plan 26,696,200 0.49
1999 FAST Plan 1,299,833 0.19
2000 1999 Plan 558,300 2.94
2000 NxTrend Plan 5,336,981 0.78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
1.1* -- Form of Underwriting Agreement
2.1* -- Agreement and Plan of Merger dated February 21, 2000, by and
among the Company, NTI Acquisition Corp., NxTrend
Technology, Inc. and representatives of the stockholders of
NxTrend named therein
2.2* -- Agreement and Plan of Merger, dated , 2000, by and
between Buildnet, Inc., a North Carolina corporation and
BuildNet, Inc., a Delaware corporation
3.1* -- Amended and Restated Certificate of Incorporation of
Registrant
3.2* -- Form of Amended and Restated Certificate of Incorporation of
Registrant
3.3* -- Form of Amended and Restated Bylaws of Registrant
4.1* -- Specimen certificate for shares of common stock
4.2 -- Amended and Restated Investor Rights Agreement dated May 21,
1999, between the Registrant and the holders of stock and
warrants to purchase stock of the Registrant named therein,
as amended
4.3 -- Series C Investor Rights Agreement dated October 29, 1999,
between the Registrant and the holders of stock of the
Registrant named therein, as amended of the Registrant and
the stockholders of NxTrend Technology, Inc. named therein
5.1* -- Opinion of Wyrick Robbins Yates & Ponton LLP
10.1 -- BuildNet, Inc. 1997 Stock Plan
10.2 -- BuildNet, Inc. 1999 Stock Plan
10.3 -- The F.A.S.T. Management Group, Inc. 1997 Stock Option Plan
10.4* -- NxTrend Technology, Inc. 1999 Amended and Restated Equity
Incentive Plan
10.5 -- Stock Purchase Warrant dated October 8, 1997, issued by the
Registrant to Petra Capital, LLC
10.6 -- Stock Purchase Warrant dated October 8, 1997, issued by the
Registrant to Piedmont Venture Partners Limited Partnership
10.7* -- Stock Purchase Warrant dated April 24, 1998, issued by the
Registrant to Piedmont Venture Partners Limited Partnership
10.8 -- Stock Purchase Warrant dated October 8, 1998, issued by the
Registrant to Petra Capital, LLC
10.9 -- Stock Purchase Warrants dated November 5, 1998, issued by
The F.A.S.T. Management Group, a wholly owned subsidiary of
the Registrant, to Deerwood Enterprises, Ltd.
10.10 -- Stock Purchase Warrant dated May 21, 1999, issued by the
Registrant to Petra Capital, LLC
10.11** -- Stock Purchase Warrant dated May 21, 1999, issued by the
Registrant to GE Capital Equity Investments, Inc.
10.12 -- Form of Founding Member Agreement
10.13 -- Form of Builder Incentive Series C Preferred Stock Purchase
Warrant
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10.14 -- Employment Agreement dated May, 1999, between the Registrant
and Nathan P. Morton
10.15 -- Employment Agreement dated April 2, 1999, between the
Registrant and Bayard M. Atwood, III
10.16 -- Employment Agreement dated May 19, 1999, between the
Registrant and Keith T. Brown
10.17 -- Employment Agreement dated May 19, 1999, between the
Registrant and Charles M. Cosby
10.18 -- Employment Agreement dated August 31, 1999, between the
Registrant and Peter B. Drayson
10.19 -- Employment Agreement dated August 31, 1999, between the
Registrant and Steven C. Thompson
10.20 -- Employment Agreement dated September 27, 1999, between the
Registrant and Stephen L. Holcombe
10.21 -- Employment Agreement dated September 27, 1999, between the
Registrant and David F. Russo
10.22** -- Master Services Agreement dated December 18, 1998, between
the Registrant and Electronic Data Systems Corporation
10.23** -- Internet Development, Marketing and Distribution Agreement
dated as of May 21, 1999, between the Registrant and General
Electric Company
10.24 -- Subordinated Convertible Promissory Note dated January 18,
2000, issued by the Registrant to TUG Liquidation, LLC
10.25 -- Secured Convertible Promissory Note dated January 31, 2000,
issued by the Registrant to J.D. Edward World Source Company
10.26** -- ABA Net Branch and Member Website Development Agreement,
dated February 2000, between Registrant and mortgage.com
10.27** -- Internet Marketing and Co-branded Website Development
Agreement, dated February 2000, between Registrant and
mortgage.com
10.28** -- Marketing Agreement, dated February 2000, between Registrant
and mortgage.com
16.1 -- Letter re Change in Certifying Accountant
21.1 -- List of Subsidiaries
23.1 -- Consents of PricewaterhouseCoopers LLP
23.2 -- Consent of Wyrick Robbins Yates & Ponton LLP (included in
Exhibit 5.1)
24.1 -- Power of Attorney (see page II-8)
27.1 -- Financial Data Schedule (for SEC use only)
99.1 -- Consent of director nominee
- ---------------
* To be filed in amendment.
** Confidential treatment requested.
(b) Financial Statement Schedules.
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Financial Statements or the
related Notes.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter 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 foregoing provisions, or otherwise
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151
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person 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 of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the 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) of 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at this time shall
be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Raleigh, State of North
Carolina, on this 17th day of March 2000.
BUILDNET, INC.
By: /s/ NATHAN P. MORTON
------------------------------------
Nathan P. Morton
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of BuildNet, Inc. (the
"Company"), hereby severally constitute and appoint Nathan P. Morton and Stephen
L. Holcombe, and each of them individually, with full powers of substitution and
resubstitution, our true and lawful attorneys, with full powers to them and each
of them to sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement (including
post-effective amendments), and any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, in connection with the
registration under the Securities Act of 1933, as amended, of equity securities
of the Company, and to file or cause to be filed the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby ratifying and
confirming all that said attorneys, and each of them, or their substitute or
substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated:
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ NATHAN P. MORTON Chief Executive Officer March 17, 2000
- --------------------------------------------------- (Principal Executive Officer)
Nathan P. Morton and Director
/s/ STEPHEN L. HOLCOMBE Chief Financial Officer March 17, 2000
- --------------------------------------------------- (Principal Financial and
Stephen L. Holcombe Accounting Officer)
/s/ KEITH T. BROWN Chairman March 17, 2000
- ---------------------------------------------------
Keith T. Brown
/s/ BAYARD M. ATWOOD, III Director March 17, 2000
- ---------------------------------------------------
Bayard M. Atwood, III
/s/ PAUL A. RYDER Director March 17, 2000
- ---------------------------------------------------
Paul A. Ryder
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SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ JUSTIN HALL-TIPPING Director March 17, 2000
- ---------------------------------------------------
Justin Hall-Tipping
/s/ NORVELL E. MILLER, IV Director March 17, 2000
- ---------------------------------------------------
Norvell E. Miller, IV
/s/ WILLIAM W. NEAL Director March 17, 2000
- ---------------------------------------------------
William W. Neal
/s/ JERRY A. ROSE Director March 17, 2000
- ---------------------------------------------------
Jerry A. Rose
/s/ JOEL D. KOBLENTZ Director March 17, 2000
- ---------------------------------------------------
Joel D. Koblentz
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