As filed with the Securities and Exchange Commission on August 25, 1999
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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ANDROMEDIA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7372 68-0370250
(State or other
jurisdiction of
incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
818 Mission Street, Second Floor, San Francisco, CA 94103, (415) 365-6700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Kent B. Godfrey
Chief Executive Officer
818 Mission Street, Second Floor, San Francisco, CA 94103, (415) 365-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Jeffrey A. Herbst Tracy K. Edmonson
Gil M. Labrucherie Tad J. Freese
David L. Leibsohn Michael R. Fassler
Christine S. Wong Latham & Watkins
Wilson Sonsini Goodrich & Rosati 505 Montgomery Street
Professional Corporation Suite 1900
650 Page Mill Road San Francisco, CA 94111
Palo Alto, CA 94304 Phone: (415) 391-0600
Phone: (650) 493-9300 Fax: (415) 395-8095
Fax: (650) 493-6811
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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. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Aggregate
Title of Each Class of Offering Price Amount of
Securities to be Registered (1) Registration Fee
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Common Stock, $0.001 par value............... $40,000,000 $11,120
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
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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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- August 25, 1999
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Prospectus
, 1999
[ANDROMEDIA LOGO]
Shares of Common Stock
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Andromedia, Inc.: The Offering:
. We believe that we . We are offering
are the first shares of our
company to offer a common stock.
comprehensive e-
marketing solution
that combines
advanced Web site
monitoring,
personalization
and analysis
capabilities.
. The underwriters
have an option to
purchase an
additional
shares from
Andromedia to
cover over-
allotments.
. Andromedia, Inc.
818 Mission Street . This is our
Second Floor San initial public
Francisco, CA offering, and no
94103 (415) 365- public market
6700 currently exists
for our shares. We
anticipate that
the initial public
offering price
will be between
$ and $ .
Proposed Symbol and
Market:
. ANDO/Nasdaq
National Market
. We expect to use
the proceeds from
this offering for
general corporate
purposes,
principally
working capital,
capital
expenditures and
additional sales
and marketing
efforts.
. Closing: ,
1999.
-------------------------------------------
Per Share Total
-----------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to Andromedia:
-----------------------------------------
This investment involves risk. See "Risk Factors" beginning on page 4.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
SG Cowen
C.E. Unterberg, Towbin
Wit Capital Corporation
DLJdirect Inc.
[Graphics depicting the Andromedia e-marketing solution]
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock. In this prospectus, unless the
context indicates otherwise, the "Company," "Andromedia," "we," "us" and "our"
refer to Andromedia, Inc. and its consolidated subsidiaries.
Andromedia(R), ARIA(R), LikeMinds(TM) and Moviecritic(R) are
trademarks/service marks of Andromedia, Inc. Every other trademark, trade name
or service mark of any other company appearing in this prospectus is the
property of its holder.
TABLE OF CONTENTS
Page
Prospectus Summary................... 1
Risk Factors......................... 4
Use of Proceeds...................... 13
Dividend Policy...................... 13
Capitalization....................... 14
Dilution ............................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business............................. 28
Management........................... 41
Page
Certain Transactions.............................. 52
Principal Stockholders............................ 53
Description of Capital Stock...................... 55
Shares Eligible for Future Sale................... 58
Underwriting...................................... 60
Legal Matters..................................... 62
Experts........................................... 63
Where You Can Find More Information............... 63
Index to Financial Statements..................... F-1
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and the related notes
appearing elsewhere in this prospectus. Unless stated otherwise, the
information contained in this prospectus assumes that the underwriters' over-
allotment option is not exercised and that we reincorporate into Delaware
immediately prior to the offering.
Andromedia, Inc.
We believe that we are the first company to offer a comprehensive e-marketing
solution that combines advanced Web site monitoring, personalization and
analysis capabilities. Our solution monitors and analyzes Web site activity and
visitor behavior data and, in real-time, helps our customers improve the
effectiveness of their Internet marketing and selling efforts. Our solution
helps companies identify and target the most qualified customers, understand
their tastes and preferences, refine sales and marketing tactics in real-time
and predict likely cross-selling opportunities. We have designed our solution
to convert Web site browsers into buyers, and buyers into loyal customers,
which we believe can significantly increase our customers' e-commerce revenues.
The Internet has emerged as a powerful and rapidly growing medium for
communication and commerce. While some early participants in e-commerce have
achieved a high degree of brand recognition and revenue growth, they are now
facing an increasingly competitive market. The result is that many companies
are finding it difficult to attract and retain customers through their Web
sites. Forrester Research estimates that only 2.7% of first time visitors to an
e-commerce Web site convert from browsers into buyers.
In order to attract and retain customers, companies must improve their Web
site monitoring,
personalization and analysis capabilities. With improved Web site monitoring
capabilities, companies are able to gain insight about their customers by
observing and capturing customer behavior in real-time as customers browse
their Web site. By personalizing Web page content to better reflect customer
tastes and preferences, companies are able to enhance the user's Web site
experience and improve the conversion rate of browsers into buyers. With
improved Web site analysis, companies can receive feedback to measure and
evaluate the effectiveness of their marketing messages, promotions and
campaigns.
Our e-marketing software applications consist of our ARIA and LikeMinds
product lines which are sold as an integrated solution or individually.
. ARIA provides comprehensive Web site monitoring and analysis that allows
marketers to better understand how customers respond to particular Web
pages, content categories and e-marketing campaigns.
. LikeMinds personalization software provides personally relevant
predictions of which content and products will be best suited for Web
site visitors.
In addition, we provide professional services to assist customers in
identifying, implementing and integrating Web-based technologies to improve the
effectiveness of their Internet marketing and selling efforts.
1
We believe our solution provides a highly effective "virtual salesperson" for
online customers. It collects data on customer browsing and shopping behavior
and works with other e-commerce applications to interact with online customers
in real-time. Our solution gains information about their tastes and preferences
and provides personally relevant information and purchase recommendations. Our
solution also refines its marketing and selling tactics based on immediate
feedback and analysis.
Our objective is to be the leading provider of e-marketing software solutions
for marketing and selling on the Internet. Key elements of our strategy include
establishing our products as the leading e-marketing software solution,
delivering the most comprehensive e-marketing solution, leveraging and
expanding relationships with leading e-commerce software providers, expanding
our global presence, capitalizing on our installed base of customers and
pursuing strategic acquisitions.
We have over 100 customers in a broad range of industries including
education, government, entertainment, financial services, manufacturing, media,
online merchants and traditional retailers. Our customers include Chase
Manhattan Bank, Daimler-Chrysler, E*Trade, Internet Gift Registry, Levi Strauss
& Co., Motley Fool, Sun Microsystems, The Weather Channel, United Parcel
Service and the United States Postal Service. We market our products and
services primarily through our direct sales force and to a lesser extent
through indirect channels including Internet service providers, application
service providers, systems integrators and Web design studios, as well as other
technology and marketing partners.
We were incorporated in California in January 1996, and we intend to
reincorporate in Delaware immediately prior to the offering. Our corporate
headquarters are located at 818 Mission Street, Second Floor, San Francisco,
California 94103. We maintain sales and support offices in Boston, Chicago,
London, Los Angeles, New York City and Washington, D.C.
The Offering
Common stock offered by
Andromedia...................... shares
Common stock to be outstanding
after this offering............. shares
Use of proceeds.................. We plan to use the proceeds from this offering for
general corporate purposes, principally working
capital, capital expenditures and additional sales and
marketing efforts, as well as potential acquisitions.
Proposed Nasdaq National Market
symbol.......................... ANDO
This table is based on shares outstanding as of July 31, 1999. This table
excludes:
. 3,314,596 shares subject to outstanding options as of July 31, 1999 at a
weighted average exercise price of $1.93 per share;
. 2,641,466 additional shares available for grant as of July 31, 1999 under
our 1996 stock plan, 1997 stock plan, 1999 stock plan and 1999 employee
stock purchase plan; and
. 159,230 shares of common stock subject to outstanding warrants at a
weighted average exercise price of $4.90 per share.
2
Summary Consolidated Financial Data
(In thousands, except per share data)
You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations." You should also refer to the other information set forth in
this prospectus, including our financial statements and the related notes.
Years Ended Six Months
December 31, Ended June 30,
---------------- ----------------
1997 1998 1998 1999
------- ------- ------- -------
Statement of Operations Data:
Revenues:
Licenses................................. $ 413 $ 1,153 $ 461 $ 1,715
Services and maintenance................. 36 816 196 907
------- ------- ------- -------
Total revenues.......................... 449 1,969 657 2,622
Gross profit.............................. 406 954 424 590
Loss from operations...................... (3,409) (9,677) (3,449) (8,626)
Net loss.................................. (3,350) (9,556) (3,454) (8,608)
Pro forma basic and diluted net loss per
share.................................... $ 0.95 $ 0.59
======= =======
Shares used to compute pro forma basic and
diluted net loss per share............... 10,096 14,665
The pro forma basic and diluted share calculations above reflect the
conversion upon the closing of the offering of all outstanding shares of
preferred stock into 11,176,666 shares of common stock as if the conversion
occurred at the date of original issuance.
As of June 30, 1999
--------------------
Pro Forma
Actual As Adjusted
------- -----------
Balance Sheet Data:
Cash and cash equivalents................................. $ 9,075 $
Working capital........................................... 7,392
Total assets.............................................. 16,537
Long-term debt and lease obligations, less current........ 255
Mandatorily redeemable convertible preferred stock........ 55,141
Total stockholders' equity (deficit)...................... (44,003)
The pro forma as adjusted column reflects the conversion of our outstanding
preferred stock to common stock, which will occur upon the closing of the
offering, the sale of shares of common stock in the offering and the
application of the net proceeds from the offering, after deducting underwriting
discounts and commissions and estimated offering expenses. For more information
on how we will use the proceeds from this offering, see "Use of Proceeds."
3
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors before you buy our common stock.
The risks described below are not the only ones that face our business. You
should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes. Our business,
financial condition and results of operations could be seriously harmed by any
of the following risks. In the event our business is seriously harmed by one or
more of these risks, then the market price of our common stock could decline
significantly, and you could lose all or a part of your investment.
Evaluating the future prospects of our business is difficult because we are an
early-stage company that may encounter significant risks and difficulties in
the new and rapidly evolving market in which we participate.
Andromedia was incorporated in January 1996 and has a limited operating
history. We began shipping our ARIA product line in the first quarter of 1997.
We generated revenues of $449,000 in 1997, $2.0 million in 1998 and $2.6
million in the first six months of 1999. As a result of our limited operating
history, it is difficult to evaluate the future prospects of our business. We
participate in the new and rapidly evolving market for e-marketing software
applications. Accordingly, we encounter the risks and difficulties frequently
encountered by early-stage companies in new and rapidly evolving markets. We
cannot assure you that we will successfully address these risks and
difficulties, and if we fail to do so, it may cause us serious harm.
The market for e-marketing software applications is in its early stage of
development. The use of these applications by businesses that have historically
relied upon traditional sales and marketing techniques will require widespread
acceptance of a new and substantially different sales and marketing approach.
To date, few companies have measured the effectiveness of their Internet sales
and marketing activities and, as a result, it is too early to accurately judge
the effectiveness of selling and marketing over the Internet as compared to
traditional marketing and selling methods. Accordingly, the demand for, and
market acceptance of, our products is uncertain. This uncertainty is compounded
by the risk that e-commerce may not grow to the extent we expect or within an
adequate time frame to allow our business to succeed.
We have a history of losses and expect to incur substantial losses in the
future.
We had net losses of $3.4 million in 1997, $9.6 million in 1998 and $8.6
million in the first six months of 1999. As of June 30, 1999, we had an
accumulated deficit of $23.1 million. We have not had a profitable quarter to
date and we may not be able to achieve profitability in future quarters. We
expect that our losses will continue to increase in 1999. We expect to continue
to incur significant sales and marketing, research and development and general
and administrative expenses. As a result, we will need to generate significant
quarterly revenues to achieve profitability, which we may be unable to do.
Although our revenues have grown in recent quarters, we do not believe that we
can sustain these growth rates, or that such growth rates are indicative of
future revenue growth rates.
Our quarterly operating results often depend on a small number of large orders.
We derive a significant portion of our revenues in each quarter from a small
number of relatively large orders. We could be seriously harmed if we were
unable to complete one or more substantial sales in any quarter. For example,
during five of our last six quarters, we had at least one customer that
accounted for more than 10% of total revenue in each of those quarters.
4
Fluctuations in our results of operations make it difficult to predict our
future performance and may result in volatility in the market price of our
common stock.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors,
particularly as a result of the risks we describe in this section. In this
regard, most of our expenses are fixed in the short-term, and we may not be
able to quickly reduce spending if our revenues are lower than expected. In
addition, our ability to forecast revenue is limited. As a result, our
operating results are volatile and difficult to predict and you should not rely
on the results of one quarter as an indication of future performance. In some
future quarter our operating results may fall below the expectations of
securities analysts and investors. In this event, the market price of our
common stock could fall significantly.
We depend on our ARIA and LikeMinds product lines. A decline in the demand for
ARIA or LikeMinds would seriously harm us.
We currently derive substantially all of our revenues from our ARIA and
LikeMinds product lines and related services. We expect to continue to depend
on revenues generated from new and enhanced versions of our ARIA and LikeMinds
product lines for the foreseeable future. Consequently, a decline in the price
of or demand for these products, or their failure to achieve broad market
acceptance, would seriously harm us. In addition, we cannot assure you that we
will successfully develop and introduce new and enhanced versions of our ARIA
and LikeMinds product lines or that such products will achieve market
acceptance.
Our business could be seriously impacted by the privacy concerns of e-commerce
users.
Our ARIA product line captures, and our LikeMinds product line uses,
information about the tastes and preferences of online users each time a user
visits a Web site or volunteers information in response to survey questions.
Privacy concerns may cause Web site visitors to resist providing the personal
data necessary to support this profiling capability. More importantly, even the
perception of privacy concerns may indirectly inhibit market acceptance of our
products. If customer privacy concerns are not adequately addressed, we could
be seriously harmed.
In addition, there is a substantial probability that new U.S. legislative and
regulatory requirements designed to protect individual privacy could be imposed
on businesses engaged in e-commerce. The U.S. Federal Trade Commission has also
indicated that it will be vigilant in using its existing statutory authority to
institute enforcement actions against companies that the FTC believes have
infringed individual privacy. Moreover, the recently enacted Children's Online
Privacy Act, which takes effect on October 21, 1999, imposes new obligations on
all online businesses which target customers who are children under the age of
13 and other requirements on all businesses engaged in e-commerce to protect
the privacy of children under the age of 13. Proposed FTC regulations designed
to implement the law will go into effect in the year 2000. Various other
countries and political entities, such as the European Economic Community, have
adopted legislation or regulatory requirements which are in some respects
stricter than U.S. requirements. The United States may adopt similar
legislation or regulatory requirements, which could seriously harm us.
Our ARIA product line captures some of its data with "cookies" to identify
unique user information and preferences. A "cookie" is a bit of information
keyed to a specific server, file pathway or directory location. Cookies are
typically stored on a computer user's hard disk drive, possibly without the
user's knowledge, but generally may be removed or disabled by the user. Some
countries have imposed laws limiting the use of cookies, and a number of
commentators, advocates and governmental bodies in the United States and other
countries have urged passage of laws limiting or abolishing the use of cookies.
If such laws are passed, we could be seriously harmed.
5
We face intense competition, and if we are unable to compete successfully, we
will be seriously harmed.
Even though the market for our products is in an early stage of development,
it is already intensely competitive, and we expect competition to increase in
the future. Increased competition could result in loss of market share, price
reductions and reduced gross margins for our products, any of which could
seriously harm us. For a discussion of our primary competitors see "Business--
Competition."
We may not be able to compete successfully against current and future
competitors. Many of our competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition and a larger installed base of customers
than we have. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our target markets. As a result, our competitors may be able to
respond more quickly to evolving industry standards and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address customer needs. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
We need to substantially expand our direct sales operations to increase our
revenues. If we fail to do so, we would be seriously harmed and our growth will
be limited.
We need to substantially expand our direct sales operations if we are to
increase our revenues. If we fail to increase our direct sales capabilities, we
would be seriously harmed, and our growth would be limited. We have recently
expanded our direct sales force and plan to hire additional sales personnel. As
of July 31, 1999, our direct sales organization, including sales and sales
support personnel, consisted of 36 employees. 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 will require extensive training and
typically take several months to achieve productivity. We cannot be certain
that our recent hires will be as productive as we desire.
We depend on key personnel. The loss of the services of one or more of our key
personnel, or our failure to attract and retain other highly qualified
personnel in the future would seriously harm us.
Our future success depends on the continued service of our senior management
and other key personnel. The loss of the services of one or more of our key
personnel could seriously harm us. Most of our key personnel are not bound by
employment agreements. In addition, we do not carry key person life insurance
on any of our employees.
Our future success also depends on our continuing ability to attract, hire,
train and retain a substantial number of highly skilled managerial, technical,
sales, marketing and customer support personnel. Competition for such qualified
personnel in our industry and geographical location in the San Francisco Bay
Area is intense, particularly for software development and technical personnel.
We would be seriously harmed if we are unable to retain our key employees, or
to attract, assimilate or retain other highly qualified personnel in the
future.
The expansion of our business has placed, and continues to place, a significant
strain on our management, operating infrastructure and resources and could
seriously harm us.
We have recently experienced a period of significant expansion of our
business that has placed, and continues to place, a significant strain on our
management, operating infrastructure and resources. A failure to properly
manage the expansion of our business could seriously harm us. We
6
have recently hired a significant number of employees and plan to further
increase our total headcount. Our headcount has increased from 36 at December
31, 1997 to 86 at December 31, 1998 to 121 at June 30, 1999. Furthermore, our
Chief Financial Officer and Vice President of Sales joined us in June and July
1999, respectively, and they have had limited exposure to our prior operations.
To properly manage this growth, we must, among other measures, implement and
improve on a timely basis our operating infrastructure including our
administrative, financial and operational systems, procedures and controls. We
may not be able to complete the necessary improvements to our systems,
procedures and controls on a timely basis, which could seriously harm us.
To remain competitive we intend to acquire complementary businesses, products,
services and technologies and a failure to do so could seriously harm us. We
are also subject to risks associated with making these acquisitions.
Due to the intense competition in the e-marketing software market, we believe
that our success will depend in part on our ability to successfully identify
and acquire complementary businesses, products, services and technologies. For
example, in late 1998 we acquired LikeMinds, Inc., and the LikeMinds product
line now represents a significant portion of our product offerings. Although we
currently do not have any agreements or understandings to do so, we do intend
to acquire complementary businesses, products, services and technologies in the
future. However, we cannot assure you that we will be able to identify
additional acquisition or investment opportunities that may be necessary to
maintain our competitive market position. Some of the risks and difficulties
that we may encounter in making future acquisitions and investments include:
. complementary business, products, services and technologies may not be
available on commercially reasonable terms;
. we may not be able to successfully compete for acquisition and investment
opportunities with many of our competitors who have greater financial
resources and more well-established industry relationships;
. acquired products, services and technologies may not meet customer needs
and therefore may not achieve widespread market acceptance;
. we may incur difficulties in assimilating acquired products, services and
technologies with our existing products, services and technologies;
. we may incur difficulties associated with the integration of the
personnel and operations of an acquired company with our personnel and
operations; and
. integration of acquired and existing products and services may result in
decreased revenue from existing products and services.
These risks and difficulties could disrupt our ongoing business, distract our
management and other key employees, increase our expenses and adversely affect
our results of operations. In addition, acquisitions and investments may have a
negative effect on our reported results of operations from acquisition or
investment related charges and amortization of acquired technology, goodwill
and other intangible assets. Any of these acquisition-related risks could
seriously harm us.
We rely on our strategic technology and distribution relationships to
facilitate the development and widespread acceptance of our products. A loss of
one or more of these strategic relationships could seriously harm us.
We rely on our strategic relationships with:
. leading platform and applications providers such as Allaire, ATG,
BroadVision, Netscape/America Online, Sun Microsystems and Vignette;
7
. Internet services companies such as Anubis, BASE Consulting, Fort Point
Partners, iXL, Multimedia Live, Net Effect, Net Quotient, Novo
Interactions, Oven Digital and Stonebridge;
. Webcraft, a leading provider of personalized direct marketing services
and a subsidiary of Big Flower Holdings, Inc., which provides us access
to traditional geographic, demographic and psychographic data; and
. Object Design, which provides us the object database for our ARIA
recorder product.
We have no binding contractual commitments with most of these companies and,
as a result, these companies generally may terminate their relationships with
us without penalty. The loss of one or more of these strategic relationships
could seriously harm our ability to develop new and enhanced products,
successfully deploy our products or generate additional product sales
opportunities.
Our professional services organization may remain unprofitable, which could
seriously harm us.
As of July 31, 1999, our Services Group consisted of 29 employees, and we
plan to substantially increase the size of this organization. We expect our
services and maintenance revenue to increase as we continue to provide
consulting, training and customer support services that complement our products
and as our installed base of customers grows. We generally bill our clients for
our services on a fixed-price project basis, although from time to time we bill
our clients on a time and materials basis. Failure to estimate accurately the
resources and time required for a services engagement or to complete fixed-
price engagements within budget could expose us to risks associated with cost
overruns and may adversely affect our results of operations. We cannot assure
you that we will successfully expand our services capabilities or that our
services organization will achieve or maintain profitability.
If our potential new products or product enhancements are not launched on a
timely basis, or do not achieve market acceptance, we would be seriously
harmed.
The life cycles of products within our ARIA and LikeMinds product lines are
difficult to predict because the e-marketing software market is characterized
by changing customer needs, frequent new software product introductions and
rapidly evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards could render our
existing products obsolete and unmarketable. If we do not launch new products
or new versions of existing products on a timely basis, or if these products do
not achieve market acceptance, we would be seriously harmed.
Development of our software products is complex and subject to frequent
delays, and we may encounter difficulties, as we have in the past, that could
delay or prevent the successful and timely development, introduction and
marketing of the new products and product releases. Moreover, even if new
products or product releases are completed and introduced, they may never
achieve widespread market acceptance. Failure to release these products under
development on a timely basis, or failure of these products under development,
if and when released, to achieve widespread market acceptance, could seriously
harm us.
Future expansion of our international operations is important to the growth of
our business and a failure to successfully expand these operations in a timely
manner could seriously harm us.
Although we recognized approximately 8% of our total revenue in 1998 from
products and services sold to customers located outside of the United States,
international revenue may account for an increasing percentage of our total
revenue in the future. We believe that we must continue to expand our
international sales and marketing activities in order to be successful. To
successfully expand international sales, we must expand our international
operations, recruit additional international sales and support personnel, and
expand our distribution channels.
8
This strategy will require significant management attention and financial
resources. We have five employees located outside of the United States as of
July 31, 1999, and have very limited experience in marketing, selling and
distributing our products and services internationally. The acceptance and use
of the Internet in international markets are in earlier stages of development
than in the United States, particularly as a method for conducting commerce. If
the Internet or e-commerce fail to gain sufficient acceptance in international
markets, or we fail to further expand our international operations in a timely
and effective manner, we could be seriously harmed.
We depend on increasing use of the Internet and on the growth of e-commerce. If
the use of the Internet and e-commerce does not grow as anticipated, we would
be seriously harmed.
Our future revenues depend upon the increased acceptance and use of the
Internet and other online services as a medium of commerce. Rapid growth in the
use of the Internet as a medium of commerce is a relatively recent phenomenon.
Acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of customers may not adopt or continue to use the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and few proven services and products
exist.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure of the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability as a commercial medium due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in, or insufficient availability of, telecommunications
services to support the Internet also could result in slower response times and
adversely affect usage of the Internet generally.
Protection of our intellectual property may not be adequate.
Our success is highly dependent upon our ability to protect the intellectual
property contained in our software products and associated with our brand
names. We seek to protect our technology through a combination of patent,
copyright, trade secret and trademark laws. If we do not adequately protect our
intellectual property, we could be seriously harmed.
We have been granted two U.S. patents and have one pending U.S. patent
application. We have one issued foreign patent but do not have any pending
foreign patent applications. It is possible that no patents will issue from the
currently pending patent application. Our patents relate to our collaborative
filtering technology which enables our LikeMinds product line to make
predictions about the profile and behavior of Web site visitors and to provide
personally relevant information and purchase recommendations. It is possible
that our current patents or potential future patents may be found invalid or
unenforceable or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages. In
addition, the patents of others may seriously limit our ability to do business.
In this regard, we have not performed any comprehensive analysis of patents of
others that may limit our ability to do business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, we expect software piracy to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an
9
extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate, and our competitors may independently
develop similar technology, duplicate our products or design around our patents
or our other intellectual property.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have from time to time received
claims that we are infringing a third party's intellectual property rights. It
is possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property rights. We
expect that software developers will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all, which could seriously
harm us.
We face a number of unknown risks associated with trying to become Year 2000
compliant.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in the year 2000.
We could be seriously harmed by year 2000 compliance problems experienced by
us, our customers or third party suppliers of equipment and software. Although
we have conducted a year 2000 compliance review of our ARIA and LikeMinds
products and our software and operating systems which we believe to be
critical, we cannot assure you that our testing procedures are adequate to
discover year 2000 compliance problems that could seriously harm us. Although
to date we have not incurred material expenditures in connection with
identifying, evaluating and correcting year 2000 problems, we cannot assure you
that we will not discover year 2000 compliance problems that will require
substantial expenditures to fix. This could seriously harm us. In addition, we
believe that many of our larger customers will restrict or eliminate software
purchasing decisions in the last quarter of 1999 in order to gain system
stability for the year 2000 date change. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
Management may apply the proceeds of this offering to uses that do not increase
our results of operations or market value.
The net proceeds from the sale of the common stock being sold in this
offering will be used for general working capital. We have not reserved or
allocated the net proceeds for any specific purpose, and we cannot specify with
certainty how we will use the net proceeds. Accordingly, our management will
have considerable discretion in the application of the net proceeds, and you
will not have the opportunity, as part or your investment decision, to assess
whether the proceeds are being used appropriately. We cannot assure you that
the net proceeds will be used for purposes that increase our results of
operations or market value.
Shares eligible for public sale after this offering could adversely affect our
stock price.
The availability of a large number of shares of our common stock for sale
will generally result in the need for sellers to accept a lower price in order
to complete the sale. This would result in a lower market price of our common
stock. After this offering, there will be outstanding shares of our
common stock, or if the underwriters' over-allotment option is
exercised in full. Of these shares, the shares sold in this offering
will be freely tradable except for any shares purchased by our "affiliates" as
defined in Rule 144 under the Securities Act. The remaining
10
shares of common stock held by our existing stockholders are subject to 180-day
lock-up agreements and are eligible for sale after that time only if registered
or if they qualify for an exemption from registration under Rule 144 or 701
under the Securities Act. Subject to the provisions of Rule 144 or 701,
shares of our common stock will be available for sale in the public market 180
days after the date of this prospectus, subject in the case of shares held by
affiliates to compliance with volume restrictions.
Following the offering, trading in our common stock may be limited and you must
be able to withstand a possible loss of your investment.
A public market for trading our common stock has not existed prior to this
offering. Although this offering will result in a public trading market for our
common stock, we do not know how liquid the market for our stock will be. The
price of the common stock being sold in this offering will be determined
through negotiations between the underwriters and us. If you purchase common
stock in this offering, you may not be able to resell such stock at or above
the price you paid.
The market price of our common stock, like other Internet-related technology
stocks, may be volatile.
The stock markets have in general, and with respect to Internet-related
technology companies in particular, recently experienced extreme stock price
and volume volatility. The stock markets may continue to experience volatility
that may adversely affect the market price and trading volume of our common
stock. Stock prices for many companies in the technology and emerging growth
sector have experienced wide fluctuations that have often been unrelated to
their financial performance. Similar fluctuations may affect the market price
of our common stock. In addition, if we fail to address any of the risks
described in this section, the market price of our common stock and the value
of your investment could decline significantly.
You will suffer immediate and substantial dilution.
The initial public offering price per share of our common stock will
significantly exceed the net tangible book value per share. If we were to
liquidate immediately following this offering, investors purchasing shares in
this offering would receive a per share amount of tangible assets net of
liabilities that would be substantially less than the per share initial public
offering price. Investors purchasing shares in this offering will suffer
immediate dilution of $ per share from their investment.
Our charter documents and Delaware law will make it more difficult to acquire
us.
Provisions of our certificate of incorporation and bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. For example, our board of directors is divided into three
classes, with one class being elected each year by our stockholders, which
generally makes it more difficult for stockholders to replace a majority of
directors and obtain control of our board. In addition, stockholder meetings
may be called only by our board of directors, the chairman of the board and the
president, advance notice is required prior to stockholder proposals, and
stockholders may not act by written consent. Further, we have authorized
preferred stock that is undesignated, making it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of Andromedia.
Delaware law also could make it more difficult for a third party to acquire
us. Specifically, Section 203 of the Delaware General Corporation Law may have
an anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts
11
that might result in a premium over the market price for the shares of common
stock held by our stockholders.
You should not rely on forward-looking statements because they are inherently
uncertain.
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," and similar expressions to identify these
forward-looking statements. This prospectus also contains forward-looking
statements attributed to certain third parties relating to their estimates
regarding growth of the number of Web users and e-commerce. You should not
place undue reliance on these forward-looking statements, which apply only as
of the date of this prospectus. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described above and elsewhere in this
prospectus.
12
USE OF PROCEEDS
We estimate net proceeds from the sale of the shares of common stock
in this offering to be approximately $ million after deducting underwriting
discounts and commissions and our estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, the net proceeds
would be approximately $ million.
We expect to use the net proceeds for general corporate purposes, principally
working capital, capital expenditures and additional sales and marketing
efforts. In addition, we may use a portion of the net proceeds to acquire
complementary businesses, products, services and technologies; however, we
currently have no agreements or understandings for such acquisitions. We intend
to invest the net proceeds of this offering in interest-bearing, investment
grade securities until they are used.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future. In addition, our existing bank line of credit
prohibits the payment of dividends.
13
CAPITALIZATION
The following table sets forth the following information:
. the cash position and actual capitalization of Andromedia as of June 30,
1999;
. the pro forma capitalization of Andromedia after giving effect to the
conversion of all outstanding shares of convertible preferred stock into
11,176,666 shares of common stock; and
. the pro forma as adjusted capitalization to give effect to the sale of
shares of common stock at the initial public offering price of $ per
share in this offering, less underwriting discounts and commissions and
estimated offering expenses payable by Andromedia.
As of June 30, 1999
------------------------------
Pro Pro Forma As
Actual Forma Adjusted
------- ------- ------------
(In thousands)
Cash and cash equivalents....................... $ 9,075 $ 9,075 $
======= ======= =====
Long-term debt and lease obligations less
current........................................ $ 255 $ 255 $ 255
Mandatorily redeemable convertible preferred
stock.......................................... 55,141 -- --
Stockholders' equity (deficit):.................
Convertible preferred stock; $0.001 par value:
5,199,602 shares authorized, 4,928,689 shares
issued, and outstanding actual; 7,500,000
shares authorized, none issued and outstanding
pro forma .................................... 1 --
Common stock: $0.001 par value; 20,000,000
shares authorized actual; 4,000,000, 5,942,125
and 6,166,886 (unaudited) shares issued
actual; 150,000,000 shares authorized,
17,343,552 shares issued and outstanding pro
forma ........................................ 6 17
Paid-in capital................................ 7,576 36,276
Deferred stock compensation.................... (2,015) (2,015)
Preferred stock accretion...................... (26,431) --
Accumulated deficit............................ (23,140) (23,140)
------- ------- -----
Total stockholders' equity (deficit)......... (44,003) 11,138
------- -------
Total capitalization........................... $11,393 $11,393 $
======= ======= =====
This table does not include:
. 3,314,596 shares subject to outstanding options as of July 31, 1999 at a
weighted average exercise price of $1.93 per share;
. 2,641,466 additional shares available for grant as of July 31, 1999 under
our 1996 stock plan, 1997 stock plan, 1999 stock plan and 1999 employee
stock purchase plan; and
. 159,230 shares of common stock subject to outstanding warrants at a
weighted average exercise price of $4.90 per share.
14
DILUTION
The net tangible book value of our common stock on June 30, 1999 was
$ , or approximately $ per share. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. Dilution in net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately afterwards.
After giving effect to our sale of shares of common stock offered by
this prospectus at an estimated price of $ per share and after deducting
the underwriting discount and estimated offering expenses payable by us, our
net tangible book value would have been $ , or approximately $ per
share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to new investors.
Estimated public offering price per share........................... $
Net tangible book value per share as of June 30, 1999............. $
Increase per share attributable to new investors..................
---
As adjusted net tangible book value per share after the offering....
---
Dilution in net tangible book value per share to new public
investors.......................................................... $
===
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. As of June 30, 1999, there were options
outstanding to purchase a total 3,185,186 shares of common stock with a
weighted average exercise price of $1.93 per share and warrants outstanding to
purchase a total of 159,230 shares of common stock with a weighted average
exercise price per share of $4.90. The exercise of outstanding options and
warrants having an exercise price less than the offering price would increase
the dilutive effect to new investors.
The following table sets forth, as of June 30, 1999, the differences between
the number of shares of common stock purchased from us, the total price and
average price per share paid by existing stockholders and by the new investors,
before deducting expenses payable by us, using the estimated public offering
price of $ per share.
Shares Purchased Total Consideration
------------------- ------------------- Average Price
Number Percentage Amount Percentage Per Share
-------- ---------- -------- ---------- -------------
Existing stockholders..... % $ % $
New investors.............
-------- ----- -------- ----- ----
Total................... 100.0% $ 100.0%
======== ===== ======== =====
If the underwriters over-allotment option is exercised in full, the number of
shares held by new public investors will be increased to or approximately
% of the total number of shares of our common stock outstanding after this
offering.
15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this prospectus. The selected consolidated
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the selected balance sheet data as of December 31, 1997 and 1998 have
been derived from our audited consolidated financial statements and the related
notes included elsewhere in this prospectus. The selected consolidated balance
sheet data as of December 31, 1996 have been derived from our audited
consolidated financial statements not included in this prospectus. The selected
consolidated statement of operations data for the six months ended June 30,
1998 and 1999 and the selected consolidated balance sheet data as of June 30,
1999 have been derived from unaudited consolidated financial statements
included elsewhere in this prospectus. In the opinion of management, this
unaudited data have been prepared on the same basis as the audited financial
statements referred to above and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of results of
operations for the indicated periods. Results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year.
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- --------
(In thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
Licenses..................... $ -- $ 413 $ 1,153 $ 461 $ 1,715
Services and maintenance..... -- 36 816 196 907
------- ------- -------- ------- --------
Total revenues.............. -- 449 1,969 657 2,622
------- ------- -------- ------- --------
Cost of revenues:
Licenses..................... 25 69 20 129
Services and maintenance..... 18 946 213 1,903
------- ------- -------- ------- --------
Total cost of revenues...... 43 1,015 233 2,032
------- ------- -------- ------- --------
Gross profit.................. -- 406 954 424 590
Operating expenses:
Sales and marketing.......... 387 1,512 5,199 1,837 4,610
Research and development..... 884 1,446 2,337 1,021 1,731
General and administrative... 365 857 2,106 970 1,950
Amortization of acquired
intangible assets........... -- -- 247 -- 496
Non-cash stock compensation.. -- -- 287 45 429
Write off of acquired in
process technology.......... -- -- 455 -- --
------- ------- -------- ------- --------
Total operating expenses.... 1,636 3,815 10,631 3,873 9,216
------- ------- -------- ------- --------
Loss from operations.......... (1,636) (3,409) (9,677) (3,449) (8,626)
Interest income (expense),
net.......................... 10 59 121 (5) 18
------- ------- -------- ------- --------
Net loss...................... (1,626) (3,350) (9,556) (3,454) (8,608)
Preferred stock accretion..... -- -- (1,351) (1,351) (25,080)
------- ------- -------- ------- --------
Net loss attributable to
common stockholders.......... $(1,626) $(3,350) $(10,907) $(4,805) $(33,688)
======= ======= ======== ======= ========
Net loss per share:
Basic and diluted............ $ (0.49) $ (0.95) $ (2.66) $ (1.30) $ (6.01)
======= ======= ======== ======= ========
Weighted average shares...... 3,344 3,531 4,105 3,684 5,602
Pro forma net loss per share:
Basic and diluted............ $ (0.95) $ (0.59)
======== ========
Weighted average shares...... 10,096 14,665
16
As of
December 31, As of
------------------------ June 30,
1996 1997 1998 1999
------ ------- -------- --------
(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents................. $ 383 $ 696 $ 1,881 $ 9,075
Working capital........................... 116 549 829 7,392
Total assets.............................. 628 1,389 6,795 16,537
Long-term debt and lease obligations, less
current ................................. 84 390 255
Mandatorily redeemable convertible
preferred stock.......................... -- 3,548 14,838 55,141
Total stockholders' equity (deficit)...... 308 (2,751) (10,758) (44,003)
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations with the financial statements and the notes to the
financial statements included elsewhere in this prospectus. This discussion
contains forward-looking statements based on our current expectations,
assumptions, estimates and projections. These forward-looking statements
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, as more fully described in the "Risk Factors" section and
elsewhere in this prospectus. We undertake no obligation to update any forward-
looking statements for any reason, even if new information becomes available or
other events occur in the future.
Overview
We believe that we are the first company to offer a comprehensive e-marketing
solution that combines advanced Web site monitoring, personalization and
analysis capabilities. Our solution monitors and analyzes Web site activity and
visitor behavior data and, in real-time, helps our customers improve the
effectiveness of their Internet marketing and selling efforts. Our ARIA product
line provides comprehensive Web site monitoring and analysis, collecting the
customer data necessary for marketers to understand the effectiveness of their
Web sites. Our LikeMinds product has the ability to turn the data collected
from ARIA, other e-commerce applications and traditional data resources into
personally relevant predictions for marketing to Web site visitors. In
addition, we provide professional services to assist customers in identifying,
implementing and integrating Web-based technologies to improve the
effectiveness of their Internet marketing and selling efforts.
From our inception in 1996 through most of 1998, our operations were focused
primarily on activities such as raising capital, recruiting personnel,
developing our products, building sales channels and a market for our products
and developing an operating infrastructure. In the first quarter of 1997, we
introduced and licensed the initial version of our ARIA product, ARIA 1.0.
During 1998 and 1999, we released various upgrades to ARIA, including our most
recent version, ARIA 3.0. In October 1998, we acquired LikeMinds for
approximately 1.9 million shares of our common stock. As a result of this
transaction, we expensed certain in process research and development that was
acquired in this transaction totaling $455,000. The acquisition included the
purchase of patented technologies related to collaborative filtering, the
technology used in the personalization process. In December 1998, we introduced
our initial version of the LikeMinds software for licensing to customers.
Through June 30, 1999, we have derived substantially all of our revenues from
product licensing and associated services. Product licensing revenues consist
of license fees for the perpetual use of our ARIA and LikeMinds products.
Service revenues are attributable to the installation, configuration,
consulting and other support services associated with the sale of our products.
We anticipate that license and service revenues from our ARIA and LikeMinds
products will continue to account for a substantial portion of our revenues in
the future.
Selling prices for our software products typically range from ten thousand to
several hundred thousand dollars. Annual support and maintenance contracts
entitle customers to telephone and Web-based support and upgrades. The price
for our support and maintenance program is based on a percentage of list price
and is generally paid in advance. Consulting fees for implementation services
and training are generally charged on a fixed-fee basis for package services
and billed as time is incurred.
We generally provide software installation and configuration services in
conjunction with the licensing of our products to customers. We recognize
license revenues upon shipment for contracts which require minimal installation
and configuration services. On certain contracts which require
18
more extensive configuration, modification or customization services as part of
the initial installation, we recognize license and service revenues using
percentage of completion contract accounting with labor days as the basis for
determining the percentage complete. Where multiple products or services are
sold together under one contract, we allocate revenue to each element based on
its relative fair value, with fair value determined using the price charged for
that element when sold separately. We recognize service revenues as services
are performed. We recognize maintenance service revenue ratably over the term
of the maintenance agreement. Cash received in advance of revenue recognition
is recorded as deferred revenue on our balance sheet.
We market our products primarily through our direct sales force. Sales
derived through indirect channels accounted for less than 5% of our total
revenues to date. Sales derived through indirect channels may increase as a
percentage of total revenues as we expand our international efforts and
domestic distribution channels. In 1997, two customers accounted for 11% and
10% of total revenues and in 1998 and in the six months ended June 30, 1999,
two different customers accounted for 13% and 15%, respectively, of total
revenues.
We have sustained losses on a quarterly and annual basis since inception. As
of our quarter ended June 30, 1999, we had an accumulated deficit of $23.1
million. Our net loss was $1.6 million in 1996, $3.4 million in 1997, $9.6
million in 1998 and $8.6 million in the six months ended June 30, 1999. These
losses resulted from significant costs incurred in the development and sale of
our products and services. We expect to experience significant growth in our
operating expenses in order to execute our business plan, particularly in the
areas of sales and marketing, research and development and expansion of
international operations. As a result, we anticipate that these operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. We expect to incur additional losses and continued
negative cash flow from operations in the future. We cannot assure you that we
will achieve or sustain profitability.
Results of Operations
The following table sets forth certain data expressed as a percentage of
total revenue for the periods indicated.
Six Months
Years Ended Ended
December 31, June 30,
-------------- --------------
1997 1998 1998 1999
------ ------ ------ ------
Revenues:
Licenses................................. 92.0% 58.6% 70.2% 65.4%
Services and maintenance................. 8.0 41.4 29.8 34.6
------ ------ ------ ------
Total revenues.......................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Licenses................................. 5.6 3.5 3.0 4.9
Services and maintenance................. 4.0 48.0 32.4 72.6
------ ------ ------ ------
Total cost of revenues.................. 9.6 51.5 35.4 77.5
------ ------ ------ ------
Gross profit............................... 90.4 48.5 64.6 22.5
Operating expenses:
Sales and marketing...................... 336.7 264.0 279.6 175.8
Research and development................. 322.0 118.7 155.4 66.0
General and administrative............... 190.9 107.0 147.6 74.4
Amortization of acquired intangible
assets.................................. -- 12.5 -- 18.9
Non-cash stock compensation.............. -- 14.6 6.8 16.4
Write off of acquired in process
technology.............................. -- 23.1 -- --
------ ------ ------ ------
Total operating expenses................ 849.6 539.9 589.4 351.5
------ ------ ------ ------
Loss from operations....................... (759.2) (491.4) (524.8) (329.0)
Interest income (expense), net............. 13.1 6.1 (0.8) 0.7
------ ------ ------ ------
Net loss................................... 746.1% 485.3% 525.6% 328.3%
====== ====== ====== ======
19
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999
Revenues
Total Revenues. Revenues increased from $657,000 in the six months ended June
30, 1998 to $2.6 million in the six months ended June 30, 1999.
License Revenues. Software license revenues increased from $461,000 in the
six months ended June 30, 1998 to $1.7 million in the six months ended June 30,
1999. The increase resulted primarily from an increase in the number of
licenses of our ARIA product, the addition of LikeMinds licenses in 1999 and an
increase in the average selling price of these products. Average selling prices
increased due to a few major product sales that carried higher prices.
Service Revenues. Service and maintenance revenues increased from $196,000 in
the six months ended June 30, 1998 to $907,000 in the six months ended June 30,
1999. The increase resulted primarily from increased license sales which
resulted in an increase in associated consulting services. Maintenance revenues
also increased as a result of an increase in the installed customer base.
Cost of Revenues
Costs of Licenses. Cost of license revenues consists primarily of royalties
associated with third party software embedded in our software products as well
as software product costs such as user manuals, distribution and media costs.
Cost of license revenues increased from $20,000 in the six months ended June
30, 1998 to $129,000 in the six months ended June 30, 1999. The increase in
costs of licenses resulted from the increase in license transactions in the
1999 period.
Cost of Services. Cost of service revenues generally consists of salaries,
benefits and associated overhead costs of our Services Group. Cost of service
revenues increased from $213,000 in the six months ended June 30, 1998 to $1.9
million in the six months ended June 30, 1999. This increase was primarily the
result of increased personnel in our Services Group. Historically, we have
reported cost of service revenues in excess of our service revenues because of
our investment in the growth of this organization. Our Services Group has grown
from one person at December 31, 1997 to 16 at December 31, 1998 and 29 at July
31, 1999. This growth has required that we invest in hiring and training
personnel and building management and operational infrastructure. We expect
that our cost of services will continue to exceed our service revenues for at
least the next several quarters.
Operating Expenses
Sales and Marketing. We market our products principally through our direct
sales force. Sales and marketing expenses consist of personnel costs, including
commissions and related overhead costs, as well as travel and entertainment
expenses, advertising and promotion expenses, trade shows and other marketing
costs. Sales and marketing expenses increased from $1.8 million in the
six months ended June 30, 1998 to $4.6 million in the six months ended June 30,
1999. This increase was due mainly to higher commissions associated with
growing revenues and to increased sales and marketing personnel. We expect
sales and marketing expenses to increase as we expand our direct sales force
and our other sales and marketing efforts.
Research and Development. Research and development expense consists
principally of salaries, benefits and related overhead costs as well as the
cost of consultants. Research and development expense increased from $1.0
million in the six months ended June 30, 1998 to $1.7 million in the six months
ended June 30, 1999. This increase was due primarily to increased research and
development personnel including consultants retained to assist in research and
development activity. We expect to continue to invest in research and
development for the foreseeable future.
20
General and Administrative. General and administrative expenses include
salaries, benefits and overhead associated with our executive, finance, human
resource, legal, accounting and internal information systems functions. General
and administrative expenses increased from $970,000 in the six months ended
June 30, 1998 to $2.0 million in the six months ended June 30, 1999. This
increase was due primarily to increased general and administrative personnel.
We expect general and administrative expenses to increase as we continue to
build our operational infrastructure and incur additional overhead associated
with being a public company.
Amortization of Acquired Intangible Assets. Amortization of acquired
intangible assets consists primarily of intangible assets acquired as part of
the LikeMinds acquisition in October 1998 and includes amortization of
goodwill, assembled workforce and patent costs. These intangible assets are
being amortized over their estimated weighted average economic life of 2.5
years. Amortization of acquired intangible assets increased from zero in the
six months ended June 30, 1998 to $496,000 in the six months ended June 30,
1999 due to the timing of the LikeMinds acquisition.
Non-cash Stock Compensation. We granted certain stock options to our officers
and employees at prices deemed to be below fair value of the underlying stock.
The cumulative differential between the fair value of the underlying stock at
the date the options were granted and the exercise price of the granted options
was $2.7 million at June 30, 1999. This amount is being amortized, on an
accelerated basis, over the four year vesting period of the granted options. As
a consequence, our results from operations will include deferred compensation
expense at least through 2003. During the six months ended June 30, 1998 and
1999, $45,000 and $429,000, respectively, was recognized as expense.
Preferred Stock Accretion. Shares of our Series C, D and E mandatorily
redeemable convertible preferred stock are redeemable at the higher of the
original issuance price or the fair market value at any time after February 1,
2004. Accordingly, we have valued the mandatorily redeemable convertible
preferred stock at its fair value at the end of each period presented, with the
periodic differences recorded as preferred stock accretion. We recorded
preferred stock accretion of $25.1 million in the six months ended June 30,
1999. Upon completion of this offering, all outstanding shares of convertible
preferred stock will convert into shares of common stock, and preferred stock
accretion will cease.
Fiscal Years Ended December 31, 1996, 1997 and 1998
Revenues
Total Revenues. Revenues increased from $449,000 in 1997 to $2.0 million in
1998. We did not have any revenues in 1996 as we commenced shipping our first
product in 1997. Although we acquired LikeMinds in October 1998, we did not
derive any significant revenues from LikeMinds products in 1998.
License Revenues. License revenues increased from $413,000 in 1997 to $1.2
million in 1998. The increase resulted primarily from an increase in the number
of licenses of our ARIA product line.
Service and Maintenance Revenues. Service and maintenance revenues increased
from $36,000 in 1997 to $816,000 in 1998. The increase resulted primarily from
increased license sales which resulted in increased associated consulting
services. Maintenance revenues also increased as a result of an increase in the
installed customer base.
Cost of Revenues
Costs of Licenses. Cost of license revenues increased from $25,000 in 1997 to
$69,000 in 1998 as a result of the increase in the number of licenses sold in
1998.
21
Cost of Services and Maintenance. Cost of services revenues increased from
$18,000 in 1997 to $946,000 in 1998. This increase was primarily the result of
growth in the number of our Services Group personnel. We formed our Services
Group in late 1997 as a result of the increase in our software license
transactions. Throughout 1998, we built this organization by hiring personnel
and building operational infrastructure.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $387,000 in
1996 to $1.5 million in 1997 and $5.2 million in 1998. The increase from 1996
to 1997 resulted mainly from increases in the number of sales and marketing
personnel and the related costs to develop a sales and marketing function. The
increase from 1997 to 1998 resulted from increases in the number of sales and
marketing personnel as well as increased sales commissions resulting from
increased sales activity, increased travel and entertainment expenses from the
increased number of personnel and an increase in advertising expenses as we
began developing marketing programs to build awareness of Andromedia and our
products.
Research and Development. Research and development expenses increased from
$884,000 in 1996 to $1.4 million in 1997 and $2.3 million in 1998. The
increases in each of these periods were due primarily to increased numbers of
research and development personnel and consultants retained to assist in
research and development activities.
General and Administrative. General and administrative expenses increased
from $365,000 in 1996 to $857,000 in 1997 and $2.1 million in 1998. The
increases in each of these periods resulted primarily from increased personnel
and from 1997 to 1998, due to an increase in professional services for legal,
accounting and recruiting related activities.
Amortization of Acquired Intangible Assets. Amortization of acquired
intangible assets totaled $247,000 in 1998 resulting from the LikeMinds
acquisition. There was no amortization of intangible assets in 1996 and 1997.
Non-cash Stock Compensation. Our results of operations will include
amortization of deferred non-cash stock compensation expense at least through
2003. Non-cash stock compensation expense totaled $287,000 in 1998. There was
no amortization of deferred non-cash stock compensation in 1996 or 1997.
Write Off of Acquired In Process Technology. In connection with the
acquisition of LikeMinds in October 1998, we recorded an expense for in process
research and development acquired from LikeMinds which had not yet reached
technological feasibility. This expense amounted to $455,000 and is stated
separately on our 1998 statement of operations.
The value assigned to acquired in process technology was determined by
identifying research projects in areas for which technological feasibility had
not been established as of the acquisition date. These include projects,
primarily major version upgrades, for our LikeMinds product line. We determined
the value by estimating the revenue contribution of each of these products and
the amount of the revenues attributable to the core/developed technology and
the in process technology. The net cash flows were then discounted utilizing a
weighted average cost of capital of 26.5%. This discount rate takes into
consideration the inherent uncertainties surrounding the successful development
of the in process research and development, the profitability levels of such
technology and the uncertainty of technological advances which could
potentially impact the estimates described above. We estimated the completion
level of acquired in process technology based on the time and related costs
incurred in
22
development before the close of the acquisition in relation to aggregate
estimated costs of completing the project. The average percentage of completion
of the projects was 59% at the date of the acquisition. Revenues are projected
to be generated in 1999 for the versions in development at the acquisition
date. If these projects are not successfully developed, our future revenues and
profitability may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
Income Taxes. We did not record any provision or benefit for income taxes for
any of the periods presented as we have incurred net operating losses and have
no ability to carryback losses. At December 31, 1998, we had approximately
$11.9 million of federal net operating loss carryforwards available to offset
future taxable income. We have fully reserved our gross deferred tax assets
based on a number of factors including the lack of a long history of profits.
Preferred Stock Accretion. We recorded preferred stock accretion of $1.4
million in the year ended December 31, 1998.
23
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statements of
operations data for the six quarters ended June 30, 1999, as well as the
percentage of our revenues represented by each item. These data have been
derived from unaudited interim consolidated financial statements prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, considered necessary for a full presentation of such
information when read in conjunction with the consolidated financial statements
and related notes appearing elsewhere in this prospectus.
Quarters Ended
---------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
Consolidated Statement of
Operations Data: (In thousands)
Revenues:
Licenses.............. $ 263 $ 198 $ 249 $ 443 $ 822 $ 893
Services and
maintenance........... 55 141 160 460 257 650
------- ------- ------- ------- ------- -------
Total revenues........ 318 339 409 903 1,079 1,543
------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses.............. 10 11 16 32 51 78
Services and
maintenance........... 73 140 185 548 770 1,133
------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 83 151 201 580 821 1,211
------- ------- ------- ------- ------- -------
Gross profit........... 235 188 208 323 258 332
Operating expenses:
Sales and marketing... 771 1,066 1,572 1,790 1,962 2,648
Research and
development........... 495 526 694 622 760 971
General and
administrative........ 442 530 453 681 874 1,076
Amortization of
acquired intangible
assets................ -- -- -- 247 248 248
Non-cash stock
compensation.......... 5 40 108 134 172 257
Write off of acquired
in process
technology............ -- -- -- 455 -- --
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,713 2,162 2,827 3,929 4,016 5,200
------- ------- ------- ------- ------- -------
Loss from operations... (1,478) (1,974) (2,619) (3,606) (3,758) (4,868)
Interest income
(expense), net......... (17) 12 90 36 (64) (82)
------- ------- ------- ------- ------- -------
Net loss............... $(1,495) $(1,962) $(2,529) $(3,570) $(3,822) $(4,786)
======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
Licenses.............. 82.7 % 58.4 % 60.9 % 49.1 % 76.2 % 57.9 %
Services and
maintenance........... 17.3 41.6 39.1 50.9 23.8 42.1
------- ------- ------- ------- ------- -------
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses.............. 3.1 3.2 3.9 3.5 4.7 5.1
Services and
maintenance........... 23.0 41.3 45.2 60.7 71.4 73.4
------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 26.1 44.5 49.1 64.2 76.1 78.5
------- ------- ------- ------- ------- -------
Gross profit........... 73.9 55.5 50.9 35.8 23.9 21.5
Operating expenses:
Sales and marketing... 242.5 314.5 384.4 198.2 181.8 171.6
Research and
development........... 155.7 155.2 169.7 68.9 70.4 62.9
General and
administrative........ 139.0 156.3 110.8 75.4 81.0 69.7
Amortization of
acquired intangible
assets................ -- -- -- 27.4 23.0 16.0
Non-cash stock
compensation.......... 1.6 11.8 26.4 14.8 15.9 16.7
Write off of acquired
in process
technology............ -- -- -- 50.4 -- --
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 538.8 637.8 691.3 435.1 372.1 336.9
------- ------- ------- ------- ------- -------
Loss from operations... (464.9) (582.3) (640.4) (399.3) (348.2) (315.4)
Interest income
(expense), net......... (5.3) 3.5 22.0 4.0 (5.9) 5.3
------- ------- ------- ------- ------- -------
Net loss............... (470.2)% (578.8)% (618.4)% (395.3)% (354.1)% (310.1)%
======= ======= ======= ======= ======= =======
24
We develop our business plans and establish our hiring and staffing plans
based on expectations of future revenue. Since we operate in an emerging market
and have a short operating history, our revenues are difficult to forecast with
accuracy and consequently, our expectations of future revenue may not be
accurate. If our revenues fall short of our expectations, our results of
operations may be disproportionately adversely affected as our expenses are, in
large part, fixed. In addition, as we have a short operating history, quarter
to quarter comparisons of our operating results may not be meaningful and
should not be relied upon as an indicator of future performance.
Liquidity and Capital Resources
Since inception, we have financed our operations and funded our capital
expenditures through the private sale of equity securities, resulting in net
proceeds of $30.5 million through June 30, 1999. As of June 30, 1999, we had
$9.1 million in cash and cash equivalents and $7.4 million in working capital.
Net cash used in operating activities was approximately $1.3 million in 1996,
$3.3 million in 1997, $7.9 million in 1998 and $6.9 million for the six months
ended June 30, 1999. For such periods, net cash used in operating activities
was primarily used to fund ongoing operations.
Net cash used in investing activities was approximately $135,000 in 1996,
$105,000 in 1997, $1.1 million in 1998 and $1.2 million for the six months
ended June 30, 1999. Investing activities for the periods consisted primarily
of capital expenditures, including the purchase of computer equipment and
related software. We expect that our capital expenditures will continue to
increase as our operations grow. We have recently executed a lease for a
significant amount of additional office space to accommodate our growth.
Net cash provided by financing activities was $1.8 million in 1996, $3.7
million in 1997, $10.2 million in 1998, and $15.2 million for the six months
ended June 30, 1999, and consisted primarily of proceeds from the issuance of
preferred stock. We have a $2.0 million accounts receivable revolving line of
credit with Silicon Valley Bank that bears interest at the prime rate and
expires in February 2000. There are currently no outstanding borrowings under
this line, although the amount available for borrowing has been reduced by the
issuance of a $100,000 letter of credit. We have a $1.0 million equipment line
of credit with the same bank bearing interest at prime rate plus 0.50% that
expires in February 2000. In August 1999 and February 2000, amounts funded
under this line convert to a term note repayable in 36 equal monthly
installments. As of June 30, 1999, we had approximately $452,000 in borrowings
outstanding under this equipment line. We also have an outstanding term loan
with the same bank bearing interest at a rate of prime plus 0.50% in the amount
of $326,000 as of June 30, 1999. This term loan is being repaid in equal
monthly installments through May 2001. The term loan and lines of credit are
secured by all of our tangible and intangible personal property, including our
intellectual property rights. Our borrowing arrangements require us to comply
with various financial covenants and subject us to certain restrictions.
We expect to experience significant growth in our operating expenses and
capital expenditures for the foreseeable future. Management believes that the
net proceeds of this offering, together with our existing cash and cash
equivalents, and commercial credit facilities will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
In addition, we may use cash resources to fund acquisitions or investments in
complementary businesses, products, services and technologies. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to obtain additional equity or debt financing. We
cannot assure you that additional financing will be available at all, or if
available, that it will be obtainable on favorable terms.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000
25
from dates prior to the year 2000. Many companies' software and computer
systems may need to be upgraded or replaced in order to correctly process dates
beginning in 2000.
State of Readiness. Our business is dependent on the operation of numerous
systems that could potentially be impacted by year 2000 related problems. Those
systems include, among others:
.hardware and software systems used by us to deliver services to our
customers, including our proprietary software systems as well as hardware
and software supplied by third parties;
.communications networks, such as the Internet and private intranets, which
we depend on to communicate both internally and with our customers and
potential customers;
.the internal systems of our customers and suppliers;
.the hardware and software systems used internally by us in the management
of our business; and
.non-information technology systems and services used by us in our
business, such as telephone systems and building systems.
We have and plan to continue to internally review both our internal
operational systems as well as our software and service product offerings to
determine their year 2000 readiness. With regard to internal systems, we have
primarily focused on information technology systems that serve critical
operational, financial, administrative and customer support functions. Our
evaluation and remediation of such issues have centered on ensuring that we are
operating on manufacturer provided software and system updates that the
manufacturers have determined to be year 2000 ready. We have not undertaken
audits and tests of those systems to ensure year 2000 readiness because vendors
for these systems have made representations that their systems are year 2000
compliant. As a result, some of these systems may, either independently or in
combination with other systems become affected by the year 2000 date change. In
addition, we are aware of a number of non-critical software products we use
internally in everyday operations which are not expected to be year 2000
certified by their manufacturers. These systems are generally off the shelf
software products which we believe are replaceable without material affect on
the company if they prove to be incapacitated in the Year 2000. Further, we
have not initiated and do not plan to initiate a review of our non-information
technology systems which we believe to be non-critical.
With regard to our software products and services, we have tested our ARIA
and LikeMinds versions 3.0 and later releases and have determined that they
meet our criteria for year 2000 readiness. We cannot assure you that our
testing procedures are adequate to identify all potential year 2000 issues. We
have made available to our customers year 2000 compliant versions of ARIA and
LikeMinds under the terms and conditions of our standard maintenance and
support agreements.
Costs. To date, we have not incurred any material expenditures in connection
with identifying or evaluating year 2000 compliance issues. Most of our
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and year 2000 compliance matters generally. At this time, we do not
anticipate that we will incur significant operating expenses or be required to
invest heavily in computer systems improvements to be year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects associated with year 2000 compliance. If expenses relating to year 2000
compliance are higher than anticipated, it could seriously harm us.
Risks. We are not currently aware of any year 2000 compliance problems
relating to our software solutions that would seriously harm us. However, we
cannot assure you that we will not discover year 2000 compliance problems that
will require substantial expenditures to correct. In addition, clients use our
software products in numerous and varied computing environments and in
26
combination with numerous other software products. We have not undertaken a
study of our customers' year 2000 readiness nor have we undertaken a study of
the environments in which our software may be deployed. Further, our software
is integrated with a number of third party software products, some of which
have not been classified as year 2000 ready by their manufacturers. Our
software testing procedures included these third party software components in
the testing of our own products and we believe that the noncompliant aspects of
these third party products do not affect that functions that our software
relies on. There can be no assurance that our testing procedures are adequate
to identify all potential year 2000 issues.
Furthermore, our success may depend on our customers success in identifying
and managing year 2000 issues in a timely manner. We expect that in general,
many of our larger clients will restrict or eliminate software system
purchasing decisions in the last quarter of 1999 in order to gain system
stability for the year 2000 date change. Further, depending on the success of
our customers in identifying and mitigating their year 2000 issues, significant
remediation of year 2000 issues required in the first of quarter of 2000 is
possible. This may have the result of significantly reducing new contract sales
opportunities in the fourth quarter of 1999 and the first quarter of 2000 and
may impact the investment made by our customers in continuing to install
software previously acquired from us during these quarters. This may cause us
serious harm.
Worst Case Scenario. We believe that our worst case scenario would be a
complete failure of our ARIA and LikeMinds product lines. Any such failures
would cause our customers to be unable to monitor, analyze and improve the
effectiveness of their Web site activity, and could cause the partial or
complete failure of other unrelated software being utilized by such customers.
Contingency Plan. As discussed above, we are engaged in an ongoing year 2000
assessment and have not yet developed any contingency plans. The results of our
year 2000 testing and the responses received from third-party vendors and
service providers will be taken into account in determining the nature and
extent of any contingency plans.
Interest Rate Risk
We have an investment portfolio of money market funds and fixed income
certificates of deposit. The fixed income certificates of deposit, like all
fixed income securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. In view of the nature and mix of
our total portfolio, a 10% movement in market interest rates would not have a
significant impact on the total value of our portfolio as of June 30, 1999.
27
BUSINESS
We believe that we are the first company to offer a comprehensive e-marketing
solution that combines advanced Web site monitoring, personalization and
analysis capabilities. Our solution monitors and analyzes Web site activity and
visitor behavior data and, in real-time, helps our customers improve the
effectiveness of their Internet marketing and selling efforts. Our solution
helps companies identify and target the most qualified customers, know their
tastes and preferences, refine sales and marketing tactics in real-time and
predict likely cross-selling opportunities.
Our e-marketing software applications consist of our ARIA and LikeMinds
product lines that are sold as an integrated solution or individually. ARIA
provides comprehensive Web site monitoring and analysis software that allows
marketers to better understand how customers respond to particular Web pages,
content categories and e-marketing campaigns. LikeMinds personalization
software provides personally relevant predictions of which content and products
will be best suited for Web site visitors. LikeMinds personalization software
also provides a Web site experience that we believe engages online customers,
keeps them at a Web site longer and encourages them to return to the Web site
more frequently. In addition, we provide professional services to assist
customers in identifying, implementing and integrating Web-based technologies
to improve the effectiveness of their Internet marketing and selling efforts.
Industry Background
Growth of the Internet and E-commerce. The Internet has emerged as a powerful
and rapidly growing medium for communication and commerce. International Data
Corporation estimates that the number of Web users will grow from approximately
142 million worldwide in 1998 to 502 million by the end of 2002, and Forrester
Research estimates that Internet business-to-business and business-to-consumer
transactions will grow from $51 billion in 1998 to over $1.4 trillion in 2003.
We believe that companies generally adopt the Internet as a medium of
commerce in three phases. In the first phase, or the e-presence phase,
companies seek to quickly establish a presence on the Internet. These early
efforts often consist of a Web site composed primarily of a company's marketing
literature that provides online access to information about a company's
products or services, organization and operations. In the second phase, or the
e-commerce phase, a company begins, often in a rudimentary manner, to offer
goods and services for sale online. During this phase, companies generally
begin to evaluate the effectiveness of their online presence. In the third
phase, or the e-marketing phase, companies begin to focus on effectively
marketing to the growing number of individuals and businesses buying goods and
services on the Internet by delivering a highly personalized experience to
online buyers.
Challenges of Marketing and Selling on the Internet. While some early
participants in e-commerce have achieved a high degree of brand recognition and
revenue growth, they are now facing an increasingly competitive market.
Forrester Research estimates that the percentage of large U.S. companies (1,000
or more employees) using the Internet as a channel for commerce will increase
from 20% in 1998 to 98% in 2002.
In addition to increased competition, companies using the Internet face the
following marketing and selling challenges.
. High Level of Customer Choice. The Internet greatly facilitates
comparison shopping and increases the ease of switching online merchants.
. Lack of Traditional Competitive Differentiation. The Internet reduces the
effectiveness of many of the key factors that previously differentiated a
company's products or services such as price, location, availability and
access.
28
. Reduced Personal Interaction. The Internet greatly reduces the
opportunity for face-to-face contact and interpersonal relationships that
serves as a powerful means of customer acquisition and retention.
. High Level of Customer Expectations. Online customers expect a high
degree of product selection and are beginning to require a higher level
of service and support.
The result is that many companies conducting business on the Internet are
finding it difficult to attract and retain customers. Forrester Research
estimates that only 2.7% of first time visitors to an e-commerce Web site
convert from browsers into buyers. Forrester Research also reports that 44% of
online merchants do not track their rate of success in converting browsers into
buyers. Nevertheless, these results come in an environment where the data to
better understand and attract online customers is readily available. The
Internet enables the collection of information on a customer's tastes and
preferences in a way previously unavailable using other media. The Internet
offers the ability to capture an unprecedented amount of data on what
individual customers buy, as well as how they respond to advertising,
promotions and Web site layout. Importantly, this data is available in real-
time, meaning at the moment the customer is engaged with a Web site.
In order to attract and retain customers, companies must improve their Web
site monitoring, personalization and analysis capabilities. With improved Web
site monitoring capabilities, companies are able to gain insight about their
customers by observing and capturing customer behavior in real-time as the
customer browses the Web site. By personalizing Web page content to better
reflect customer tastes and preferences, companies will be able to enhance the
user's Web site experience and improve the conversion rate of browsers into
buyers. With improved Web site analysis, companies can receive feedback to
measure and evaluate the effectiveness of their marketing messages, promotions
and campaigns.
Limitations of Current Solutions. To date, companies have primarily purchased
and implemented two groups of specific applications to address the challenges
of online marketing and selling. The first group of specific applications
consists of Web site analysis and tracking tools. Most of these tools analyze
the information contained in the detailed activity logs generated by Web
servers. However, to date these products have not analyzed the more valuable
data stored within an e-commerce application, such as when a user puts an item
in a shopping cart, purchases the contents of the cart or rejects items rather
than purchasing them. In addition, these products have been limited in their
ability to scale to handle the demands of highly trafficked Web sites. The
second and newer group of specific applications, personalization software,
enables Web site content and services to be tailored to particular individuals
based on detailed information about their tastes and preferences. However, we
believe current personalization software is limited in its ability to predict
individual tastes and preferences and buying behavior. In this regard, if a
company is unable to accurately predict a customer's buying patterns, it
becomes much more difficult to create a personally relevant Web site experience
that attracts users back to the Web site. For example, if a company is using
its Web site to sell books, making poor or inaccurate recommendations will
erode user trust.
The Andromedia Opportunity. We believe a significant market opportunity
exists for a comprehensive solution that integrates advanced Web site
monitoring, personalization and analysis capabilities. The benefits of an
integrated solution are two-fold. First, the accuracy of personalization can be
significantly improved by leveraging the information gained through real-time
Web site monitoring, thereby ensuring that more personally relevant content is
delivered to online users. Second, personalization effectiveness can be
measured, evaluated and adjusted through offline analysis.
In short, an integrated e-marketing solution must:
.observe, capture and analyze customer behavior;
.provide personally relevant information to a customer;
29
.adjust that information based on real-time customer responses;
.measure the effectiveness of that interaction to refine the e-marketing
process; and
.provide enhanced analysis of captured customer data and other traditional
data resources.
Our Solution
We are a leading provider of e-marketing software solutions. We provide an
integrated solution that monitors and analyzes Web site activity and visitor
behavior data and, in real-time, helps our customers improve the effectiveness
of their Internet marketing and selling efforts. We combine sophisticated data
monitoring, personalization, analysis and reporting, and the ability to
leverage captured online data with other traditional data resources. Our
solution helps companies identify and target the most qualified customers,
understand their tastes and preferences, refine sales and marketing tactics in
real-time and predict likely cross-selling opportunities. We have designed our
solution to convert Web site browsers into buyers, and buyers into loyal
customers, which we believe can significantly increase our customers' e-
commerce revenues.
Our integrated e-marketing solution includes the following product lines:
. ARIA software provides comprehensive Web site monitoring and analysis.
ARIA directly interfaces with Web servers and e-commerce applications to
gather data on customer behavior in real-time. ARIA then allows marketers
to analyze this information to better understand how customers respond to
particular Web pages, content categories and e-marketing campaigns. ARIA
also captures and provides the customer behavior data necessary to enable
effective personalization.
. LikeMinds personalization software provides personally relevant
predictions of which content and products will be best suited for Web
site visitors. These predictions may be based upon data gathered by ARIA,
other e-commerce applications or traditional data resources. LikeMinds
personalization software also provides a Web site experience that we
believe engages online customers, keeps them at a Web site longer and
encourages them to return to the Web site more frequently.
We sell our two software product lines, ARIA and LikeMinds, as an integrated
solution or individually. The flexibility and breadth of our product offering
allows our customers to purchase a solution that matches the initial scope of
their e-commerce strategies and that can be easily augmented as they develop
more sophisticated e-marketing needs.
To understand how our e-marketing solution works, consider the sales process
in a traditional business. A good salesperson carefully watches how a customer
shops. Based on those observations the salesperson can infer what the shopper
is most interested in and may even learn something about the shopper's
personality. A good salesperson then helps the shopper find what he or she
wants, learns more about the customer through that interaction, and uses that
information to sell additional merchandise. Through a series of such
interactions, a salesperson learns to recognize customer tastes and
preferences, builds his or her sales skills and transitions from being simply a
salesperson to a trusted advisor.
Our integrated e-marketing software solution behaves similarly. It collects
data on customer browsing and shopping behavior. It works with other e-commerce
applications to intelligently interact with online customers. It gains
information about their tastes and preferences and provides personally relevant
information and purchase recommendations. Our e-marketing software refines its
marketing and selling tactics based on immediate feedback and analysis. In
short, we believe our software provides a highly effective "virtual
salesperson" for online customers.
30
We believe our solution offers the following benefits:
Delivers Improved Marketing Results. LikeMinds personalization capabilities
are designed to reflect the characteristics of an individual customer rather
than a group of customers and thereby provide more accurate and relevant
information to online customers. LikeMinds also adapts and responds to customer
behavior in real-time. This allows marketers to continuously refine their
understanding of each customer, thereby improving their ability to provide the
most up-to-date and personally relevant recommendations to customers while they
are actively engaged on a Web site. We believe that this will be extremely
beneficial to companies as customers increasingly demand a more personalized
experience based upon the time and frequency spent at Web sites.
Provides Enhanced Marketing Feedback. ARIA's activity reports are available
to immediately provide important and timely insight on the effectiveness of
online marketing campaigns. We have designed ARIA to interface directly with e-
commerce Web applications, rather than simply a Web log file, providing higher
value marketing information. ARIA's real-time monitoring of customer behavior
provides improved insight into a customer's timing and propensity of product
purchases.
Scales with the Growth of E-commerce. ARIA can collect, store and analyze the
data generated from more than 40 million page views and 200 million Web hits in
a single day, making it capable of handling the most demanding e-commerce
applications in use today. In addition, ARIA can operate across multiple Web
servers, giving organizations the capability to monitor, capture and analyze
data across multiple, complex Web sites.
Leverages a Broad Range of Data. LikeMinds is designed to integrate with
legacy databases that contain important historical customer information and to
leverage existing geographic, demographic and psychographic data to improve the
accuracy of its personalization.
Our Strategy
Our objective is to be the leading provider of e-marketing software solutions
for marketing and selling on the Internet. Our strategy includes the following:
Establish Our Products as the Leading E-marketing Software Solution. We
believe that the e-marketing software application market has just begun to
emerge. We believe that by being the first to market with an integrated e-
marketing software solution, we have an opportunity to establish our products
as the leading solution for comprehensive and effective e-marketing. By
implementing our solution across a broad spectrum of companies engaging in e-
commerce, our goal is to establish our products as the most widely used
automated e-marketing solution.
Deliver the Most Comprehensive E-marketing Solution. We intend to extend the
capabilities of our integrated Web site monitoring, personalization and
analysis solution. The core value of our integrated solution, which enables
companies to provide a personally relevant Web site experience for each
visitor, is dependent on the quality and breadth of online and other
traditional customer data available for analysis. As a result, we intend to
continue to improve our ability to identify, monitor and gather high-value
sources of online customer behavior as well as our ability to integrate with
leading e-commerce applications and third-party offline data sources. In
addition, as our customers' needs evolve, we intend to extend our decision
support and reporting capabilities with additional data analysis and data
mining techniques to provide companies with additional information and more
detailed reporting capabilities.
Leverage and Expand Relationships with Leading E-commerce Software
Providers. We intend to strengthen our existing relationships, and to develop
new relationships, with leading e-commerce software providers which will enable
us to continue to enhance the value of our solutions to customers and
accelerate the market acceptance of our products. For example, through our
existing
31
relationships with early leaders in Internet relationship management, including
BroadVision and Vignette, we have been able to design our solutions to directly
capture customer behavior, such as shopping cart inserts, deletions and
checkouts and keyword searches, which are stored in their software
applications. In many cases, this enables our customers to more easily employ
our products as part of larger, off-the-shelf solutions, thereby minimizing the
need for custom application development. We also intend to expand our
relationships with e-commerce software application providers whose applications
are suitable for the acceptance of recommendations and profiles from our
LikeMinds Personalization Server. We believe that a continued focus on
strategic relationships will enable us to continue to broaden the market for
our products.
Expand Our Global Presence. We believe that the e-marketing software market
has just begun to emerge in the United States and we are focused on capturing
new customers and expanding our presence in the domestic market. We intend to
increase the number of our direct sales professionals as well as utilize
systems integrators and resellers to address our domestic market opportunity.
We believe that international markets will represent a significant market for
our products and services. To capitalize on this growing international market,
we plan to expand our direct sales, marketing and support presence in selected
European markets and, to a lesser extent, develop alliances with international
distributors. We believe that an early presence in these markets will enhance
our long-term competitive position in these regions.
Capitalize on Our Installed Base of Customers. We currently have an installed
base of over 100 customers. Since most of our customers have purchased only one
or a few product components, we believe there is a significant opportunity for
follow-on sales. In addition, many customers use our products in specific
business units or locations, giving us the opportunity to sell across the
enterprise. Finally, since many of our customers are experiencing increasing
Web site traffic, we may be able to sell additional licenses based on increased
usage levels.
Pursue Strategic Acquisitions. We intend to pursue acquisitions of
businesses, products, services and technologies that are complementary to our
strategic focus and to expand our position in the e-marketing software
marketplace. For example, our acquisition of LikeMinds in late 1998 has enabled
us to provide an integrated Web site analysis and personalization solution.
Our Products
We offer a comprehensive line of e-marketing software applications that
consists of our ARIA and LikeMinds product lines. Our ARIA product line
captures, and our LikeMinds product line uses, information about the tastes and
preferences of online users each time a user visits a Web site or volunteers
information in response to survey questions. We offer ARIA and LikeMinds to
customers as stand-alone applications or as an integrated e-marketing solution.
ARIA Product Line. ARIA is a leading Web site activity tracking and analysis
solution for high-traffic Web sites. Marketers and Web site developers rely on
ARIA to measure the effectiveness of their e-marketing activities. For example,
ARIA can:
.analyze and identify the most valuble customers and what attracted them to
the Web site;
.identify the best-selling products;
.determine which promotions are the most effective;
.identify the most effective cross-selling opportunities; and
.improve Web site lay out based on navigation patterns of Web site
visitors.
32
The table below provides an overview of our ARIA product line and its key
capabilities.
ARIA Product Key Capabilities
- ----------------------------------------------------------------------------------------
ARIA Standard . Provides Web site monitoring, analysis and
reporting capabilities for a single host Web
server.
- ----------------------------------------------------------------------------------------
ARIA Enterprise . Includes same functionality as ARIA Standard.
. In addition, provides highly scalable Web site
monitoring and analysis capable of analyzing Web
site visitor behavior across complex, dynamic
and multi-server Web sites with high traffic
levels.
- ----------------------------------------------------------------------------------------
ARIA eCommerce . Includes same functionality as ARIA Enterprise.
. In addition, interfaces directly with e-commerce
applications and provides real-time reports on
events that occur within those applications.
- ----------------------------------------------------------------------------------------
Personal ARIA . Provides intuitive user interface that enables
marketers to create, run and save custom reports
tailored to their particular marketing needs.
ARIA Standard, ARIA Enterprise and ARIA eCommerce all provide easily
customizable pre-designed reports to effectively distribute insight on customer
behavior and the effectiveness of e-marketing campaigns. Reports can be
generated on demand or in regular intervals and can be distributed in a
spreadsheet format or accessed through a Web browser. Customers who need more
highly customized reports use Personal ARIA, which we provide with both ARIA
Enterprise and ARIA eCommerce.
LikeMinds Product Line. Our LikeMinds Personalization Server provides
personally relevant content and product recommendations to customize
interaction with customers who are actively browsing a Web site. LikeMinds
Personalization Server becomes more effective with each purchase or customer
interaction, continuously refining its understanding of each consumer and
improving its predictive capabilities. It can use explicitly expressed
preferences as well as preferences implicit in interactions such as purchases,
shopping activity or responses to promotions. The LikeMinds Personalization
Server can be used to:
. create a recommendation application. Users often like to express their
opinion on products, such as rating a movie or a restaurant. LikeMinds
can use this information to present similar products most likely to
appeal to that individual user;
. deliver instant recommendations when a user first enters a Web site based
on the user's browsing and purchase history and demographic profile;
. deliver personalized content and product recommendations based on a
user's clickstream, such as additions and deletions from a shopping cart;
and
. make recommendations based on users' expressed lifestyle preferences such
as their taste in food, music, clothes and activities.
33
We offer our LikeMinds Personalization Server with a variety of analysis
engines to meet the requirements of each customer. While the Preference Engine
and Product Matching Engine are included with the LikeMinds Personalization
Server, the Purchase Engine and Clickstream Engine are sold separately. The key
capabilities of each analysis engine that we currently offer are described in
the table below.
LikeMinds Product Key Capabilities
- -------------------------------------------------------------------------------
. Provides core personalization
LikeMinds Personalization Server technology.
Preference Engine . Uses explicitly stated user preferences
to make personally relevant product
recommendations.
Product Matching Engine . Makes personally relevant product
recommendations based on product
similarities.
. Observes online behavior and enables
the automatic tailoring of Web site
content to each customer's tastes and
preferences.
- -------------------------------------------------------------------------------
Purchase Engine . Enables e-commerce companies to
leverage customer purchase history data
to make personally relevant
recommendations.
- -------------------------------------------------------------------------------
Clickstream Engine . Builds online customer profiles in
real-time, based on navigational data
as customers browse a Web site.
Our Technology
[Graphic Depicting ARIA platform/recorder with diagram showing monitors at
left, LikeMinds Personalization Server engines in middle and ARIA reporter
modules at right]
Our ARIA and LikeMinds products leverage the functionality of a common
platform to enable scalable, flexible and accurate Web site monitoring,
analysis and personalization. The architecture is compatible with application
programming interfaces, or APIs, communication protocols and file formats to
enable integration with external systems such as Web e-commerce servers and
business process applications. The architecture also utilizes numerous standard
programming languages, including extensible markup language, or XML, and
network protocols, including the Information and Content Exchange protocol, or
ICE. ICE is utilized to syndicate and distribute data from ARIA monitors to the
LikeMinds Personalization Server and reporting applications.
ARIA Technology
We have based the ARIA product line on a common architecture that consists of
three core components:
Monitors. We have equipped ARIA with Web site monitors that are able to
interface with Web servers and applications to gather Web site activity data in
real-time. Unlike other Web site tracking software, the ARIA monitors do not
capture information from Web server transaction logs, which can rapidly become
very large and significantly slow down processing times. Unlike the Web log
file approach, we believe that our monitor technology provides the level of
detail required for marketers to translate Web site activity information into
useful marketing and sales intelligence. In addition, unlike the ARIA monitors,
other software solutions that use monitors store data in a database or data
warehouse where the data is not available for real-time analysis or
personalization. ARIA monitors can be easily extended to collect new kinds of
Web site information that is provided to third-party
34
applications such as the LikeMinds Personalization Server. ARIA currently uses
three different types of monitors:
. ARIA Network Monitors. These monitors are placed at strategic points
within the network to capture the interaction between Web browsers and
the Web server. They examine the content of the interaction and extract
page tags, page titles and other valuable information;
. ARIA Server Monitors. These monitors plug directly into Web servers,
providing the only method of accessing data that is transmitted through
the Secure Sockets Layer connection. They supply real-time Web site
activity data by automatically capturing and making available information
from the Web server; and
. ARIA Application Monitors. These monitors integrate with e-commerce
applications to gather data on Web site activity such as shopping cart
inserts, deletes and checkouts, key word searches and other e-commerce
activities.
Recorders. The ARIA recorder is the processing engine that resides in the
central part of the application and receives the data from the monitors. We
license technology from Object Design, Inc. for the recorder database.
Reporter. The ARIA reporter creates reports based on the Web site activity
information stored in a highly scaleable object database optimized for creating
ARIA reports. ARIA reports can be generated on demand or in regular intervals
and can be distributed in a spreadsheet format or as HTML documents accessible
by a Web browser.
LikeMinds Technology
The LikeMinds Personalization Server uses our patented collaborative
filtering algorithms. Collaborative filtering technology works as follows:
. the system records a value to represent a user interaction such as rating
a product, viewing a page or purchasing a product. The values can be
derived directly from explicit ratings or implied from data such as
clickstreams or purchase history;
. LikeMinds matches the selected user with others who have viewed or
purchased the same items;
. LikeMinds then computes how similar the target user is to other users who
have viewed or purchased the same items;
. after the comparison, similar users are selected as "proxies" or
"mentors"; and
. when an application requests a recommendation for personalized content or
a product recommendation, the LikeMinds Personalization Server retrieves
the relevant data associated with that person's proxies or mentors to
predict items likely to appeal to the target individual.
We believe that LikeMinds' patented collaborative filtering process provides
an advantage over competing technologies. Other collaborative filtering
algorithms typically partition users into static clusters which provide an
individual prediction that is the arithmetic mean of all users in the same
static cluster. This static cluster methodology works for those users whose
behavior closely matches the average of the cluster, but its accuracy suffers
for users whose behavior deviates from the average. In contrast, LikeMinds
dynamically creates an individual cluster in real-time for each customer every
time a personalization application requests a recommendation for that customer.
As a customer's tastes change, the members of the customer's cluster change so
that only those individuals that most closely match the behavior of the target
customer remain as proxies or mentors for that customer. As a result,
LikeMinds' predictions are based on dynamically updated customer data and
continuously provide the most personally relevant content and product
recommendations for each customer.
35
Customers
Our customers represent a broad spectrum of enterprises in diverse sectors
including education and government, entertainment, financial services,
manufacturers, media, online merchants, traditional retailers and technology
companies. Below is representative list of our customers that have generated
revenues or deferred revenues of at least $25,000 since January 1, 1998:
Online Companies Manufacturers/Retailers Technology
Big Star Audi BellSouth
CheckOut.com Daimler-Chrysler Broderbund Software
Cybershop International Encyclopedia Britannica EarthLink
E*Trade Hallmark Home Services Network
Giant Step Levi Strauss & Co. Intelenet Communications
iVillage Office Depot MatraNet
Internet Gift Registry Office Max Sun Microsystems
Medscape United Parcel Service US West
Motley Fool Xerox Corporation XTRA
NetFlix.com
On2.com Media Financial Services
Pangolin All Media Guide Chase Manhattan Bank
RealEstate.com Forrester Research First Chicago
visitalk.com Fox Home Entertainment First Union
www.com Launch Media Interactive Investor
NewsReal Intuit
Government Total Sports
General Services Administration The Weather Channel
U.S. Postal Service
Entertainment
Cinemax/HBO
Columbia House
Diva Systems
Sony Corporation
West Coast Video
Professional Services
Our Services Group provides consulting services and customer support. We
believe that providing superior consulting services and customer support are
critical to the satisfaction of our customers and our own success. As of July
31, 1999, our Services Group consisted of 29 employees.
Consulting Services. We provide a variety of consulting services to help
companies implement our products and improve their marketing strategies. Our
Services Group offers a high level of expertise in Web analysis and reporting,
personalization techniques, customization and technology integration. We also
offer extensive education and training programs for our customers at our
offices in San Francisco and at customer sites.
Customer Support. We provide our customers with a variety of support
services, including telephone support, Web-based support and updates to our
products and documentation. Our Web-based support is available 24 hours a day
and provides answers to frequently asked questions, technical advice and an
area for downloading product updates. We enter our maintenance and support
contracts separate from our product license agreements. In addition to our
standard maintenance and support program, we also offer a premium maintenance
and support program that includes proactively monitoring the customer's Web
site to anticipate problems and provide real-time solutions.
36
Sales and Marketing
We market our products and services primarily through our direct sales force
and through indirect channels including Internet service providers, application
service providers, systems integrators, and Web design studios, as well as
other technology and marketing partners. We maintain sales offices in Boston,
Chicago, London, Los Angeles, New York and Washington, D.C. We also have sales
representatives based in Atlanta, Austin and Minneapolis. As of July 31, 1999,
we had 30 sales representatives, managers and support personnel. We intend to
increase our North American and European sales forces by opening new offices as
appropriate to meet demand.
We use a variety of marketing programs to build market awareness of
Andromedia and our integrated software solutions, as well as to identify
potential customers for our products and services. Our marketing department
currently includes 13 employees who conduct public relations, produce marketing
materials, participate in trade shows, conferences and seminars, develop sales
tools and presentations, conduct marketing research and establish and maintain
close relationships with industry experts. In addition, our marketing
department creates and maintains our Web site. Finally, product managers in our
marketing department conduct competitive research, determine marketing
requirements for our products and set product direction and priorities.
We also use our personalization technology to develop market awareness of
Andromedia. For example, we developed our Moviecritic.com Web site which
provides a place for online users to send and receive movie critiques and get
movie recommendations based on personal preferences provided by the user. We
believe that Moviecritic.com is now regarded as one of the leading movie
evaluation Web sites with an average of 45,000 visitors each month during 1999.
Although we do not currently operate Moviecritic.com as a separate business, we
may in the future establish it as a stand-alone business if we believe its
operating model becomes mature enough to exist independently. We are also in
the process of launching Bookcritic.com which will provide book recommendations
in a manner similar to Moviecritic.com.
Strategic Relationships
A key element of our strategy is to establish strategic relationships that
enable us to continue to enhance the value of our e-marketing solutions to
customers and accelerate the market acceptance of our products. These
relationships fall into two categories: technology partners and distribution
partners.
Technology Relationships. We strive to establish relationships with leading
industry e-commerce platform and application providers and technology partners
that add value to our products. We have found that these relationships enable
our customers to more easily employ our products as part of larger, off-the-
shelf solutions, thereby minimizing the need for custom application
development. In addition, these relationships increase demand for our products
since many of our prospective customers first invest in complementary products
from our partner companies. We have strategic
relationships with leading platform and applications providers such as Allaire,
ATG, BroadVision, Netscape/America Online, Sun Microsystems and Vignette. We
continue to seek additional partners who complement our product and marketing
strategy. We share with our partners sales and marketing collateral materials,
sales leads and technology integration services.
In addition, we have recently established a relationship with Big Flower
Holdings, a direct marketing services provider that provides us access to
traditional geographic, demographic and psychographic profiles of over 220
million persons residing in the United States. Access to this large database of
historical consumer information is intended to enable our products to provide
more accurate information regarding the tastes and preferences of online
consumers. Our relationship with Webcraft, a leading provider of personalized
direct marketing services and a subsidiary of Big Flower
37
Holdings, Inc., is part of our strategy to consolidate traditional data from
various information channels with our own captured online data to enhance our
personalization solution.
Distribution Relationships. We intend to accelerate the implementation of our
e-marketing solutions by expanding our relationships with leading systems
integrators that specialize in designing and deploying e-commerce Web sites. We
have entered into distribution partnerships with eleven Internet services
companies: Anubis, BASE Consulting, DataSage, Fort Point Partners, iXL Inc.,
Multimedia Live, Net Effect, Net Quotient, Novo Interactive, Oven Digital and
Stonebridge. We believe that these relationships will both facilitate the
successful deployment of our products and generate additional product sales
opportunities.
Competition
The market for e-marketing software applications, including Web site tracking
and analysis solutions and personalization solutions, is new, rapidly evolving
and intensely competitive. We expect competition to increase both from existing
competitors and new market entrants. We believe that the principal competitive
factors in our market are:
. product features, including performance and scalability;
. ""plug-and-play" capability with leading e-commerce hardware and software
applications;
. quality of customer service and support and professional consulting
services;
. company reputation; and
. to a lesser extent, price.
We believe that there are currently no direct competitors that provide
comprehensive e-marketing software solutions. However, in various segments of
this market, we compete with a number of companies.
. Web Site Tracking and Analysis. The primary competitors for our ARIA
product line include Accrue, net.Genesis and WebTrends.
. Personalization. The primary competitors for our LikeMinds product line
include Net Perceptions, the Apex division of HNC Software, Engage and
Personify.
Many of our current competitors, as well as a number of potential new
competitors, have longer operating histories and substantially greater name
recognition, financial, technical and marketing resources than we. Some of our
current and potential competitors may also have larger more diverse customer
bases than we. In addition, current or potential competitors have established
and may establish strategic partnerships or consolidate to more effectively
market and distribute their products and enhance their product and service
offerings.
In addition to these current and potential competitors, we also face
competition from the internal marketing capabilities of Web publishers who
develop proprietary marketing solutions rather than employ the commercial
solutions of Andromedia or our competitors. We cannot assure you that we will
be able to successfully compete with these internal solutions.
Intense competition may result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm us. We cannot assure
you that we will be able to successfully compete against existing or future
competitors.
38
Intellectual Property
We depend upon protecting our intellectual property assets, which consist
primarily of the computer software technology in our products and the
trademarks and brand names associated with our company and its products. If we
do not adequately protect our intellectual property, we could be seriously
harmed.
We currently hold two U.S. patents and one foreign patent and we have one
U.S. patent application pending. It is possible that any patent or trademark
issued to us may not provide us with any competitive advantages or that the
patents or proprietary rights of third parties may substantially restrict our
ability to conduct our business. We generally have not performed any
comprehensive patent search for other patents that may limit our ability to do
business. In addition, the laws of some foreign countries do not protect our
intellectual property to the same extent as U.S. law.
Our software products are sold to our customers under software licenses that
impose restrictions on our customers' ability to duplicate, reverse engineer or
otherwise use our software for purposes which could compromise our intellectual
property rights. We also seek to protect our software, documentation and other
proprietary written materials under trade secret and copyright laws, which
afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Preventing unauthorized use of our products and
proprietary information is difficult, and while we are unable to know the
extent to which unauthorized copying and use of our software takes place, we
expect this to be a persistent problem. A discussion of the risks associated
with the protection of our intellectual property rights and potential
infringement by us of the patents and intellectual property rights of others is
set forth in "Risk Factors--Protection our intellectual property may not be
adequate."
Product Development
We believe that our future success will in large part depend on our ability
to improve the ARIA and LikeMinds product lines, develop new products, maintain
technological leadership and meet rapidly evolving customer requirements for
large scale marketing software applications. Our product development and
engineering organization is primarily responsible for product architecture,
core technology, product testing and quality assurance, writing end-user
documentation, and expanding the ability of our software applications to
efficiently operate with the leading hardware platforms, operating systems,
database management systems and critical e-commerce transaction processing
standards.
Since our inception, we have made substantial investments in product
development and related activities. As of July 31, 1999, product development
and engineering staff consisted of 28 employees. Our total expenses for
research and development were $884,000, $1.4 million and $2.3 million in 1996,
1997 and 1998, respectively, and $1.7 million in the first six months of 1999.
We expect to continue to devote substantial resources to our product
development and related activities.
Employees
As of July 31, 1999, we had a total of 125 employees, of whom there were 29
in our Services Group, 28 in development and engineering, 51 in sales and
marketing and 17 in corporate finance and administration. None of our employees
is represented by a labor union, and we have never experienced a work stoppage.
We believe our relationship with our employees is good.
39
Facilities
Our principal executive and corporate offices and development and network
operations are located in San Francisco, California, in approximately 11,000
square feet of leased office space under a lease that expires in 2003. We plan
to relocate our principal executive and corporate offices during the fourth
quarter of 1999 to approximately 28,000 square feet of leased office space
located in San Francisco under a lease that expires in 2004. We believe that
our facilities are adequate for our current operations and that additional
leased space can be obtained if needed.
Legal Proceedings
We are not currently involved in any material legal proceedings. We may from
time to time become a party to various legal proceedings in the ordinary course
of business.
40
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding Andromedia's
current executive officers and directors:
Name Age Position
Kent B. Godfrey.................. 41 Chairman of the Board and Chief Executive Officer
Paul R. Gifford.................. 47 President, Chief Operating Officer and Director
Neil R. Blumenfield.............. 45 Vice President of Worldwide Services
James W. Doubek.................. 46 Vice President of Engineering
Stephen F. Ghiglieri............. 38 Vice President of Finance and Chief Financial Officer
Daniel R. Greening, Ph.D. ....... 40 Vice President and Chief Solutions Architect
Stephen P. Kanzler............... 48 Vice President of Marketing
Jeffrey M. Tedesco............... 41 Vice President of Sales
L. William Krause(b)............. 57 Director
Hyunja F. Laskin(a).............. 32 Director
Jack L. Rivkin(b)................ 59 Director
Robert J. Saldich(b)............. 66 Director
Richard Wolpert.................. 37 Director
Kristopher A. Wood(a)............ 28 Director
- --------
(a) Member of the Audit Committee.
(b) Member of the Compensation Committee.
Kent B. Godfrey has served as Chief Executive Officer and a director of
Andromedia since its inception in January of 1996 and has served as Chairman of
the Board since June 1999. From January 1996 to September 1998, Mr. Godfrey
served as President and Chief Executive Officer of Andromedia. From September
1993 to February 1995, Mr. Godfrey served as Vice President Marketing/Strategic
Planning for IA Corp., a high-end custom solutions provider. From July 1991 to
December 1992, Mr. Godfrey served as Vice President of Marketing and Business
Development at Epoch Systems, a hierarchical storage management software
company. From February 1986 to July 1991, Mr. Godfrey held various executive
management positions at Sequent Computer Systems, a manufacturer of computer
systems used in high-end transaction processing and decision support
applications. Mr. Godfrey serves on the boards of directors of TRM Corporation
and HipBone, Inc. and is a member of the advisory boards of eForce, Inc.,
Facilitas, Inc., Softcoin, Inc. and the Palo Alto Coffee Company. He also
serves on the advisory board of the non-profit charitable organization Planet
Hope. Mr. Godfrey received a B.S. degree in Operations Research from Babson
College and a M.S. degree in Economics from the London School of Economics.
Paul R. Gifford has served as President and Chief Operating Officer of
Andromedia since September 1998, and has served as a director since July 1999.
From July 1998 to September 1998, Mr. Gifford served as Vice President of
Marketing of Andromedia. From October 1996 to April 1998, Mr. Gifford served as
Vice President of Product Development at Auspex Systems, a provider of high-
performance network file servers and high-availability data management software
solutions. From March 1996 to October 1996, Mr. Gifford served as a Vice
President at Tencor Instruments, a manufacturer of capital equipment for
semiconducter test applications. From December 1985 to October 1995, Mr.
Gifford held various positions at Sequent Computer Systems, including Vice
President of Corporate Strategic Programs. Mr. Gifford received B.S. and M.S.
degrees in Electrical Engineering from the Rochester Institute of Technology
and has completed the Executive Masters of Business Administrations Program at
Stanford University.
Neil R. Blumenfield has served as Vice President of Worldwide Services of
Andromedia since October of 1998. From April 1998 to October 1998, Mr.
Blumenfield served as Director of Sales at Pictra, Inc., a developer of Web-
based photographic imaging software and services. From April 1994 to October
1997, Mr. Blumenfield served as Vice President of the Data Visualization Group
at
41
Visigenic Software, a developer of software for distributed Internet and
intranet applications. Mr. Blumenfield received a B.A. degree in Political
Science from the University of California, Berkeley.
James W. Doubek has served as Vice President of Engineering of Andromedia
since the merger of Andromedia and LikeMinds in October 1998. From March 1997
to October 1998, Mr. Doubek was Vice President of Engineering at LikeMinds.
From January 1995 to March 1997, Mr. Doubek was Vice President, Engineering at
Chaco Communications, a software development company. From September 1989 to
November 1994, Mr. Doubek was Director of Appware Foundation at Software
Transformation, a software company acquired by Novell. Mr. Doubek received B.S.
and M.S. degrees in Mathematics from the University of Miami.
Stephen F. Ghiglieri has served as Vice President of Finance and Chief
Financial Officer of Andromedia since July 1999. From July 1994 to May 1999,
Mr. Ghiglieri served as Vice President, Finance and Administration and Chief
Financial Officer at Oacis Healthcare Holdings, Corp. and its wholly owned
subsidiary, Oacis Healthcare Systems, Inc., a healthcare information system
software company. From 1992 to 1994, Mr. Ghiglieri served as Controller for
Oclassen Pharmaceuticals, Inc., a pharmaceutical development and marketing
company. Prior to 1992, Mr. Ghiglieri worked in the auditing division of Price
Waterhouse. Mr. Ghiglieri received a B.S. in Business Administration from the
California State University, Hayward and is a certified public accountant.
Daniel R. Greening, Ph.D. has served as Vice President and Chief Solutions
Architect of Andromedia since the merger of Andromedia and LikeMinds in October
1998. From March 1997 to October 1998, Dr. Greening was a co-founder and Chief
Technical Officer at LikeMinds. From November 1994 to March 1997, Dr. Greening
was the Chief Executive Officer of Chaco Communications, a software development
company. From March 1991 to October 1994, he was Director of Frameworks at
Software Transformation, a software company acquired by Novell. Dr. Greening
received a B.S. degree in Computer Engineering from the University of Michigan
and M.S. and Ph.D. degrees in Computer Science from the University of
California, Los Angeles.
Stephen P. Kanzler has served as Vice President of Marketing of Andromedia
since the merger of Andromedia and LikeMinds in October 1998. From March 1996
to October 1998, Mr. Kanzler was co-founder, President, Chief Executive Officer
and a director of LikeMinds. From August 1992 to March 1996, Mr. Kanzler served
as a business consultant. From June 1987 to August 1992, Mr. Kanzler developed
product and marketing strategies for operating systems and networking products
in Microsoft's Systems Division. His last position at Microsoft was National
Marketing Manager of Microsoft's Enterprise Systems Division. Mr. Kanzler
served in the U.S. Navy and attended the U.S. Navy's Nuclear Power School.
Jeffrey M. Tedesco has served as Vice President of Sales of Andromedia since
June 1999. From November 1998 to May 1999, Mr. Tedesco served as Vice President
of Sales and Business Development for Netmosphere, a provider of collaborative
project management software. From December 1996 to July 1998, Mr. Tedesco
served as Vice President of Sales, Consulting, and Customer Support for
FirstFloor Software, a marketing encyclopedia systems company. From January
1994 to December 1996, Mr. Tedesco served as Director, Sales for the Western
Region of Banyan Systems, a provider of enterprise software solutions. Mr.
Tedesco received a B.S. degree in Business Management from Santa Clara
University.
L. William Krause has served as a director of Andromedia since August 1999.
Since November 1998, Mr. Krause has been President of LWK Ventures, a private
investment company. Mr. Krause served as President, Chief Executive Officer and
as a director of Storm Technology, Inc., a provider of computer peripherals for
digital imaging, from October 1991 to November 1998 when it filed for
protection under federal bankruptcy laws. Prior to that, Mr. Krause spent ten
years at 3Com Corporation, a manufacturer of networking systems, where he
served as President and Chief Executive Officer until he retired in September
1990. Mr. Krause continued as Chairman of the Board
42
for 3Com Corporation until 1993. Previously, Mr. Krause served in various
marketing and general management executive positions at Hewlett-Packard
Company. Mr. Krause currently serves as a director of Aureal, Inc., Infoseek
Corporation, Pinnacle Systems, Inc., Ramp Networks, Inc. and Sybase, Inc.
Hyunja F. Laskin has served as a director of Andromedia since April 1998.
Since 1994, Ms. Laskin has been a Principal of UBS Capital LLC, the private
equity business of UBS AG. Prior to joining UBS Capital, Ms. Laskin worked in
the strategic planning department of Pepsico, Inc. and in the high yield group
of Merrill Lynch. Ms. Laskin is a director of a number of private companies in
which UBS Capital has an investment. Ms. Laskin received a B.A. degree from
Wellesley College and a M.B.A. degree from Columbia University.
Jack L. Rivkin has served as a director of Andromedia since April 1998. Since
October 1995, Mr. Rivkin has served as an officer of Citigroup Investments,
Inc., where he is currently an Executive Vice President. From September 1994 to
September 1998, he was a director and member of the Investment Committee of
Greenwich Street Capital Partners, Inc. From March 1993 to October 1995, Mr.
Rivkin served as Vice Chairman and Director of Global Research at Smith Barney
Inc. Mr. Rivkin presently is a director of a number of private companies in
which Citigroup Investments or its affiliates have investments. He also is a
director of PRT Group Inc., 24/7 Media, Inc. and On2.com. Mr. Rivkin received a
professional degree in metallurgical engineering from the Colorado School of
Mines and a MBA degree from Harvard University. He is an adjunct professor at
Columbia University.
Robert J. Saldich has served as a director of Andromedia since August 1999,
after having previously served on the board from September 1996 to March 1999.
On October 1, 1995, Mr. Saldich retired as President and Chief Executive
Officer of Raychem Corporation, a producer of technology-based products for
industry, which recently merged with TYCO Corporation. Mr. Saldich joined
Raychem in 1964 and held various positions until elected president and chief
executive officer in January 1990. Mr. Saldich currently serves on the boards
of the Center for the Common Good, the American Leadership Forum of Silicon
Valley and the National Conference for Community and Justice in Silicon Valley.
He is on the Technology Advisory Board for the National Institute of Standards
and Technology in Washington, D.C. Mr. Saldich received a B.S. degree in
chemical engineering from Rice University and a MBA degree from Harvard
University.
Richard Wolpert has served as a director of Andromedia since August 1999.
Since July 1998, Mr. Wolpert has served as the partner in charge of Internet
and technology ventures for The Yucaipa Companies, a private investment firm.
Since August 1998, Mr. Wolpert has also served as acting Chief Executive
Officer of CheckOut.com, an entertainment e-commerce company. From March 1996
to July 1998, Mr. Wolpert served in various executive capacities at Disney
Online, most recently as President. From June 1994 to March 1996, Mr. Wolpert
was President of Chance Technologies, a private investment portfolio of various
Internet and technology companies. Mr. Wolpert is also a director of
CheckOut.com, GameSpy Industries and Scour.net. Mr. Wolpert received a B.S.
degree in math and computer science for the University of California, Los
Angeles.
Kristopher A. Wood has served as a director of Andromedia since March 1999.
Since September 1997, Mr. Wood has been a Managing Director of XL Ventures,
Inc., the venture capital investment subsidiary of Big Flower Holdings, Inc.,
an advertising, marketing and information services company. Since September
1995, Mr. Wood has also been Managing Director of Mergers and Acquisitions of
Big Flower Holdings, Inc. From July 1993 to May 1995, Mr. Wood was a member of
the Global Finance Group at BT Alex. Brown. Mr. Wood also serves as a director
of About.com, Inc. Mr. Wood received a B.S. degree in Economics from the
Wharton School of the University of Pennsylvania.
43
Board Composition
Our certificate of incorporation will provide for a classified board of
directors consisting of three classes of directors, each serving a staggered
three-year term. As a result, a portion of Andromedia's board of directors will
be elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board will be elected
to one-year terms, two will be elected to two-year terms and three will be
elected to three-year terms. Thereafter, directors will be elected for three-
year terms. Ms. Laskin and Mr. Rivkin have been designated Class I directors
whose term expires at the 2000 annual meeting of stockholders. Messrs. Wood,
Gifford and Godfrey have been designated Class II directors whose term expires
at the 2001 annual meeting of stockholders. Messrs. Saldich, Krause and Wolpert
have been designated Class III directors whose term expires at the 2002 annual
meeting of stockholders. This classification of the board of directors may have
the effect of delaying or preventing changes in control of our company. See
"Description of Capital Stock--Certain Anti-Takeover Effects of Our Certificate
of Incorporation and Bylaws and of Delaware Law."
Board Committees
Our Board currently has two committees: an audit committee and a compensation
committee.
The audit committee is currently comprised of Mr. Wood and Ms. Laskin. The
audit committee reviews and recommends to our board the internal accounting and
financial controls for us and the accounting principles and auditing practices
and procedures to be used for our financial statements. The audit committee
makes recommendations to our board concerning the engagement of independent
public accountants and the scope of the audit to be undertaken by such
accountants.
The compensation committee is currently comprised of Messrs. Krause, Rivkin
and Saldich. The compensation committee reviews and recommends to our board
policies, practices and procedures relating to the compensation of our officers
and other managerial employees and the establishment and administration of our
employee benefit plans.
Director Compensation
We do not pay any compensation to directors for serving in that capacity.
Directors are reimbursed for all reasonable expenses incurred by them in
attending board and committee meetings. Our board of directors has the
discretion to grant options and rights to directors pursuant to our stock
plans. Employee directors are eligible to participate in our employee stock
purchase plan. "See--Employee Benefit Plans."
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Messrs. Krause, Rivkin and Saldich,
none of whom is one of our employees. None of our executive officers serves as
a director or member of the compensation committee or other board committee
performing equivalent functions of another entity that has one or more
executive officers serving on our board of directors or compensation committee.
Executive Compensation
The following table sets forth information concerning the compensation earned
for services rendered to us in 1998 by (1) our Chief Executive Officer, (2) our
four other most highly compensated executive officers who earned more than
$100,000 in 1998 and except as otherwise noted were serving as executive
officers at the end of 1998 and (3) certain other of our current executive
officers (collectively, the "Named Executive Officers"). Under the rules of the
SEC, this table does not include certain perquisites and other benefits
received by the Named Executive Officers which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in this table.
44
Summary Compensation Table
Annual Long-Term
Compensation Compensation
---------------- ------------
Securities
Underlying All Other
Salary Bonus Options (#) Compensation
Name and Principal Position -------- ------- ------------ ------------
Kent B. Godfrey.................... $150,000 $40,000 -- $16,607(g)
Chairman of the Board and
Chief Executive Officer
Paul R. Gifford(a)................. 70,456 -- 390,000 20,000(h)
President and Chief Operating
Officer
Stephen F. Ghiglieri(b)............ -- -- -- --
Vice President of Finance and
Chief Financial Officer
Mark A. Brewer(c).................. 150,000 40,353 -- --
Former Vice President of Sales
Scott G. Capdevielle(d)............ 125,000 -- -- 5,982(g)
Former Chief Technical Officer
James A. Cohan(e).................. 125,000 26,325 -- 21,607(g)
Former Chief Financial Officer
Paula B. Hawthorn(f)............... 100,500 7,033 -- --
Former Vice President of Product
Development
- --------
(a) Mr. Gifford, our President and Chief Operating Officer, joined Andromedia
in July 1998.
(b) Mr. Ghiglieri, our Vice President of Finance and Chief Financial Officer,
joined Andromedia in July 1999.
(c) Mr. Brewer served as our Vice President of Sales until June 1999.
(d) Mr. Capdevielle served as our Chief Technical Officer until June 1999.
(e) Mr. Cohan served as our Chief Financial officer until March 1999.
(f) Ms. Hawthorn served as our Vice President of Product Development until
October 1998.
(g) Represents salary earned in 1997 but paid in 1998.
(h) Represents signing bonus paid to Mr. Gifford upon commencement of his
employment.
45
Option Grants During Year Ended December 31, 1998
The following table sets forth certain information for the year ended
December 31, 1998 with respect to grants of stock options to each of the Named
Executive Officers. All options granted by us in 1998 were granted under its
1997 Stock Plan. These options have a term of 10 years. See "Employee Benefit
Plans" for a description of the material terms of these options. Andromedia
granted options to purchase common stock equal to a total of 1,368,449 shares
during 1998. Options were granted at an exercise price equal to the fair market
value of our common stock, as determined in good faith by our board of
directors. Our board of directors determined the fair market value based on our
financial results and prospects and the share price derived for arms-length
transactions. Potential realizable values are net of exercise price before
taxes, and are based on the assumption that our common stock appreciates at the
annual rate shown, compounded annually, from the date of grant until the
expiration of the ten-year term. These numbers are calculated based on SEC
requirements and do not reflect our projection or estimate of future stock
price growth.
Individual Grants
----------------------------------------
% of Potential Realizable
Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted Exercise Price Appreciation
Underlying to Price for Option Term
Name Options Employees Per Expiration ----------------------
Granted in 1998 Share Date 5% 10%
---------- --------- -------- ---------- ---------- -----------
Kent B. Godfrey......... -- -- % $ -- -- $ -- $ --
Paul R. Gifford......... 240,000 17.5 0.65 7/28/08 98,108 248,624
150,000 11.0 1.00 10/7/08 94,334 239,061
Stephen F. Ghiglieri.... -- -- -- -- -- --
Mark A. Brewer.......... -- -- -- -- -- --
Scott G. Capdevielle.... -- -- -- -- -- --
James A. Cohan.......... -- -- -- -- -- --
Paula B. Hawthorn....... -- -- -- -- -- --
Aggregated Option Exercises in Last Fiscal Year and 1998 Year-End Option Values
The following table sets forth information with respect to the Named
Executive Officers concerning exercisable and unexercisable options held as of
December 31, 1998. The value of in-the-money options is based on the positive
spread between the respective exercise prices of outstanding stock options and
$2.38, the fair market value of the common stock as of December 31, 1998. No
shares were acquired by the Named Executive Officers upon exercise of stock
options or stock purchase rights in the year ended December 31, 1998.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at December 31, In-the-Money Options
1998 at December 31, 1998
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
Name ----------- ------------- ----------- -------------
Kent B. Godfrey............. -- -- $ -- $ --
Paul R. Gifford............. -- 390,000 -- 622,200
Stephen F. Ghiglieri........ -- -- -- --
Mark A. Brewer.............. 52,000 104,000 112,320 224,640
Scott G. Capdevielle........ -- -- -- --
James A. Cohan.............. -- -- -- --
Paula B. Hawthorn........... 60,000 -- 124,800 --
Options shown above were granted under the 1997 Stock Plan and vest at a rate
of 25% of the shares on the first anniversary of the date of grant and 1/48 of
the shares each month thereafter.
Change of Control Agreements
We have entered into change of control agreements with several of our key
employees. These agreements provide for accelerated vesting of shares, options,
warrants and rights to purchase shares of our common stock held by a key
employee upon a change of control and an involuntary termination of the key
employee within 12 months of the change of control. In addition, upon the
occurence of these events, our repurchase rights with respect to the key
employee's shares, options, warrants and rights to purchase our capital stock
shall automatically lapse.
46
Employee Benefit Plans
1999 Stock Plan
Our board of directors adopted the Andromedia, Inc. 1999 Stock Plan (the
"1999 Plan") in August 1999 and our stockholders will be asked to approve the
1999 Plan in September 1999. The 1999 Plan provides for the grant of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code
(the "Code") to employees, and for the grant of nonstatutory stock options and
stock purchase rights ("SPRs") to employees, directors and consultants.
Number of Shares of Common Stock Available under the 1999 Plan. A total of
2,000,000 shares of common stock are reserved for issuance pursuant to the 1999
Plan, no options to acquire shares of common stock are currently issued and
outstanding. The 1999 Plan provides for annual increases in the number of
shares available for issuance, on the first day of each new fiscal year,
beginning with our fiscal year 2000, equal to the lesser of 5% of the
outstanding shares of common stock on the applicable first day of the fiscal
year, 1,000,000 shares or such other lesser amount as the board may determine.
Administration of the 1999 Plan. The board of directors or a committee of the
board (as applicable, the "Administrator") administers the 1999 Plan. In the
case of options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the committee will consist of two or
more "outside directors" within the meaning of Section 162(m) of the Code. The
Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability of the options and the form of consideration
payable upon exercise.
Options. The Administrator determines the exercise price of nonstatutory
stock options granted under the 1999 Plan, but with respect to nonstatutory
stock options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the exercise price must at least be
equal to the fair market value of the common stock on the date of grant. The
exercise price of all incentive stock options granted under the 1999 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of our outstanding capital stock, the
exercise price of any incentive stock option granted must equal to at least
110% of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options is
determined by the Administrator. An optionee generally must exercise an option
granted under the 1999 Plan at the time set forth in the optionee's option
agreement after termination of the optionee's status as one of our employees,
directors or consultants, or within 12 months after the optionee's termination
by death or disability, but in the case of incentive stock options no later
than ten years from the date of grant.
Stock Purchase Rights ("SPRs"). The Administrator determines the exercise
price of SPRs granted under the 1999 Plan. In the case of SPRs, unless the
Administrator determines otherwise, the restricted stock purchase agreement
entered into in connection with the exercise of the SPR shall grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason (including death
or disability). The purchase price for shares we repurchase pursuant to
restricted stock purchase agreements shall generally be the original price paid
by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to us. The repurchase option shall lapse at a rate that the
Administrator determines.
Transferability of Options and SPRs. An optionee generally may not transfer
options and SPRs granted under the 1999 Plan and only the optionee may exercise
an option and SPR during his or her lifetime.
47
Adjustments upon Merger or Asset Sale. The 1999 Plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation shall assume or substitute each
option or SPR. If the outstanding options or SPRs are not assumed or
substituted, the Administrator shall provide notice to the optionee that he or
she has the right to exercise the option or SPR as to all of the shares subject
to the option or SPR, including shares which would not otherwise be
exercisable, for a period of fifteen days from the date of the notice. The
option or SPR will terminate upon the expiration of the fifteen-day period.
Amendment and Termination of the 1999 Plan. Unless terminated sooner, the
1999 Plan will terminate automatically in 2009. In addition, the Administrator
has the authority to amend, suspend or terminate the 1999 Plan, provided that
no such action may affect any share of common stock previously issued and sold
or any option previously granted under the 1999 Plan.
1997 Stock Plan
In January 1997 our board adopted, and our stockholders approved, the 1997
Stock Plan. A total of 3,270,000 shares of common stock have been reserved for
issuance under the 1997 Stock Plan, as amended. Unless terminated sooner, the
1997 Plan will terminate automatically in January 2007. The 1997 Stock Plan
provides for the discretionary grant of incentive stock options, within the
meaning of Section 422 of the Code to employees and for the grant of
nonstatutory stock options and stock purchase rights, "SPRs," to employees,
directors and consultants.
The 1997 Stock Plan may be administered by our board or a committee of our
board (as applicable, the "Administrator"). The Administrator has the power to
determine the terms of the options or SPRs granted, including the exercise
price of the options or SPRs, the number of shares subject to each option or
SPR, the exercisability thereof, and the form of consideration payable upon
such exercise. In addition, our board has the authority to amend, alter,
suspend or terminate the 1997 Stock Plan, provided that no share of common
stock previously issued and sold or any option previously granted under the
1997 Stock Plan is affected.
The exercise price of all incentive stock options granted under the 1997
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Stock Plan is determined by the Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the common stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any incentive stock option granted must be at
least equal 110% of the fair market value on the grant date and its term must
not exceed five years. The term of all other options granted under the 1997
Stock Plan may not exceed ten years. Options generally vest as to 25% at the
end of the first year and monthly thereafter over a period of three years so
that the entire option is vested after four years, based upon the optionee's
continued employment or consulting relationship with us.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with us for any reason, including death
or disability. The purchase price for shares repurchased pursuant to a
restricted stock purchase agreement must be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to us. The repurchase option will lapse at a rate determined by the
Administrator.
48
Options and SPRs granted under the 1997 Stock Plan are generally not
transferable by the optionee, and each option and SPR is exercisable during the
lifetime of the optionee only by the optionee. Options granted under the 1997
Stock Plan must generally be exercised within 30 days after the end of
optionee's status as an employee, director or consultant of Andromedia, or
within one year after such optionee's termination by disability or death,
respectively, but in no event later than the expiration of the option's term.
The 1997 Stock Plan provides that, in the event of our merger with or into
another corporation, each outstanding option and SPR must be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options and SPRs are not assumed or substituted by the successor corporation,
the outstanding options and SPRs will fully vest.
1996 Stock Plan
In February 1996, our board adopted, and our stockholders approved, the 1996
Stock Plan. We reserved for issuance 500,000 shares of common stock under the
1996 Plan. The terms of the 1996 Stock Plan are generally the same as the terms
of the 1997 Stock Plan.
1999 Employee Stock Purchase Plan
Our board of directors adopted the Andromedia, Inc. 1999 Employee Stock
Purchase Plan (the "Purchase Plan") in August 1999. Our stockholders will be
asked to approve the Purchase Plan in September 1999.
Number of Shares of Common Stock Available under the Purchase Plan. A total
of 500,000 shares of common stock have been reserved for issuance under the
Purchase Plan. In addition, the Purchase Plan provides for annual increases in
the number of shares available for issuance on the first day of each fiscal
year, beginning with our fiscal year 2000, equal to the lesser of 2% of the
outstanding shares of common stock on the first day of the fiscal year, 500,000
shares or such other lesser amount as may be determined by our board.
Administration of the Purchase Plan. Our board of directors or a committee
appointed by our board administers the Purchase Plan. Our board of directors or
its committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.
Eligibility to Participate. Employees are eligible to participate if they are
customarily employed by us or any participating subsidiary for at least 20
hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the Purchase Plan
if such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
. whose right to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Offering Periods and Contributions. The Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, contains consecutive,
overlapping 24-month offering periods. Each offering period includes four 6-
month purchase periods. The offering periods generally start on the first
trading day on or after November and May of each year, except for the first
such offering period which will commence on the first trading day on or after
the effective date of this offering and will end on the last trading day on or
before .
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base
49
salary and commissions, but excludes payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of common stock at the end of each offering period. The
price of stock purchased under the Purchase Plan is 85% of the lower of the
fair market value of the common stock at the beginning or end of the offering
period. In the event the fair market value at the end of a purchase period is
less than the fair market value at the beginning of the offering period,
participants will be withdrawn from the current offering period following their
purchase of shares on the purchase date and will be automatically re-enrolled
in a new offering period. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with us.
Transferability of Rights. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and
distribution or as otherwise provided under the Purchase Plan.
Adjustments upon Merger or Asset Sale. The Purchase Plan provides that, in
the event of our merger with or into another corporation or a sale of
substantially all of our assets, a successor corporation may assume or
substitute for each outstanding purchase right. If the successor corporation
refuses to assume or substitute for the outstanding purchase rights, the
offering period then in progress will be shortened, and a new exercise date
will be set prior to the merger or sale of assets.
Amendment and Termination of the Purchase Plan. The 1999 Purchase Plan will
terminate in 2009. However, our board of directors has the authority to amend
or terminate the Purchase Plan, except that, subject to certain exceptions
described in the Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.
401(k) Plan
We participate in a tax-qualified employee savings and retirement plan, or
the "401(k) Plan," which covers all of our full-time employees. Under the
401(k) Plan, eligible employees may defer up to 20% of their pre-tax earnings,
subject to the Internal Revenue Service's annual contribution limit. The 401(k)
Plan permits additional discretionary matching contributions by us on behalf of
all participants in the 401(k) Plan in such a percentage amount as may be
determined by our board. To date, we have made no matching contributions. The
401(k) Plan is intended to qualify under Section 401 of the Code, as amended,
so that contributions to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by us, if any, will be deductible by us when
made. The trustee under the 401(k) Plan, at the direction of each participant,
invests the assets of the 401(k) Plan in any of a number of investment options.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation and bylaws limit or eliminate the personal
liability of our directors for monetary damages for breach of the directors'
fiduciary duty of care. The duty of care generally requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Consequently, a
director or officer will not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
. any breach of the director's duty of loyalty to us or our stockholders;
50
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; and
. any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation also provides that we will indemnify, to the
fullest extent permitted by law, any person made or threatened to be made a
party to any action or proceeding by reason of the fact that he or she is or
was one of our directors or officers or serves or served at any other
enterprise as a director, officer or employee at our request.
Our bylaws provide that we will, to the maximum extent and in the manner
permitted by Delaware law, indemnify each of the following persons against
expenses, including attorneys' fees, judgments, fines, settlements, and other
amounts incurred in connection with any proceeding arising by reason of the
fact that he or she is or was one of our agents:
. a current or past director or officer of ours;
. a current or past director or officer of another enterprise who served at
the request of us; or
. a current or past director or officer of a corporation that was a
predecessor corporation of ours or of another enterprise at the request
of a predecessor corporation.
We intend to enter into indemnification agreements with each of our directors
and executive officers to give them additional contractual assurances regarding
the scope of the indemnification described above and to provide additional
procedural protections. These agreements, among other things, indemnify our
directors and executive officers for certain expenses, including attorneys'
fees, judgments, fines, penalties and settlement amounts incurred by them in
any action or proceeding arising out of their services to us, our subsidiaries
or any other enterprise to which they provide services at our request. In
addition, we intend to obtain directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities. We believe that these indemnification provisions and agreements
are necessary to attract and retain qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against directors and officers, even though
a derivative action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement and damage awards against
our directors and officers under these indemnification provisions.
At present, there is no pending or threatened litigation or proceeding
involving any of our directors, officers or employees where indemnification is
expected to be required or permitted, and we are not aware of any threatened
litigation or proceeding that might result in a claim for indemnification.
51
CERTAIN TRANSACTIONS
Since January 1996, our inception date, there has not been nor is there
currently proposed any transaction or series of similar transactions to which
we or any of our subsidiaries was or is to be a party in which the amount
involved exceeds $60,000 and in which any director, executive officer, holder
of more than 5% of our common stock or any member of the immediate family of
any of the foregoing persons had or will have a direct or indirect material
interest other than (1) compensation agreements and other arrangements, which
are described where required in "Management," and (2) the transactions
described below.
Transactions with Directors, Executive Officers and 5% Stockholders
Between April 18, 1997 and July 17, 1997, we sold an aggregate of 1,627,269
shares of Series C preferred stock at a purchase price of $2.20 per share.
Between April 14, 1998 and June 23, 1998, we sold an aggregate of 3,301,420
shares of Series D preferred stock at a purchase price of $3.029 per share.
Between March 15, 1999 and April 8, 1999, we sold an aggregate of 4,227,521
shares of Series E preferred stock at a purchase price of $3.533 per share.
Simultaneously with the consummation of this offering, all shares of these
series of preferred stock will be converted into shares of common stock. Listed
below are those directors, executive officers and stockholders who beneficially
own 5% or more of our securities who participated in these financings. We
believe that the shares issued in these transactions were sold at the then fair
market value and that the terms of these transactions were no less favorable
than we could have obtained from unaffiliated third parties.
Series C Series D Series E Aggregate
Preferred Preferred Preferred Cash
Stock Stock Stock Consideration
Stockholder --------- --------- --------- -------------
Entities affiliated with JK&B
Capital.......................... 1,363,637 330,141 -- $3,999,999
Sippl MacDonald Ventures II,
L.P. ............................ -- 158,530 56,609 680,187
The Travelers Insurance Company... -- 990,425 651,005 5,299,998
UBS Capital II LLC................ -- 1,320,567 178,319 4,629,998
XL Ventures, Inc.................. -- -- 1,132,182 3,999,999
Eileen Richardson, a partner of JK&B Capital, served as a director of
Andromedia from April 1997 to August 1999. Roger Sippl, a partner of Sippl
MacDonald Ventures II, L.P., served as a director of Andromedia from June 1998
to February 1999. Jack Rivkin, a director of Andromedia, is the Senior Vice
President of the Travelers Investment Group, Inc., an affiliate of The
Travelers Insurance Company. Hyunja Laskin, a director of Andromedia, is an
officer of UBS Capital LLC, an affiliate of UBS Capital II LLC. Kristopher A.
Wood, a director of Andromedia, is a Managing Director of XL Ventures, Inc.
52
PRINCIPAL STOCKHOLDERS
The following table sets forth as of July 31, 1999, and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus,
certain information with respect to the beneficial ownership of common stock as
to:
. each person or entity known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
. each of the Named Executive Officers;
. each of our directors; and
. all directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 17,347,288 shares of
common stock outstanding as of July 31, 1999, assuming conversion of all
outstanding shares of preferred stock into common stock. Beneficial ownership
is determined in accordance with the rules of the SEC. Shares of common stock
subject to options that are presently exercisable or exercisable within 60 days
of July 31, 1999, are deemed outstanding for the purpose of computing the
percentage ownership of the person or entity holding the options, but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person or entity.
Unless otherwise indicated below, each person or entity named below has an
address in care of Andromedia's principal executive offices.
Percentage of Shares
Number of Beneficially Owned
Shares ------------------------
Beneficially Before After
Owned Offering Offering
Name of Beneficial Owner ------------ ---------- ----------
The Travelers Insurance Company(a).. 1,800,789 10.4%
Jack L. Rivkin(b).................. 1,800,789 10.4
JK&B Capital, L.P. and affiliated
entities(c)........................ 1,746,897 10.1
UBS Capital II LLC(d)............... 1,711,365 9.9
Hyunja F. Laskin(e)................ 1,711,365 9.9
Scott G. Capdevielle(f)............. 1,500,000 8.6
Jamie A. Cohan(g)................... 1,480,000 8.5
XL Ventures, Inc.(h)................ 1,132,182 6.5
Kristopher A. Wood(i).............. 1,132,182 6.5
Kent B. Godfrey(j).................. 1,026,042 5.9
Paul R. Gifford(k).................. 129,375 *
Mark A. Brewer(l)................... 85,750 *
Paula B. Hawthorn................... 30,000 *
Robert J. Saldich(m)................ 23,157 *
L. William Krause................... -- *
Richard Wolpert..................... -- *
All directors and officers as a
group (14 persons)(n).............. 6,370,936 36.1
- --------
* Less than 1%
53
(a) The address of record for The Travelers Insurance Company is One Tower
Square, 9 Plaza Building, Hartford, Connecticut 06183.
(b) Number of shares includes 1,800,789 shares held by The Travelers Insurance
Company. Mr. Rivkin is the Senior Vice President of the Travelers
Investment Group, Inc., an affiliate of the Travelers Insurance Company.
Mr. Rivkin disclaims beneficial ownership of the shares held by The
Travelers Insurance Company except to the extent of his proportionate
pecuniary interest in the entity.
(c) The address of record for each entity affiliated with JK&B Capital, L.P. is
205 N. Michigan Avenue, Suite 808, Chicago, Illinois 60601. Number of
shares includes 1,210,054 held by JK&B Capital, L.P. and 536,843 shares
held by JK&B Capital II, L.P.
(d) The address of record for UBS Capital II LLC is 299 Park Avenue, 34th
Floor, New York, New York 10171.
(e) Number of shares includes 1,711,365 shares held by UBS Capital II LLC. Ms.
Laskin is an officer of UBS Capital LLC. Ms. Laskin disclaims beneficial
ownership of the shares held by UBS Capital II LLC except to the extent of
her proportionate pecuniary interest in the entity.
(f) The address of record for Mr. Capdevielle is 52 Camino Encinas, Orinda,
California 94563.
(g) The address of record for Mr. Cohan is 1324 Willard Street, San Francisco,
California 94117.
(h) The address of record for XL Ventures, Inc. is c/o Big Flower Holdings,
Inc., 3 East 54th Street, New York, NY 10022.
(i) Number of shares includes 1,132,182 shares held by XL Ventures, Inc. Mr.
Wood is a Managing Director of XL Ventures, Inc. Mr. Wood disclaims
beneficial ownership of the shares held by XL Ventures, Inc. except to the
extent of his proportionate pecuniary interest in the entity.
(j) Number of shares includes 26,042 shares of common stock issuable upon
exercise of options exercisable within 60 days of July 31, 1999.
(k) Number of shares includes 129,375 shares of common stock issuable upon
exercise of options exercisable within 60 days of July 31, 1999.
(l) Number of shares includes 85,750 shares of common stock issuable upon
exercise of options exercisable within 60 days of July 31, 1999.
(m) Number of shares includes 10,000 shares of common stock issuable upon
exercise of options exercisable within 60 days of July 31, 1999.
(n) Includes the shares beneficially owned by current directors and officers,
plus an additional 534,776 shares beneficially owned by other executive
officers. Of the shares beneficially owned by other executive officers,
490,506 shares were outstanding as of July 31, 1999 and 44,270 shares are
subject to options that are exercisable within 60 days of July 31, 1999.
54
DESCRIPTION OF CAPITAL STOCK
The following summarizes the material provisions of Andromedia's capital
stock. This summary, however, does not purport to be complete and is subject
to, and qualified in its entirety by, our certificate of incorporation and
bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part and by the provisions of
applicable law.
As of, July 31, 1999, there were 17,347,288 shares of common stock
outstanding, no par value, assuming the conversion of all outstanding shares of
preferred stock into shares of common stock. Upon closing of this offering,
150,000,000 shares of common stock and 7,500,000 shares of preferred stock will
be authorized.
Common Stock
The issued and outstanding shares of common stock are, and the shares of
common stock offered by this prospectus will be upon payment for the shares
validly issued, fully paid and nonassessable. The holders of outstanding shares
of common stock are entitled to receive dividends out of legally available
assets at a time and in amounts as our board may from time to time determine.
See "Dividend Policy." The shares of common stock are not convertible, and the
holders thereof have no preemptive or subscription rights to purchase any of
our securities. Upon our liquidation, dissolution or winding up, the holders of
common stock are entitled to receive pro rata our assets that are legally
available for distribution, after payment of all debts and other liabilities.
Each outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of our stockholders, including election of directors. There
is no cumulative voting in the election of directors.
Preferred Stock
Upon the closing of this offering, our certificate of incorporation will
provide that we may issue preferred stock in one or more series and that our
board has the authority, without further action by the stockholders, to fix the
designation, rights, preferences and powers thereof, including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than the
rights of the common stock. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that such
holders would receive dividend payments and payments upon liquidation. The
issuance of preferred stock could have the effect of decreasing the market
price of the common stock. The issuance of preferred stock may also have the
effect of delaying, deterring or preventing a change in control of Andromedia.
We have no present plans to issue any shares of preferred stock.
Warrants
We have outstanding warrants to purchase 30,000 shares of common stock at an
exercise price of $15.00 per share. We also have outstanding warrants to
purchase 96,667 shares of Series C preferred stock, 12,417 shares of Series D
preferred stock and 18,159 shares of Series E preferred stock, at exercise
prices ranging from $2.20 to $3.53 and expiration dates ranging from September
2002 to February 2009. Upon closing of this offering the preferred stock
warrants will become exercisable for an aggregate of 129,230 shares of common
stock.
Registration Rights
The holders of approximately 11,206,626 shares of common stock issuable upon
conversion of our preferred stock or their permitted transferees are entitled
to certain rights with respect to registration of their shares, or the
"registrable securities," under the Securities Act.
At any time after six months following the effective date of this offering,
we can be required to file a registration statement covering registrable
securities by the holders of at least 20% of the registrable securities then
outstanding, or any lesser percent if the reasonably anticipated aggregate
offering price to the public would exceed $2.0 million. In addition, six months
after this offering,
55
holders of registrable securities may require that we register their shares for
public resale on Form S-3 or any successor form, provided we are eligible to
use Form S-3 or any successor form and the reasonably anticipated aggregate
offering price to the public would exceed $2.0 million. Furthermore, in the
event we elect to register any of our shares of common stock or other
securities for purposes of effecting any public offering, the holders of
registrable securities are entitled to include their registrable securities in
the registration, subject however to our right to reduce the number of shares
proposed to be registered in view of market conditions. All of these rights
have been waived in connection with this offering. All expenses in connection
with any registration, other than underwriting discounts and commissions, will
be borne by us. Registration rights, other than the right to require us to
register shares on Form S-3 or any successor form, will terminate at such time
as our shares are publicly traded and the holder is entitled to sell all of its
shares in any three-month period under Rule 144 of the Securities Act. If our
stockholders with registration rights cause a large number of securities to be
registered and sold in the public market, those sales could have an adverse
effect on the market price for our common stock. If we were to initiate a
registration and include registrable securities because of the exercise of
registration rights, the inclusion of registrable securities could have an
adverse effect on our ability to raise capital.
Certain Anti-Takeover Effects of Provisions of Our Certificate of Incorporation
and Bylaws and of Delaware Law
General. Certain provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring,
control of Andromedia. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of our common stock.
These provisions of Delaware law and our certificate of incorporation and
bylaws may also have the effect of discouraging or preventing certain types of
transactions involving an actual or threatened change of control of Andromedia,
including unsolicited takeover attempts, even though such a transaction may
offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
Delaware Takeover Statute. Following consummation of this offering, we will
be subject to the "business combination" provisions of Section 203 of the
Delaware General Corporation Law. In general, those provisions prohibit a
publicly-held Delaware corporation from engaging in various "business
combination" transactions with any interested stockholder for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (a) persons who are directors
and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to the date the business combination is approved by the
board of directors and approved by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
stockholder. A "business combination" is defined to include mergers,
asset sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who (a)
owns 15% or more of the corporation's voting stock; (b) is an affiliate
or associate of the corporation and was an owner
56
of 15% or more of the corporation's outstanding voting stock within the
last 3 years; or (c) is an affiliate or associate of persons described in
(a) or (b).
The statute could prohibit or delay mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.
Certificate of Incorporation and Bylaws. Our certificate of incorporation
provides that any action to be taken by our stockholders must be effected at an
annual or special stockholder meeting and may not be taken by written consent.
Our bylaws provide that special meetings of our stockholders may be called by
our board, the chairman of our board or our President. Our bylaws also require
advance written notice by a stockholder of a proposal or director nomination
that such stockholder desires to present at an annual or special stockholders
meeting. These provisions will delay consideration of a stockholder proposal
until the next annual meeting unless a special meeting is called by our Board.
Our bylaws provide that the authorized number of directors may be changed by
an amendment to our bylaws adopted by our board or by our stockholders.
Vacancies on our board may be filled by a majority of directors in office,
although less than a quorum. Our certificate of incorporation provides for a
staggered board. Under a staggered board, each director is designated to one of
three categories. Each year the directors' positions in one of the three
categories are subject to election so that it would take three years to replace
the entire board, absent resignation or premature expiration of a director's
term, which may have the effect of deterring a hostile takeover or delaying or
preventing changes in control or management of Andromedia.
Transfer Agent and Registrar
has been appointed as transfer agent and registrar for our common stock.
Listing
Application for listing of our common stock on the Nasdaq National Market
under the symbol "ANDO" has been made.
57
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and we
cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market following this offering could
adversely affect market prices prevailing from time to time and could impair
our ability to raise capital through sale of our equity securities. As
described below, no shares currently outstanding will be available for sale
immediately after this offering because of certain contractual restrictions on
resale. Sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares of
common stock based upon shares outstanding as of July 31, 1999, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants prior to completion of this offering. Of these
shares, the shares sold in this offering will be freely tradable without
restriction under the Securities Act except for any shares purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. The
remaining shares of common stock held by existing stockholders are
"restricted shares" as that term is defined in Rule 144. All such restricted
shares are subject to lock-up agreements providing that, with certain limited
exceptions, the stockholder will not offer, sell, contract to sell or otherwise
dispose of any common stock or any securities that are convertible into common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette. As a result of these
lock-up agreements, notwithstanding possible earlier eligibility for sale under
the provisions of Rules 144, 144(k) and 701, none of these shares will be
resellable until 181 days after the date of this prospectus. Beginning 181 days
after the date of this prospectus, approximately restricted shares will
be eligible for sale in the public market, all of which are subject to volume
limitations under Rule 144, except shares eligible for sale under Rule
144(k) and shares eligible for sale under Rule 701. Of those restricted
shares not eligible for sale beginning 181 days after the date of this
prospectus, restricted shares will be eligible for sale on , all of
which are subject to volume limitations under Rule 144. In addition, as of July
31, 1999, there were outstanding options and warrants to purchase an aggregate
of shares of common stock, some of which may be exercised prior to this
offering. All such options and warrants are subject to lock-up restrictions.
Donaldson, Lufkin & Jenrette may, in their sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the holding period of any prior owner
except an affiliate would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of Andromedia at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
58
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to Andromedia who purchased shares under a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell such shares in reliance on Rule
144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144. All holders of Rule 701
shares are required to wait until 90 days after the date of this prospectus
before selling such shares. However, all Rule 701 shares are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after
the offering upon obtaining the prior written consent of Donaldson, Lufkin &
Jenrette.
Following the effectiveness of this offering, we will file a registration
statement on Form S-8 registering shares of common stock subject to
outstanding options or reserved for future issuance under our stock plans. As
of July 31, 1999, options to purchase a total of shares were outstanding
and shares were reserved for future issuance under our stock plans.
Common stock issued upon exercise of outstanding vested options or issued under
our purchase plan, other than common stock issued to our affiliates, is
available for immediate resale in the open market.
Also beginning six months after the date of this offering, holders of
restricted shares will be entitled to certain registration rights for sale in
the public market. See "Description of Capital Stock-Registration Rights."
Registration of such shares under the Securities Act would result in such
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness
of such registration.
59
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation, SG Cowen Securities
Corporation, C.E. Unterberg, Towbin and Wit Capital Corporation, have severally
agreed to purchase from Andromedia the respective number of shares of common
stock set forth opposite their names below:
Number
of
Shares
Underwriters: ------
Donaldson, Lufkin & Jenrette Securities Corporation..................
SG Cowen Securities Corporation......................................
C.E. Unterberg, Towbin...............................................
Wit Capital Corporation..............................................
DLJdirect Inc........................................................
----
Total..............................................................
====
The underwriting agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares of common stock in the offering
are subject to approval by their counsel of legal matters concerning the
offering and to condition precedents that must be satisfied by Andromedia. The
underwriters are obligated to purchase and accept delivery of all of the shares
of common stock in the offering, other than those shares covered by the over-
allotment option described below, if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives of the underwriters at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
An electronic prospectus will be available on the Web sites maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and Wit Capital Corporation. In addition, all dealers purchasing
shares from Wit Capital in this offering have agreed to make a prospectus in
electronic format available on Web sites maintained by each of these dealers.
Wit Capital, a member of the National Association of Securities Dealers, Inc.,
will participate in this offering as one of the underwriters. Other than the
prospectus in electronic format, the information on these Web sites relating to
the offering is not part of this prospectus and has not been approved or
endorsed by Andromedia or the underwriters, and should not be relied on by
prospective investors.
Andromedia has granted to the underwriters an option, exercisable for 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise the option solely to cover over-allotments, if any,
made in connection with the offering. To the extent the underwriter exercise
the option, each underwriter will become obligated, subject to conditions in
the underwriting agreement, to purchase its pro rata portion of such additional
shares based on the underwriter's percentage underwriting commitment as
indicated in the above table.
60
The following table sets forth the compensation payable to the underwriters
by us in connection with the offering:
Total
Discounts and -----------------------------
Commissions Additional Without With
per Share Compensation Over-Allotment Over-Allotment
------------- ------------ -------------- --------------
Underwriting discounts
and commissions paid by
us.....................
Expenses payable by us..
Certain entities affiliated with C.E. Unterberg Towbin, one of the
underwriters in this offering, are stockholders of Andromedia. In March 1999,
these affiliates acquired an aggregate of 283,045 shares of our Series E
Preferred Stock. All shares of Series E Preferred Stock will automatically
convert to common stock at the time of this offering. A managing director at
Wit Capital Corporation holds a non-qualified stock option to purchase 10,000
shares of our common stock.
Andromedia has agreed to indemnify the underwriters against liabilities which
may arise in connection with the offering, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make.
Andromedia and each of its executive officers, directors, stockholders and
option holders have agreed not to for a period of 180 days from the date of
this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock, or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash, or
otherwise.
Donaldson, Lufkin & Jenrette Securities Corporation may choose to release
some of these shares from such restrictions prior to the expiration of the 180-
day period lock-up period, although it has no current intention of doing so.
In addition, during such 180-day period, Andromedia has also agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and stockholders of Andromedia have agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered will be determined by negotiation among Andromedia and the
underwriters. The factors to be considered in determining the initial public
offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
61
. the recent market prices of securities of generally comparable companies;
and
. the general condition of the securities markets at the time of the
offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered in any jurisdiction where action for that purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any shares of common stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
LEGAL MATTERS
The validity of the common stock in the offering will be passed upon for
Andromedia by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the
underwriters by Latham & Watkins, San Francisco, California. As of the date of
this prospectus, certain investment partnerships composed of certain current
and former members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, as well as certain individual attorneys of
this firm, beneficially own an aggregate of 49,134 shares of our common stock
on an as-converted to common stock basis.
62
EXPERTS
The financial statements of Andromedia, Inc. as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 included
in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of LikeMinds, Inc. for the year ended December 31,
1997 and for the period from January 1, 1998 to October 8, 1998 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the common stock offered hereby. This prospectus, which constitutes
a part of the registration statement, does not contain all of the information
set forth in the registration statement and the exhibits thereto. Statements
contained in this prospectus as to the contents of any contract or other
document that is filed as an exhibit to the registration statement are not
necessarily complete and each such statement is qualified in all respects by
reference to the full text of such contract or document. For further
information with respect to Andromedia and the common stock, reference is
hereby made to the registration statement and the exhibits thereto, which may
be inspected and copied at the principal office of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies of all or any part thereof may be obtained at prescribed rates from the
SEC's Public Reference Section at such addresses. Also, the SEC maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC.
Upon completion of this offering, Andromedia will become subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, will file periodic reports, proxy and information
statements and other information with the SEC. Such periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public reference facilities and Web site
of the SEC referred to above.
63
INDEX TO FINANCIAL STATEMENTS
Page
----
Andromedia, Inc.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
LikeMinds, Inc.
Report of Independent Accountants........................................ F-23
Statements of Operations................................................. F-24
Statements of Shareholders' Equity (Deficit)............................. F-25
Statements of Cash Flows................................................. F-26
Notes to Financial Statements............................................ F-27
Unaudited Pro Forma Combined Statement of Operations
Unaudited Pro Forma Combined Statement of Operations..................... F-32
Notes to Unaudited Pro Forma Combined Statement of Operations............ F-34
F-1
The reincorporation described in Note 1 to the financial statements has not
been consummated as of August 25, 1999. When the reincorporation has been
consummated, we will be in a position to furnish the following report:
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and Stockholders of
Andromedia, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Andromedia, Inc. at December 31, 1997 and 1998, and the consolidated results of
their operations and their cash flows for the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
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
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
August 10, 1999, except for Note 1
which is as of September , 1999"
F-2
ANDROMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
As of Pro forma
December 31, As of Stockholders'
----------------- June 30, Equity as of
1997 1998 1999 June 30, 1999
------- -------- ----------- -------------
(Unaudited) (Note 11)
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents.................... $ 696 $ 1,881 $ 9,075
Accounts receivable, net..................... 229 1,113 2,776
Prepaid expenses and other current assets.... 132 160 685
------- -------- --------
Total current assets........................ 1,057 3,154 12,536
Property and equipment, net.................. 332 1,399 2,255
Intangible assets, net....................... -- 2,242 1,746
------- -------- --------
$ 1,389 $ 6,795 $ 16,537
======= ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable............................. $ 184 $ 561 $ 366
Accrued liabilities.......................... 187 729 1,762
Deferred revenue............................. 70 745 2,273
Current portion of debt and lease
obligations................................. 67 290 743
------- -------- --------
Total current liabilities................... 508 2,325 5,144
------- -------- --------
Long-term debt and lease obligations less
current..................................... 84 390 255
------- -------- --------
Commitments (Note 5)
Mandatorily Redeemable Convertible Preferred
Stock: 9,365,285 shares authorized;
1,627,269, 4,928,689 and 9,156,210
(unaudited) shares outstanding actual
(aggregate liquidation preference of
$28,516, unaudited) and none outstanding in
pro forma (unaudited)....................... 3,548 14,838 55,141
------- -------- --------
Stockholders' Equity (Deficit):
Convertible Preferred Stock: $0.001 par
value; 744,910 shares authorized, issued and
outstanding (aggregate liquidation
preference of $2,130) actual; 7,500,000
shares authorized, none issued and
outstanding pro forma (unaudited)........... 1 1 1 $ --
Common Stock: $0.001 par value; 20,000,000
shares authorized actual; 4,000,000,
5,942,125 and 6,166,886 (unaudited) shares
issued actual; 150,000,000 shares
authorized, 17,343,552 shares issued and
outstanding pro forma (unaudited)........... 4 6 6 17
Paid-in-capital.............................. 2,220 5,769 7,576 36,276
Deferred stock compensation.................. -- (651) (2,015) (2,015)
Preferred Stock accretion.................... -- (1,351) (26,431) --
Accumulated deficit.......................... (4,976) (14,532) (23,140) (23,140)
------- -------- -------- --------
Total stockholders' equity (deficit)........ (2,751) (10,758) (44,003) $ 11,138
------- -------- -------- ========
$ 1,389 $ 6,795 $ 16,537
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ANDROMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- --------
(Unaudited)
Revenues:
Licenses...................... $ -- $ 413 $ 1,153 $ 461 $ 1,715
Services and maintenance...... -- 36 816 196 907
------- ------- -------- ------- --------
Total revenues............... -- 449 1,969 657 2,622
------- ------- -------- ------- --------
Cost of Revenues:
Licenses...................... -- 25 69 20 129
Services and maintenance...... -- 18 946 213 1,903
------- ------- -------- ------- --------
Total cost of revenues....... -- 43 1,015 233 2,032
------- ------- -------- ------- --------
Gross profit................... -- 406 954 424 590
Operating Expenses:
Sales and marketing........... 387 1,512 5,199 1,837 4,610
Research and development...... 884 1,446 2,337 1,021 1,731
General and administrative.... 365 857 2,106 970 1,950
Amortization of acquired
intangible assets............ -- -- 247 -- 496
Non-cash stock compensation... -- -- 287 45 429
Write off of acquired in
process technology........... -- -- 455 -- --
------- ------- -------- ------- --------
Total operating expenses..... 1,636 3,815 10,631 3,873 9,216
------- ------- -------- ------- --------
Loss from operations........... (1,636) (3,409) (9,677) (3,449) (8,626)
Interest income (expense),
net........................... 10 59 121 (5) 18
------- ------- -------- ------- --------
Net loss....................... (1,626) (3,350) (9,556) (3,454) (8,608)
Preferred stock accretion...... -- -- (1,351) (1,351) (25,080)
------- ------- -------- ------- --------
Net loss attributable to common
stockholders.................. $(1,626) $(3,350) $(10,907) $(4,805) $(33,688)
======= ======= ======== ======= ========
Net Loss Per Share:
Basic and diluted............. $ (0.49) $ (0.95) $ (2.66) $ (1.30) $ (6.01)
======= ======= ======== ======= ========
Weighted average shares....... 3,344 3,531 4,105 3,684 5,602
Pro Forma Net Loss Per Share
(Unaudited):
Basic and diluted............. $ (0.95) $ (0.59)
======== ========
Weighted average shares....... 10,096 14,665
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ANDROMEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Convertible
Preferred
Stock Common Stock Deferred Preferred
-------------- ---------------- Paid-in Stock Stock Accumulated
Shares Amount Shares Amount Capital Compensation Accretion Deficit Total
------- ------ --------- ------ ------- ------------ --------- ----------- --------
Issuance of Common Stock
to founders ........... -- $ -- 4,000,000 $ 4 $ 105 $ -- $ -- $ -- $ 109
Issuance of Series A
Convertible Preferred
Stock net of issuance
costs.................. 248,120 -- -- -- 1,143 -- -- -- 1,143
Issuance of Series B
Convertible Preferred
Stock net of issuance
costs.................. 365,211 1 -- -- 681 -- -- -- 682
Net loss................ -- -- -- -- -- (1,626) (1,626)
------- ----- --------- ---- ------ ------- -------- -------- --------
Balance at December 31,
1996................... 613,331 1 4,000,000 4 1,929 -- -- (1,626) 308
Issuance of Series B
Convertible Preferred
Stock net of issuance
costs.................. 131,579 -- -- -- 245 -- -- -- 245
Issuance of Common Stock
Options................ -- -- -- -- 46 -- -- -- 46
Net loss................ -- -- -- -- -- -- (3,350) (3,350)
------- ----- --------- ---- ------ ------- -------- -------- --------
Balance at December 31,
1997................... 744,910 1 4,000,000 4 2,220 -- -- (4,976) (2,751)
Issuance of Common Stock
upon acquisition of
LikeMinds, Inc......... -- -- 1,856,672 2 2,598 -- -- -- 2,600
Deferred stock
compensation........... -- -- -- -- 938 (938) -- -- --
Amortization of deferred
stock compensation..... -- -- -- -- 287 -- -- 287
Exercise of stock
options................ -- -- 85,453 -- 16 -- -- -- 16
Foreign translation
adjustment............. -- -- -- -- (3) -- -- -- (3)
Preferred Stock
accretion.............. -- -- -- -- -- -- (1,351) -- (1,351)
Net loss................ -- -- -- -- -- -- -- (9,556) (9,556)
------- ----- --------- ---- ------ ------- -------- -------- --------
Balance at December 31,
1998................... 744,910 1 5,942,125 6 5,769 (651) (1,351) (14,532) (10,758)
Deferred stock
compensation
(unaudited)............ -- 1,793 (1,793) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- 429 -- -- 429
Exercise of stock
options (unaudited).... -- -- 224,761 -- 45 -- -- -- 45
Foreign translation
adjustment
(unaudited)............ -- -- -- -- (31) -- -- -- (31)
Preferred Stock
accretion (unaudited).. -- -- -- -- -- -- (25,080) -- (25,080)
Net loss (unaudited).... -- -- -- -- -- -- -- (8,608) (8,608)
------- ----- --------- ---- ------ ------- -------- -------- --------
Balance at June 30, 1999
(unaudited)............ 744,910 $ 1 6,166,886 $ 6 $7,576 $(2,015) $(26,431) $(23,140) $(44,003)
======= ===== ========= ==== ====== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ANDROMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
Years Ended December 31, June 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(Unaudited)
Cash Flows from Operating
Activities:
Net loss.................... $ (1,626) $ (3,350) $ (9,556) $ (3,454) $ (8,608)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 36 106 547 91 800
Acquired in-process
technology................ -- -- 455 -- --
Non-cash stock
compensation.............. -- -- 287 45 429
Other...................... 85 46 8 11 29
Changes in assets and
liabilities, excluding
effect of acquisition:
Accounts receivable, net... -- (229) (865) (406) (1,663)
Prepaid expenses and other
current assets............ (51) (81) (28) (21) (225)
Other assets............... (62) 62 -- -- --
Accounts payable........... 200 (16) 76 248 (195)
Accrued liabilities........ 102 85 464 142 1,033
Deferred revenue........... -- 70 675 367 1,528
-------- -------- -------- -------- --------
Net cash used in operating
activities............... (1,316) (3,307) (7,937) (2,977) (6,872)
-------- -------- -------- -------- --------
Cash Flows from Investing
Activities:
Purchase of property and
equipment.................. (135) (105) (1,072) (349) (1,160)
-------- -------- -------- -------- --------
Net cash used in investing
activities............... (135) (105) (1,072) (349) (1,160)
-------- -------- -------- -------- --------
Cash Flows from Financing
Activities:
Proceeds from issuance of
Mandatorily Redeemable
Convertible Preferred
Stock, net................. -- 3,548 9,927 9,927 14,863
Proceeds from issuance of
Convertible Preferred
Stock, net................. 1,623 245 -- -- --
Proceeds from issuance of
Common Stock............... 18 -- 16 4 45
Proceeds from borrowings.... 202 -- 425 37 453
Principal payments on
borrowings................. (9) (68) (174) (37) (135)
-------- -------- -------- -------- --------
Net cash provided by
financing activities..... 1,834 3,725 10,194 9,931 15,226
-------- -------- -------- -------- --------
Net increase in cash and
cash equivalents........... 383 313 1,185 6,605 7,194
Cash and cash equivalents at
beginning of period........ -- 383 696 696 1,881
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period.............. $ 383 $ 696 $ 1,881 $ 7,301 $ 9,075
======== ======== ======== ======== ========
Supplemental Disclosure of
Cash Flow Information:
Cash paid for interest..... $ 1 $ 11 $ 43 $ 20 $ 43
Non-cash Financing and
Investing Transactions:
Shares of Common Stock
issued for acquisition of
LikeMinds.................. -- -- 2,600 -- --
Property and equipment
acquired under capital
leases..................... 27 201 279 84 --
Conversion of Convertible
note to Series A
Convertible Preferred
Stock...................... 202 -- -- -- --
Convertible Preferred Stock
Warrants issued............ -- -- 12 12 360
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company And Summary Of Significant Accounting Policies
The Company
Andromedia, Inc. (the "Company" or "Andromedia"), was incorporated in
California on January 10, 1996. The Company provides a comprehensive e-
marketing solution that combines advanced Web site monitoring, personalization
and analysis capabilities. The Company's Solution monitors and analyzes Web
site activity and visitor behavior data and, in real-time helps its customers
improve the effectiveness of their Internet marketing and selling efforts.
On August 18, 1999, the Company's Board of Directors authorized, subject to
stockholders' approval, reincorporation of the Company in Delaware. The Board
also authorized an increase in authorized shares of Common Stock to 150,000,000
and a decrease in authorized shares of preferred stock to 7,500,000, to be
effective upon the closing of the offering contemplated by this Prospectus (the
"Offering"). Share data in the accompanying financial statements has been
retroactively adjusted to reflect the proposed reincorporation, which is
expected to be completed prior to the Offering becoming effective.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in the consolidation process.
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
The Company's revenues are derived from licenses for its software products
and related services, which include maintenance, training and consulting.
Effective January 1, 1998, the Company adopted the provisions of the American
Institute of Certified Public Accountants (AICPA) Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition," as amended by Statement of
Position 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-
2."
For agreements which do not require significant installation and
configuration services, license revenues are recognized upon shipment of the
product if no significant vendor obligations remain and collection of the
resulting receivable is probable. Maintenance revenues consist of ongoing
support and product enhancements and are recognized ratably over the
maintenance period, which is typically one year. Revenues from consulting and
training are recognized as the services are performed. For the multiple-element
agreements, the revenue is allocated to each individual element based on the
vendor-specific objective evidence of its fair value.
F-7
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's software licensing agreements may include more extensive
configuration, modification or customization services. Under such
circumstances, the combined license and service revenues are recognized under
contract accounting with labor days as the basis for determining percentage
complete. When reliable estimates of costs to be incurred are available,
revenue is recognized using the percentage of completion method based upon the
level of effort required to complete the project. The completed contract method
is used where reliable estimates to complete are not feasible.
Payments received in advance of revenue recognition are recorded as deferred
revenue. Revenue recognized in advance of billings is recorded as unbilled
receivable
Prior to the adoption of SOP 97-2, license revenue was recognized upon
shipment of products to customers, if no significant vendor obligations
remained and collection of the resulting receivable was probable.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1998 and 1997, approximately $200,000 and $275,000 of certificates of
deposits, the fair value of which approximate cost, are included in cash and
cash equivalents, respectively. The Company deposits cash and cash equivalents
with high credit quality financial institutions.
Concentration of credit risk and certain risks
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
The Company's accounts receivable are derived from revenue earned from
customers located primarily in the United States. The Company performs credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable.
At December 31, 1997, one customer accounted for 20% of total accounts
receivable. At December 31, 1998, two customers accounted for 28% and 11% of
total accounts receivable.
The market in which the Company competes is characterized by changing
customer needs, frequent new software product introductions and rapidly
evolving industry standards. Significant technological change could adversely
affect the Company's operating results.
Capitalized software development costs
Software development costs are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to
establishment of technological feasibility are capitalized, if material. To
date, the period between achieving technological feasibility, which the Company
has defined as the establishment of a working model and the general
availability of such software has been short, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
F-8
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally 3
years, or the lease term, if shorter for leased assets.
Intangible assets
Intangible assets include goodwill, patent and workforce associated with
business acquisitions and are being amortized over their weighted average
useful life of 2.5 years.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
compensation expense is based on the difference, if any, between the fair value
of the Company's stock and the exercise price of the option on the measurement
date, which is typically the date of grant.
The Company accounts for options granted to non-employees under SFAS No. 123.
Under SFAS No. 123, options are recorded at their fair value on the measurement
date, which is typically the date of grant.
Preferred stock accretion
Shares of Series C, D and E Mandatorily Redeemable Convertible Preferred
Stock are redeemable at the higher of original issuance price or fair market
value at or any time after February 1, 2004. Accordingly, the Company has
valued the Mandatorily Redeemable Convertible Preferred Stock at its fair value
at the end of each period presented, with the periodic differences recorded as
preferred stock accretion. The Company recorded preferred stock accretion of
$1,351,000 and $25,080,000 (unaudited) for the year ended December 31, 1998 and
the six months ended June 30, 1999 based on $3.03 and $6.00 (unaudited) per
share being the estimated fair market values of shares of such stock at
December 31, 1998 and June 30, 1999, respectively.
Historical and pro forma net loss per share
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Options, warrants and
preferred stock were not included in the computation of diluted net loss per
share because the effect would be antidilutive.
Pro forma net loss per share has been computed assuming the conversion of all
outstanding shares of convertible preferred stock into shares of common stock
which will occur upon the closing of the Offering.
F-9
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of historical and pro forma
basic and diluted net loss per share for the periods indicated:
Six Months Ended
Years Ended December 31, June 30,
----------------------------------------- -----------------
1996 1997 1998 1998 1999
------------ ------------ ------------- ------- --------
(In thousands, except per share data) (unaudited)
Historical:
Numerator:
Net loss.............. $ (1,626) $ (3,350) $ (9,556) $(3,454) $ (8,608)
Accretion of Series C
and D Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- (1,351) (1,351) (25,080)
------------ ------------ ------------- ------- --------
Net loss attributable
to common
stockholders........ $ (1,626) $ (3,350) $ (10,907) $(4,805) $(33,688)
------------ ------------ ------------- ------- --------
Denominator:
Weighted average
shares............... 4,000 4,000 4,475 4,012 6,096
Weighted average
unvested common
shares subject to
repurchase........... (656) (469) (370) (328) (494)
------------ ------------ ------------- ------- --------
Total weighted
average shares...... 3,344 3,531 4,105 3,684 5,602
------------ ------------ ------------- ------- --------
Net loss per share:.... -- --
Basic and diluted..... $ (0.49) $ (0.95) $ (2.66) $ (1.30) $ (6.01)
============ ============ ============= ======= ========
Pro forma:
Numerator:
Net loss.............. $ (9,556) $ (8,608)
============= ========
Denominator:
Weighted average
common shares, basic
and diluted.......... 4,105 5,602
Conversion of
Convertible Preferred
Stock................ 5,991 9,063
------------- --------
Total weighted
average shares...... 10,096 14,665
============= ========
Pro forma net loss per
share:
Basic and diluted.... $ (0.95) $ (0.59)
============= ========
Comprehensive income (loss)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components and is
effective for periods beginning after December 15, 1997. The Company adopted
this statement as of the first quarter of 1998. Comprehensive loss approximated
net loss for all periods presented.
F-10
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign currency translation
Financial statements of the Company's foreign subsidiary are translated into
U.S. dollars at current rates, except that revenues, costs and expenses are
translated at weighted-average rates in effect during the year. Translation
adjustments for the periods presented were not significant.
Income taxes
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax basis of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future tax benefits of utilizing net
operating losses and research and development credit carryforwards. A valuation
allowance is provided against deferred tax assets if it is more likely than not
that they will not be realized.
Advertising expense
The Company expenses all advertising expenses as incurred. The Company's
advertising expenses were none in 1996 and $587,000 and $991,000 for 1997 and
1998, respectively.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the Financial Accounting Standards Board
deferred the effective date of SFAS 133 until the first fiscal quarter ending
June 30, 2000. The Company will adopt SFAS 133 in its quarter ending June 30,
2000 and does not expect such adoption to have an impact on the Company's
results of operations, financial position or cash flows.
In December 1998, the AICPA, issued Statement of Position 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, "Software Revenue Recognition,' with respect to
certain transactions." SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting, and (2) VSOE of fair value does not exist for
one or more of the delivered elements, and (3) all revenue recognition criteria
of SOP 97-2 has been met. SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. The Company does not expect SOP 98-9 to have a
material effect on its financial position, results of operations or cash flows.
Unaudited interim financial information
The accompanying consolidated balance sheet as of June 30, 1999, the
consolidated statements of operations and of cash flows for the six months
ended June 30, 1999 and 1998 and the consolidated statement of stockholders
deficit for the six months ended June 30, 1999 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary
F-11
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the fair presentation of the results for the interim periods. The data
disclosed in the consolidated financial statements as of such dates and for
such periods are unaudited. Results of the six months ended June 30, 1999 are
not necessarily indicative of results of the entire year.
2. Balance Sheet Components (in thousands)
December 31, June 30,
1997 1998 1999
----- ------ -----------
(unaudited)
Accounts receivable, net:
Accounts receivable................................. $ 250 $1,212 $3,176
Less: Allowance for doubtful accounts............... (21) (99) (400)
----- ------ ------
$ 229 $1,113 $2,776
===== ====== ======
Property and equipment, net:
Computer equipment.................................. $ 427 $1,497 $2,608
Furniture and fixtures.............................. 24 34 40
Leasehold improvements.............................. 23 309 352
----- ------ ------
474 1,840 3,000
Less: Accumulated depreciation and amortization..... (142) (441) (745)
----- ------ ------
$ 332 $1,399 $2,255
===== ====== ======
Intangible assets, net:
Patent.............................................. $ -- $ 133 $ 133
Assembled workforce................................. -- 895 895
Goodwill............................................ -- 1,461 1,461
----- ------ ------
-- 2,489 2,489
Less: Accumulated amortization...................... -- (247) (743)
----- ------ ------
$ -- $2,242 $1,746
===== ====== ======
Accrued liabilities:
Payroll and related expenses........................ $ 167 $ 495 $1,117
Other............................................... 20 234 645
----- ------ ------
$ 187 $ 729 $1,762
===== ====== ======
Property and equipment includes $228,000 and $507,000 of computer equipment
under capital leases at December 31, 1997 and 1998, respectively. Accumulated
amortization of assets under capital leases totaled $45,000 and $155,000 at
December 31, 1997 and 1998, respectively.
3. Acquisition
On October 8, 1998, the Company acquired all the outstanding shares of
LikeMinds, Inc. ("LikeMinds") for 1,856,672 shares of common stock. The
transaction was accounted for under the purchase method. The shares of common
stock issued in connection with the LikeMinds acquisition were valued at $1.40
per share based on an independent appraisal obtained by the Company. The total
purchase price of approximately $2,980,000 (including $380,000 of liabilities
acquired and merger related expenses) was assigned, based on the independent
appraisal, to the fair value of the assets acquired including $36,000 to
tangible assets acquired, $455,000 to in-process research and development,
$1,028,000 to other identified intangibles and the remainder of $1,461,000 to
goodwill. The in-process research and development was expensed at the
acquisition date. Goodwill and other
F-12
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
identified acquired intangibles are being amortized over their weighted average
life of approximately 2.5 years. The Company's consolidated financial statement
include the results of operations of LikeMinds from the date of acquisition.
The value assigned to acquired in-process technology was determined by
identifying research projects in areas for which technological feasibility had
not been established as of the acquisition date. These include projects
(primarily major version upgrades) for the LikeMinds product line. The value
was determined by estimating the revenue contribution of each of these products
and the amount of the revenues attributable to the core/developed technology
and the in-process technology. The net cash flows were then discounted
utilizing a weighted average cost of capital of 26.5%. This discount rate takes
into consideration the inherent uncertainties surrounding the successful
development of the in-process research and development, the expected
profitability levels of such technology and the uncertainty of technological
advances which could potentially impact the estimates described above. The
completion level of acquired in process technology was estimated based on the
time and related costs incurred in development before the close of the
acquisition in relation to aggregate estimated costs of completing the project.
The average percentage of completion of the projects was 59% at the date of the
acquisition. Revenues are projected to be generated in 1999 for the versions in
development at the acquisition date. If these projects are not successfully
developed, future revenues and profitability of the Company may be adversely
affected. Additionally, the value of other intangible assets acquired may
become impaired.
The following unaudited pro forma consolidated financial information reflects
the results of operations for the years ended December 31, 1997 and 1998, as if
the acquisition had occurred on January 1, 1997 and 1998 and after giving
effect to purchase accounting adjustments but excluding the impact of write off
of acquired in-process technology. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what
operating results would have been had the acquisition actually taken place on
January 1, 1998 and may not be indicative of future operating results (in
thousands, except per share data).
Years Ended
December 31,
-----------------
1997 1998
------- --------
(Unaudited)
Revenues................................................. $ 697 $ 2,537
Net loss................................................. (4,980) (10,111)
Net loss attributable to common stockholders............. (4,980) (11,462)
Net loss per share (basic and diluted)................... $ (0.94) $ (2.10)
Weighted average shares (basic and diluted).............. 5,270 5,468
4. Borrowings
Line of credit
In September 1997, the Company entered into a revolving line of credit
agreement with a bank which provided for borrowings of up to $500,000. In
conjunction with this line of credit, the Company issued warrants for 6,667
shares of Series C Convertible Preferred Stock. The line of credit expired in
December 1998.
In February 1999, the Company entered into a revolving accounts receivable
based line of credit agreement with a bank which provides for borrowings of up
to $2,000,000. The line of credit requires compliance with certain financial
tests, prohibits payment of dividends, charges interest at the bank's prime
rate and expires in February 2000. Borrowings are collateralized by all of the
assets of the Company.
F-13
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 1999, the Company had one letter of credit of $100,000
outstanding under this line (unaudited).
Equipment line of credit
The Company has a term loan outstanding which requires monthly payments, is
collateralized by all the assets of the Company and bears interest at the
bank's prime rate plus 0.5%. As of December 31, 1998, outstanding borrowings
under this loan aggregated $411,000.
The loan requires the Company to meet certain financial tests and to comply
with certain other covenants. The Company was in compliance with such covenants
at December 31, 1998 and June 30, 1999 (unaudited).
Future principal payments under the loan as of December 31 ,1998 are as
follows (in thousands):
Year Ending
December 31,
1999.................................................................... $170
2000.................................................................... 170
2001.................................................................... 71
----
$411
====
In February 1999, the Company entered into an equipment financing line with a
bank which provides for borrowings of up to $1,000,000. The equipment loan is
repayable in monthly installments through August 2002 and February 2003 and
bears interest at the bank's prime rate plus 0.5%.
Bridge loan agreement
In February 1999, the Company entered into a bridge loan agreement (the "1999
Bridge Loan") with a bank to borrow up to $2,400,000. The loan was due at the
earlier of May 31, 1999 or the receipt of the Series E Preferred Stock
financing. In February 1999, the Company borrowed $1,003,000 against the line.
Approximately $550,000 of principal amount, plus accrued interest, was
subsequently repaid in March 1999 and the remaining $453,000 of loan balance
was rolled into the aforementioned February 1999 equipment line of credit.
5. Commitments
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through December 2002. Rent
expense for the years ended December 31, 1996, 1997 and 1998 was $38,000,
$60,000 and $230,000, respectively.
In February 1998, the Company entered into a new office lease agreement for
its San Francisco facility which expires in July 2003. The Company has the
right to request a five year extension at the end of the original lease term.
As of December 31, 1998, the Company had provided a $100,000 of letter of
credit to the landlord, as security for faithful performance of the lease. The
balance of the letter of credit will decline by $20,000 each year.
F-14
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1998 were as follows:
Capital Operating
Years Ended Leases Leases
December 31, ------- ---------
(In thousands)
1999....................................................... $ 137 $ 406
2000....................................................... 99 330
2001....................................................... 57 220
2002....................................................... -- 225
2003....................................................... -- 125
----- ------
Total minimum lease payments............................... 293 $1,306
======
Less: amount representing interest......................... (24)
-----
Present value of capital lease obligations................. 269
Less: Current portion...................................... (120)
-----
Long-term portion of capital lease obligations............. $ 149
=====
6. Mandatorily Redeemable Convertible Preferred Stock and Convertible Preferred
Stock
Mandatorily Redeemable Convertible Preferred Stock consists of the following
(in thousands, except share data):
Shares
Outstanding Amount
----------- -------
Issuance of Series C Preferred Stock................... 1,627,269 $ 3,548
--------- -------
Balance at December 31, 1997........................... 1,627,269 3,548
Issuance of Series D Preferred Stock................... 3,301,420 9,927
Issuance of Series D Preferred Stock Warrants.......... -- 12
Preferred Stock accretion.............................. -- 1,351
--------- -------
Balance at December 31, 1998........................... 4,928,689 14,838
Issuance of Series E Preferred Stock (unaudited)....... 4,227,521 14,863
Issuance of Series C and E Preferred Stock Warrants
(unaudited)........................................... -- 360
Preferred Stock accretion (unaudited).................. -- 25,080
--------- -------
Balance at June 30, 1999 (unaudited)................... 9,156,210 $55,141
========= =======
The Company has 248,120 shares of Series A Convertible Preferred Stock and
496,790 shares of Series B Convertible Preferred Stock authorized, issued and
outstanding at December 31, 1997 and 1998.
The holders of Mandatorily Redeemable Convertible Preferred Stock and
Convertible Preferred Stock have various rights and preferences as follows:
Redemption
Upon written notice of at least a majority of the holders of Series C, Series
D or Series E Convertible Preferred Stock, at any time subsequent to February
1, 2004, the Company must redeem a specified percentage of Series C, D and E
Convertible Preferred Stock at a price equal to the greater of (i) $2.20
(Series C), $3.029 (Series D) and $3.533 (Series E) per share, respectively,
plus all declared
F-15
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
but unpaid dividends on such shares or (ii) the per share fair market value as
determined by mutual agreement between a majority of the holders of the
applicable series of redeemable preferred and a majority of the Board of
Directors.
Voting
Each share of Series A, B, C, D and E Convertible Preferred Stock has voting
rights equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.
As long as 300,000 shares of Series C Convertible Preferred Stock are
outstanding, the holders of the shares of such series voting together as a
separate series, are entitled to elect one member of the Board of Directors. So
long as there remain outstanding 540,000 shares of Series D Convertible
Preferred Stock, the holders of the Series D Convertible Preferred Stock,
voting together as a separate series, shall be entitled to elect two members of
the Board of Directors. So long as there remain outstanding 690,000 shares of
Series E Convertible Preferred Stock, the holders of Series E Convertible
Preferred Stock voting together as a separate series, shall be entitled to
elect one member of Board of Directors. The remaining directors shall be
elected by the holders of Common and Preferred Stock voting as a single class.
The Company shall not, without first obtaining the affirmative vote or
written consent of the holders of not less than (1) a majority of the
outstanding shares of Series C Convertible Preferred Stock so long as there
remain outstanding 300,000 shares of Series C Convertible Preferred Stock,
(2) 67% of outstanding shares of the Series D Convertible Preferred Stock so
long as there remain outstanding 540,000 shares of Series D Convertible
Preferred Stock and (3) 67% of outstanding shares of Series E Convertible
Preferred Stock so long as there remain outstanding 690,000 shares of Series E
Convertible Preferred Stock: enter into any merger, consolidation,
reorganization, recapitalization or sale of assets transaction or series of
transactions which results in the shareholders of the Company not owning a
majority of the outstanding shares of the surviving corporation; enter into or
otherwise become a party to any agreement whereby any shareholder or
shareholders of the Company shall transfer capital stock of the Company to an
independent third party or a group of independent third parties pursuant to
which such parties acquire capital stock of the Company possessing the voting
power to elect a majority of the Company's board of directors; declare any
dividends or distributions on any shares of capital stock of the Company, but
this restriction shall not apply to the repurchase of shares of Common Stock
pursuant to repurchase agreements or prevent the Company from entering into an
agreement, directly or indirectly with officers, employees, stockholders or
directors of the Company, unless approved by a majority of the Company's
disinterested directors on the Board of Directors; enter into any financial
commitments in excess of $500,000; dismiss or hire the Company's Chief
Financial Officer or other equivalent senior level financial officer; or
approve the annual budget of the Company.
Dividends
Holders of Series A, B, C, D and E Convertible Preferred Stock are entitled
to receive noncumulative dividends at the per annum rate of $0.24, $0.10,
$0.11, $0.15 and $0.18 per share, respectively, when and if declared by the
Board of Directors. The holders of Series A, B, C, D and E Convertible
Preferred Stock will also be entitled to participate in dividends on Common
Stock, when and if declared by the Board of Directors, based on the number of
shares of Common Stock held on an as-if converted basis. No dividends on
Convertible Preferred Stock or Common Stock have been declared by the Board
from inception through December 31, 1998.
F-16
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's Common Stock and Convertible Preferred Stock own less than 50%
of the resulting voting power of the surviving entity, the holders of Series A,
B, C, D and E Convertible Preferred Stock are entitled to receive an amount of
$4.78, $1.90, $2.20, $3.029 and $3.533 per share, respectively, plus any
declared but unpaid dividends prior to and in preference to any distribution to
the holders of Common Stock. The remaining assets, if any, shall be distributed
among the holders of Series C, D and E Convertible Preferred Stock and Common
Stock in the same manner as if all the shares of Series C, D and E Convertible
Preferred Stock had been converted into Common Stock until the aggregate amount
received by the holders of Series C, D and E Convertible Preferred Stock is an
amount equal to $4.40, $4.81 and $5.73 per share, respectively; thereafter, any
such of Series C, D and E Convertible Preferred Stock shall have no further
right to share in any remaining assets and surplus fund of the Company. Should
the Company's legally available assets be insufficient to satisfy the
liquidation preferences, the funds will be distributed among the holders of
Series A, B, C, D and E Convertible Preferred Stock in proportion to the full
preferential amount each such holder is otherwise entitled to receive.
Conversion
Each share of Series A, B, C, D and E Convertible Preferred Stock is
convertible into Common Stock, at the option of the holder. Series A
Convertible Preferred Stock converts on a ratio of one share of Preferred Stock
to four shares of Common Stock subject to adjustment for dilution. Series B, C
and E Convertible Preferred Stock convert on a one-to-one ratio, subject to
adjustment for dilution. Each share of Series D Convertible Preferred Stock
converts on a ratio of 1 to 1.16 subject to adjustment for dilution. Each share
of Series A, B, C, D and E Convertible Preferred Stock automatically converts
into the number of shares of Common Stock at the then effective conversion
ratio upon: (i) the closing of a public offering of Common Stock at a per share
price of at least $7.10 per share with gross proceeds of at least $20,000,000,
or (ii) the consent of the holders of at least 67% of the shares of such series
of Preferred Stock, voting as a separate class. The conversion ratio of each
share of Series E Convertible Preferred Stock is subject to change in the event
of failure of the Company to achieve certain predefined revenue milestones.
However, no adjustment would occur in the event the Company completes the
initial public offering by December 31, 1999.
At December 31, 1998, the Company reserved an aggregate of 6,949,222 shares
of Common Stock for issuance upon the conversion of Series A, B, C and D
Convertible Preferred Stock, respectively.
Warrants for Mandatorily Redeemable Convertible Preferred Stock
In 1998, in connection with securing a bridge loan, the Company issued
warrants to purchase 12,417 shares of Series D Convertible Preferred Stock at
$3.03 per share, which expire in February 2003. The Company recorded the bridge
loan at a discount of approximately $12,000 which discount was allocated to the
warrants and amortized in 1998. The fair value of the warrants was estimated on
the date of grant using the Black-Scholes model.
During the quarter ended March 31, 1999, in connection with securing the 1999
Bridge Loan agreement, the Company issued warrants to purchase 18,159 shares of
Series E Convertible Preferred Stock at $3.53 per share to the lending
institution. These warrants will expire in the year 2009. The fair value of the
warrants was estimated to be approximately 60,000 using the Black-Scholes
model.
F-17
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1999, the Company issued warrants to purchase 90,000 shares of
Series C Convertible Preferred Stock at $2.20 per share to a vendor for
services to be rendered. These warrants will expire in March 2004. The fair
value of the warrants of $300,000 was estimated based on the value of the
services to be rendered by such vendor which also approximated the fair value
under the Black-Scholes model.
7. Common Stock
The Company's articles of incorporation, as amended in March 1999, authorize
the Company to issue 20,000,000 shares of no par value Common Stock. Upon
incorporation of the Company in January 1996, the Company issued 4,000,0000
shares of Common Stock to three founders. Such shares are subject to the
Company's right of first refusal and a portion of which are also subject to a
right of repurchase by the Company. Approximately 353,820 shares issued to
employees of LikeMinds, Inc. are also subject to the Company's right of
repurchase, which right lapses over an eighteen month period. At December 31,
1998 and June 30, 1999 approximately 541,820 shares and 447,820 shares
(unaudited) were subject to the Company's right to repurchase.
8. Stock Option Plans
1996 Stock Option Plan
The 1996 Stock Plan (the "Plan") provides for the issuance of up to 500,000
shares of Common Stock in connection with incentive and non-statutory stock
option awards granted to employees, directors and consultants to the Company.
Stock purchase rights may also be granted under the Plan. Options must be
issued at prices not less than 100 percent and 85 percent of the estimated fair
value of the stock on the date of grant for incentive and non-statutory
options, respectively, and are exercisable for periods not exceeding ten years
from the date of grant. Options granted to shareholders who own greater than 10
percent of the outstanding stock at the time of grant are exercisable for
periods not exceeding five years from the date of grant and must be issued at
prices not less than 110 percent of the estimated fair value at the date of
grant. Options granted under the Plan vest ratably over four years following
the date of grant, although the Board of Directors may issue options that vest
over shorter periods.
1997 Stock Option Plan
The Company adopted the 1997 Stock Option Plan in May 1997 and amended it in
April 1998. The terms under this plan are consistent with the 1996 Stock Option
Plan except for the vesting period. Under the 1997 Stock Option Plan, any
option granted shall be exercisable according to the terms determined by the
Board of Directors, but in no case at a rate of less than 20% per year over
five years from the date the option is granted. To date, options granted
generally vest 25% after one year of service and monthly for the three years
thereafter. The Company has reserved 3,270,000 shares of Common Stock for
issuance under this Plan.
F-18
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option activity under the 1996 and 1997
stock option plans:
Weighted
Options Average
Available Options Exercise
for Grant Outstanding Price
---------- ----------- --------
Shares authorized.............................. 500,000 -- $ --
Options granted................................ (489,072) 489,072 0.11
---------- ---------
Outstanding at December 31, 1996............... 10,928 489,072 0.11
Additional shares authorized.................. 750,000 -- --
Options granted............................... (675,822) 675,822 0.26
Options canceled.............................. 16,438 (16,438) 0.19
---------- ---------
Outstanding at December 31, 1997............... 101,544 1,148,456 0.20
Additional shares authorized.................. 1,320,000 -- --
Options granted............................... (1,368,449) 1,368,449 0.75
Options exercised............................. -- (85,453) 0.19
Options canceled.............................. 385,050 (385,050) 0.32
---------- ---------
Outstanding at December 31, 1998............... 438,145 2,046,402 0.54
Additional shares authorized (unaudited)...... 1,200,000 --
Options granted (unaudited)................... (1,599,500) 1,599,500 3.25
Options exercised (unaudited)................. -- (224,761) 0.20
Options canceled (unaudited).................. 235,985 (235,985) 0.54
---------- ---------
Outstanding at June 30, 1999 (unaudited)....... 274,630 3,185,156 $1.93
========== =========
Options Outstanding at Options Exercisable
December 31, 1998 at December 31, 1998
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Outstanding (in years) Price Outstanding Price
Range of Exercise Price ----------- ----------- -------- ----------- --------
$0.025-- $0.125........... 271,479 7.28 $0.06 185,146 $0.06
0.19 -- 0.30.............. 633,577 8.67 0.25 259,163 0.25
0.65 -- 1.00.............. 1,141,346 9.65 0.82 33,627 0.69
--------- -------
2,046,402 9.03 $0.54 477,936 $0.21
========= =======
The Company accounts for employee and board of director stock options in
accordance with the provisions of APB No. 25 and complies with the disclosure
provisions of SFAS No. 123.
Under APB No. 25, compensation expense is recognized based on the amount by
which the fair value of the underlying common stock exceeds the exercise price
of the stock options at the measurement date, which in the case of employee
stock options is typically the date of grant. For financial reporting purposes,
the Company has determined that the deemed fair market value on the date of
grant of certain employee stock options was in excess of the exercise price of
the options. This amount is recorded as deferred compensation and is classified
as a reduction of stockholders' equity and is amortized as a charge to
operations over the vesting period of the applicable options. The vesting
period is generally four years. The fair value per share used to calculate
deferred compensation was derived by reference to the preferred stock values
and the Company's initial
F-19
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
public offering price range. Consequently, the Company recorded deferred stock
compensation of $938,000 and $1,793,000 (unaudited) during the year ended
December 31, 1998, and the six months ended June 30, 1999, respectively.
Amortization recognized for the year ended December 31, 1998 and the six months
ended June 30, 1999 totaled $287,000 and $429,000 (unaudited), respectively.
The weighted average fair values of the options granted in 1996, 1997 and
1998 were $0.03, $0.06 and $0.81, respectively.
Had compensation cost for option grants to employees been determined
consistent with SFAS No. 123, the Company's net loss would have been as follows
(in thousands, except per share data):
Year Ended December 31,
------------------------
1996 1997 1998
------- ------- --------
Pro forma net loss................................... $ 1,633 $ 3,376 $ 10,200
Pro forma net loss attributable to common
stockholders........................................ 1,633 3,376 11,551
Pro forma net loss per share, basic and diluted...... $ 0.49 $ 0.96 $ 2.81
The above proforma disclosures are not necessarily representative of the
effects on reported income or loss for future years as additional grants are
made each year and options vest over several years.
The fair value of each option grant was estimated on the date of grant using
the minimum value options pricing model with the following weighted average
assumptions by year:
1996 1997 1998
------- ------- -------
Risk-free interest rate................................. 5.9% 5.4% 5.1%
Expected life........................................... 5 years 5 years 5 years
Dividends............................................... -- -- --
Because the Company does not have actively traded equity securities,
volatility is not considered in determining the value of options granted to
employees.
9. Income Taxes
No provision or benefit for income taxes has been recognized for any of the
periods presented as the Company has incurred net operating losses and has no
carryback potential.
Deferred tax assets and liabilities consist of the following:
Years Ended
December 31,
----------------
1997 1998
------- -------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,500 $ 4,850
Accruals and reserves................................... 23 73
Research tax credits.................................... 150 455
Capitalized start-up costs.............................. 250 190
------- -------
1,923 5,568
Valuation allowance..................................... (1,923) (5,568)
------- -------
$ -- $ --
======= =======
F-20
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management believes that, based on a number of factors including the lack of
a long history of profits and that the Company operates in a developing market
that is characterized by rapidly changing technology, it is more likely than
not that the deferred tax assets will not be utilized, such that a full
valuation allowance has been recorded.
At December 31, 1998, the Company had approximately $11,900,000 of federal
operating loss carryforwards, available to offset future taxable income which
expire in varying amounts through 2018. At December 31, 1998, the Company had
approximately $257,000 and $198,000 of federal and state research tax credits
which expire in varying amounts through 2013. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances including as a result of a
cumulative ownership change of more than 50%, as defined, over a three year
period. The issuance of the Company's convertible preferred securities during
1996, 1997 and 1998 may have resulted in a limitation on utilization of such
net operating loss carryforwards.
10. Significant Customers And Geographic Information
The Company has adopted the Financial Accounting Standards Board's Statements
of Financial Accounting Standards No. 131, or SFAS 131, "Disclosure about
Segments of an Enterprise and Related Information."
The Company has one reportable segment. Management uses one measurement of
profitability for its business. The Company markets its products and related
services to customers in many industries in the United States and Europe.
Revenue by geographic region is as follows (in thousands):
Years Ended
December 31,
-----------------
1996 1997 1998
----- ---- ------
United States................................................. $ -- $449 $1,813
Europe........................................................ -- -- 156
----- ---- ------
$ -- $449 $1,969
===== ==== ======
Two customers individually accounted for 11% and 10% of revenues in 1997. One
customer accounted for 13% of revenues in 1998.
11. Subsequent Events (Unaudited)
On August 12, 1999, the Company entered into a five year noncancelable lease
agreement. Aggregate future minimum payments under this lease total to
approximately $5,170,000. In connection with this agreement, the Company issued
a warrant to purchase 30,000 shares of the Company's Common Stock at an
exercise price of $15.00 per share. This warrant expires on August 12, 2001.
Additionally, the Company is required to deposit cash or maintain a letter of
credit in the amount of $1 million.
On August 23, 1999, the Company's Board of Directors authorized the Company
to file a registration statement with the Securities and Exchange Commission
for the purpose of an initial public offering of the Company's common stock.
Upon the completion of this offering, the
F-21
ANDROMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's preferred stock will be converted into shares of common stock, and
all outstanding shares of preferred stock will be cancelled and retired. The
pro forma effect of the conversion has been presented as a separate column in
the Company's balance sheet, assuming the conversion had occurred as of June
30, 1999.
The Board of Directors also authorized, subject to stockholders' approval,
establishment of the 1999 Stock Plan with two million shares authorized for
future option grants and the 1999 Employee Stock Purchase Plan with 500,000
shares reserved for issuance. These plans will become effective upon the
closing of the initial public offering.
F-22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
LikeMinds, Inc.
In our opinion, the accompanying statements of operations, of shareholders'
equity (deficit) and of cash flows of LikeMinds, Inc. present fairly, in all
material respects, the results of its operations and its cash flows for the
year ended December 31, 1997 and the period from January 1, 1998 to October 8,
1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of LikeMinds' 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
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
August 10, 1999
F-23
LIKEMINDS, INC.
STATEMENTS OF OPERATIONS
(In thousands)
Period
From
January 1,
Year Ended 1998 to
December 31, October 8,
1997 1998
------------ ----------
Revenues................................................ $ 248 $ 568
Cost of revenues........................................ 158 211
----- -----
Gross profit.......................................... 90 357
Operating expenses:
Sales and marketing.................................... 178 111
Research and development............................... 296 278
General and administrative............................. 133 90
Amortization of acquired intangible assets............. 100 100
----- -----
Total operating expenses.............................. 707 579
----- -----
Loss from operations.................................... (617) (222)
Interest income (expense), net.......................... (18) (40)
----- -----
Net loss................................................ $(635) $(262)
===== =====
The accompanying notes are an integral part of these financial statements
F-24
LIKEMINDS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Convertible
Preferred Total
Stock Common Stock Stock Shareholders'
-------------- ----------------- Subscription Accumulated Equity
Shares Amount Shares Amount Receivable Deficit (Deficit)
------- ------ --------- ------ ------------ ----------- -------------
Balance at December 31,
1996................... -- $ -- 1,896,453 $ 27 $ (8) $ (83) $ (56)
Proceeds from stock
subscription
receivable............. -- -- -- -- 8 -- --
Issuance of Common Stock
for acquisition of
Chaco Communications... -- -- 1,000,000 450 -- -- 450
Issuance of Series A
Preferred Stock, net... 602,461 550 -- -- -- -- 550
Net loss................ -- -- -- -- (635) (635)
------- ---- --------- ---- ----- ----- -----
Balance at December 31,
1997................... 602,461 550 2,896,453 477 -- (718) 309
Repurchase of unvested
Common Stock, net...... -- -- (75,408) (2) -- -- (2)
Net loss................ -- -- -- -- (262) (262)
------- ---- --------- ---- ----- ----- -----
Balance at October 8,
1998................... 602,461 $550 2,821,045 $475 $ -- $(980) $ 45
======= ==== ========= ==== ===== ===== =====
The accompanying notes are an integral part of these financial statements
F-25
LIKEMINDS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Period
from
January 1,
Year Ended 1998 to
December 31, October 8,
1997 1998
------------ ----------
Cash Flows from Operating Activities:
Net loss.............................................. $(635) $(262)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 119 102
Changes in current assets and liabilities:
Accounts receivable.................................. (49) 38
Other assets......................................... 19 --
Accounts payable and accrued liabilities............. (40) (74)
Deferred revenue..................................... 67 (67)
----- -----
Net cash used in operating activities............... (519) (263)
----- -----
Cash Flows from Investing Activities:
Cash acquired from acquisition........................ 19 --
Purchase of property and equipment.................... (25) --
----- -----
Net cash used in investing activities............... (6) --
----- -----
Cash Flows from Financing Activities:
Proceeds from issuance of Series A Preferred Stock.... 550 --
Proceeds from issuance of Common Stock................ 8 --
Proceeds from advances made by Andromedia............. -- 129
Repurchase of Common Stock, net....................... -- (2)
----- -----
Net cash provided by financing activities........... 558 127
----- -----
Net increase (decrease) in cash and cash equivalents... 33 (136)
Cash and cash equivalents at beginning of period....... 113 146
----- -----
Cash and cash equivalents at end of period............. $ 146 $ 10
===== =====
Supplemental Non-cash Investing and Financing Activity:
Issuance of 1,000,000 shares of Common Stock for
acquisition of Chaco Communications.................. $ 450 $ --
The accompanying notes are an integral part of these financial statements
F-26
LIKEMINDS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
LikeMinds
LikeMinds, Inc., ("LikeMinds"), formerly Website Software Company, Inc., was
incorporated in California on February 14, 1996. LikeMinds develops, markets
and supports customer Web site personalization software.
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
Combined license and service revenues are recognized under contract
accounting. When reliable estimates of costs to be incurred are available,
revenue is recognized using the percentage of completion method based upon the
level of effort required to complete the project. The completed contract method
is used where reliable estimates to complete are not feasible.
Maintenance revenue is deferred and recognized on a straight-line basis over
the life of the related contract, which generally is one year.
Cash and cash equivalents
LikeMinds considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Concentration of credit risk and significant customers
Financial instruments that potentially subject LikeMinds to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
LikeMinds deposits cash and cash equivalents with high credit quality financial
institutions. LikeMinds' accounts receivable are derived from revenue earned
from customers located in the U.S. LikeMinds performs credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. LikeMinds maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
Period From
Year Ended January 1, 1998
December 31, to October 1,
1997 1998
------------ ---------------
Company A....................................... 15% --%
Company B....................................... -- 19
At December 31, 1997, Company A accounted for 100% of total accounts
receivable. At October 8, 1998, Company B accounted for 100% of total accounts
receivable.
F-27
LIKEMINDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Capitalized software development costs
Software development costs are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to
establishment of technological feasibility are capitalized, if material. To
date, the period between achieving technological feasibility, which LikeMinds
has defined as the establishment of a working model, which typically occurs
upon completion of the first beta version and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, LikeMinds has not
capitalized any software development costs.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
Goodwill
The goodwill represents the excess of the cost of acquired business over the
fair value of net assets acquired. The goodwill is being amortized over three
years using the straight-line method.
Stock-based compensation
LikeMinds accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
Income taxes
LikeMinds accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax basis of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future tax benefits of utilizing net
operating losses and research and development credit carryforwards. A valuation
allowance is provided against deferred tax assets if it is more likely than not
that they will not be realized.
Recent accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Substantially all of LikeMinds revenues and
costs are dollar denominated and LikeMinds has not engaged in derivative and
hedging activities.
In December 1998, the AICPA, issued Statement of Position 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, "Software Revenue Recognition,' with respect to
certain transactions." SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair
F-28
LIKEMINDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
values of all the undelivered elements that are not accounted for by means of
long-term contract accounting, and (2) VSOE of fair value does not exist for
one or more of the delivered elements, and (3) all revenue recognition criteria
of SOP 97-2 has been met. SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. LikeMinds does not expect SOP 98-9 to have any
effect on its results of operations.
Segment information
Effective January 1, 1998, LikeMinds adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
LikeMinds identifies its operating segments based on business activities,
management responsibility and geographical location. During the year and period
ended December 31, 1997 and October 8, 1998, LikeMinds operated in a single
business segment operating in the software community, primarily in the United
States. Through October 8, 1998, foreign operations had not been significant.
2. Acquisition
On April 17, 1997, LikeMinds acquired all the outstanding shares of Chaco
Communications, a provider of software consulting services. The acquisition has
been accounted for using the purchase method. The total purchase price of
approximately $450,000 consisted of 1,000,000 shares of LikeMinds' Common Stock
and has been allocated to the tangible and intangible assets acquired and the
liabilities assumed on the basis of their respective fair values on the
acquisition date. The fair value of the net tangible assets acquired was
$19,000 and the remainder amount of $431,000 was allocated to goodwill which is
being amortization over three years using the straight line method.
3. Income Taxes
LikeMinds did not have any provision for income taxes as a result of losses
incurred since inception. Management believes that, based on a number of
factors, it is more likely than not that the deferred tax assets will not be
realized, such that a full valuation allowance has been recorded.
At October 8, 1998, LikeMinds had approximately $700,000 of federal and state
net operating loss carryforwards available to offset future taxable income
which expire in varying amounts beginning in 2005. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating losses that LikeMinds may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than
50%, as defined, over a three year period. As a result of LikeMinds acquisition
by Andromedia, utilization of its net operating losses is subject to an annual
limitation of approximately $150,000.
4. Preferred Stock
At October 8, 1998, Likeminds had 1,000,000 and 602,461 shares of Series A
Preferred Stock authorized and outstanding, respectively. The outstanding
shares of Series A Preferred Stock have a liquidation preference of $570,000.
F-29
LIKEMINDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
Each share of Series A has voting rights equal to an equivalent number of
shares of Common Stock into which it is convertible and votes together as one
class with the Common Stock.
As long as at least fifty percent of the shares of Preferred Stock remain
outstanding, LikeMinds must obtain approval from a majority of the holders of
Preferred Stock in order to alter the articles of incorporation as related to
Preferred Stock, change the authorized number of shares of Preferred Stock,
repurchase any shares of Common Stock other than shares subject to the right of
repurchase by LikeMinds, change the authorized number of Directors, authorize a
dividend for any class or series other than Preferred Stock, create a new class
of stock or effect a merger, consolidation or sale of assets where the existing
shareholders retain less than 50% of the voting stock of the surviving entity.
Dividends
Holders of Series A Preferred Stock are entitled to receive noncumulative
dividends at the per annum rate of $0.028 per share, when and if declared by
the Board of Directors. The holders of Series A Preferred Stock will also be
entitled to participate in dividends on Common Stock, when and if declared by
the Board of Directors, based on the number of shares of Common Stock held on
an as-if converted basis. No dividends on Preferred Stock or Common Stock have
been declared by the Board from inception through December 31, 1997 and October
8, 1998, respectively.
Liquidation
In the event of any liquidation, dissolution or winding up of LikeMinds,
including a merger, acquisition or sale of assets where the beneficial owners
of LikeMinds' Common Stock and Preferred Stock own less than 51% of the
resulting voting power of the surviving entity, the holders of Series A
Preferred Stock are entitled to receive an amount equal to the original issue
price of the Series A preferred stock per share, respectively, plus any
declared but unpaid dividends prior to and in preference to any distribution to
the holders of Common Stock. The remaining assets, if any, shall be distributed
pro rata. Should LikeMinds' legally available assets be insufficient to satisfy
the liquidation preferences, the funds will be distributed to the Series A
Preferred stockholders ratably.
Conversion
Each share of Series A Preferred Stock is convertible, at the option of the
holder, according to a conversion ratio, subject to adjustment for dilution.
Each share of Series A Preferred Stock automatically converts into the number
of shares of Common Stock into which such shares are convertible at the then
effective conversion ratio upon: (1) the closing of a public offering of Common
Stock at a per share price of at least $5.00 per share with gross proceeds of
at least $7,500,000, (2) a merger, sale of substantially all of the assets or
other transactions which result in a change in control or (3) the consent of
the holders of the majority of Preferred Stock.
At December 31, 1997 and October 8, 1998, LikeMinds had reserved 1,000,000
shares of Common Stock for the conversion of Series A Preferred Stock.
F-30
LIKEMINDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Common Stock:
LikeMinds' Articles of Incorporation, as amended, authorize LikeMinds to
issue 10,000,000 shares of no par value Common Stock and 1,000,000 shares of
Preferred Stock. A portion of the shares sold to employees are subject to a
right of repurchase by LikeMinds subject to vesting, which is generally over a
four year period from the earlier of grant date or employee hire date, as
applicable, until vesting is complete. At December 31, 1997, and October 8,
1998, there were 344,806 and 258,604 shares subject to LikeMinds' right to
repurchase.
6. Acquisition by Andromedia, Inc.
On October 8, 1998, Andromedia, Inc. ("Andromedia") acquired all of
LikeMinds' outstanding shares, at which time LinkMinds merged with Andromedia.
Prior to completing the acquisition, Andromedia provided advances aggregating
approximately $129,000 to LikeMinds.
F-31
ANDROMEDIA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations give
effect to the acquisition by Andromedia, Inc. ("Andromedia" or the "Company")
of LikeMinds, Inc. ("LikeMinds") in a transaction accounted for as a purchase.
The unaudited pro forma combined statement of operations is based on the
individual statement of operations of Andromedia for the year ended December
31, 1998 and LikeMinds for the period from January 1, 1998 through October 8,
1998, appearing elsewhere in this prospectus. LikeMinds' operating results for
the period from October 9, 1998 to December 31, 1998 are included in
Andromedia's historical consolidated statement of operations for the year ended
December 31, 1998. Adjustments have been made to such information to give
effect to the October 8, 1998 acquistion of LikeMinds, as if the acquisition
had occurred on January 1, 1998.
The following unaudited pro forma combined statement of operations is not
necessarily indicative of the future results of operations of the Company or
the results of operations which would have resulted had the Company and
LikeMinds been combined during the period presented. In addition, the pro forma
results are not intended to be a projection of future results. The unaudited
pro forma combined statement of operations should be read in conjunction with
the consolidated financial statements of Andromedia and subsidiaries and the
financial statements of LikeMinds, including the notes thereto, appearing
elsewhere in the Prospectus.
F-32
ANDROMEDIA, INC.
(In thousands, except per share amounts)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS--(Continued)
Year Ended December 31, 1998
---------------------------------------
Like Pro
Andromedia Minds Adjustments Forma
---------- ----- ----------- --------
Total revenues....................... $ 1,969 $ 568 $ -- $ 2,537
Cost of revenues..................... 1,015 211 -- 1,226
-------- ----- ----- --------
Gross profit........................ 954 357 -- 1,311
Operating expenses:
Sales and marketing................. 5,199 111 -- 5,310
Research and development............ 2,337 278 -- 2,615
General and administrative.......... 2,106 90 -- 2,196
Amortization of acquired intangible
assets............................. 247 100 748 (a) 1,095
Non cash stock compensation......... 287 -- -- 287
Write off of acquired in process
technology 455 -- (455)(b) --
-------- ----- ----- --------
Total operating expenses.......... 10,631 579 293 11,503
-------- ----- ----- --------
Loss from operations................. (9,677) (222) (293) (10,192)
Interest income (expense), net....... 121 (40) -- 81
-------- ----- ----- --------
Net loss............................. (9,556) (262) (293) (10,111)
Preferred stock accretion............ (1,351) -- -- (1,351)
-------- ----- ----- --------
Net loss attributable to common
stockholders........................ $(10,907) $(262) $(293) $(11,462)
======== ===== ===== ========
Pro forma net loss per share: Basic
and diluted......................... $ (2.10)
========
Shares used in computing pro forma
net loss per share: Basic and
diluted............................. 5,468
See accompanying notes to pro forma combined statement of operations.
F-33
ANDROMEDIA, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Note 1--Basis of Presentation:
The unaudited pro forma combined statement of operations has been prepared to
reflect the acquisition of LikeMinds by Andromedia, as if the acquisition had
occurred on January 1, 1998.
Note 2--Pro Forma Adjustments:
Based on an independent appraisal, the total purchase price of the
acquisition of approximately $2,980,000 (including $380,000 for liabilities
assumed and merger related expenses) was assigned to the fair value of the net
assets acquired, including $36,000 to tangible assets, $455,000 to acquired in-
process technology, $1,028,000 to other identified intangible assets and the
remaining $1,461,000 to goodwill.
The following adjustments were applied to the historical statement of
operations to arrive at the pro forma combined statement of operations:
(a) Reflects the additional amortization expense of $748,000 related to
intangible assets resulting from the acquisition of LikeMinds over their
estimated useful lives.
(b) Eliminates the nonrecurring write-off of in-process research and
development directly attributable to the acquisition of LikeMinds.
F-34
[Graphics depicting the Andromedia e-marketing solution]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[ANDROMEDIA LOGO]
Shares of Common Stock
---------------------
PROSPECTUS
---------------------
Donaldson, Lufkin & Jenrette
SG Cowen
C.E. Unterberg, Towbin
Wit Capital Corporation
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Andromedia
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock 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 their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
Amount
To Be
Paid
-------
Securities and Exchange Commission registration fee................. $11,120
NASD filing fee..................................................... 4,250
Nasdaq National Market listing fee.................................. *
Printing and engraving expenses..................................... *
Professional fees and expenses...................................... *
Blue Sky fees and expenses.......................................... 7,500
Transfer agent fees................................................. *
Miscellaneous *
-------
Total............................................................... *
=======
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by applicable law.
Article Sixth of the Registrant's certificate of incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of the Registrant's bylaws provides for the indemnification of
officers and directors (and allows the Registrant to indemnify other employees
and third parties) acting on behalf of the Registrant if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to the
best interest of the Registrant, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
The Registrant intends to enter into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Registrant intends to obtain directors' and officers' insurance providing
indemnification for certain of the Registrant's directors, officers and
employees for certain liabilities.
Reference is also made to Section 7 of the Underwriting Agreement to be filed
as Exhibit 1.1 to the Registration Statement for information concerning the
Underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued and sold the following
securities:
(a) During the past three years, the Registrant sold an aggregate 312,505
shares of unregistered common stock to directors, officers, employees, former
employees and consultants at prices ranging
II-1
from $0.1250 to $3.20 per share, for aggregate cash consideration of $58,504.
These shares were sold pursuant to the exercise of options granted by the
Board. As to each director, officer, employee, former employee and consultant
of the Registrant who was issued these securities, the Registrant relied upon
Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"). Each
such person purchased securities of the Registrant pursuant to a written
contract between such person and the Registrant. In addition, the Registrant
met the conditions imposed under Rule 701(b).
(b) On December 16, 1996, the Registrant sold 365,217 shares of unregistered
Series B Preferred Stock at a price per share of $1.90 to fourteen investors
for aggregate cash consideration of $693,912. The Registrant relied upon
Section 4(2) of the Securities Act in connection with the sale of the shares.
(c) On December 27, 1996, the Registrant sold 131,573 shares of unregistered
Series B Preferred Stock at a price per share of $1.90 to one investor for
aggregate cash consideration of $249,988. The Registrant relied upon Section
4(2) of the Securities Act in connection with the sale of the shares.
(d) On April 18, 1997, the Registrant sold 1,454,547 shares of unregistered
Series C Preferred Stock at a price per share of $2.20 to four investors for
aggregate cash consideration of $3,200,003. The Registrant relied upon Section
4(2) of the Securities Act in connection with the sale of the shares.
(e) On July 17, 1997, the Registrant sold 172,722 shares of unregistered
Series C Preferred Stock at a price per share of $2.20 to ten investors for
aggregate cash consideration of $379,988.40. The Registrant relied upon Section
4(2) of the Securities Act in connection with the sale of the shares.
(f) On September 17, 1997, the Registrant issued a warrant to purchase up to
6,667 shares of Series C Preferred Stock at an exercise price of $3.00 per
share. The Registrant relied upon Section 4(2) of the Securities Act in
connection with the issuance of the warrant.
(g) On February 2, 1998, the Registrant issued a warrant to purchase up to
12,417 shares of Series D Preferred Stock at an exercise price of $3.02 per
share. The Registrant relied upon Section 4(2) of the Securities Act in
connection with the issuance of the warrant.
(h) On April 14, 1998, the Registrant sold 2,872,232 shares of unregistered
Series D Preferred Stock at a price per share of $3.029 to five investors for
aggregate cash consideration of $8,699,990. The Registrant relied upon Section
4(2) of the Securities Act in connection with the sale of the shares.
(i) On June 23, 1998, the Registrant sold 429,188 shares of unregistered
Series D Preferred Stock at a price per share of $3.029 to twenty-four
investors for aggregate cash consideration of $1,300,010. The Registrant relied
upon Section 4(2) of the Securities Act in connection with the sale of the
shares.
(j) On October 15, 1998, the Registrant issued 1,856,675 shares of Common
Stock pursuant the Agreement and Plan of Merger between the Registrant and
LikeMinds, Inc. The Registrant relied upon Section 4(2) of the Securities Act
in connection with the sale of the shares.
(k) On February 2, 1999, the Registrant issued a warrant to purchase up to
18,159 shares of Series E Preferred Stock at an exercise price of $3.533 per
share. The Registrant relied upon Section 4(2) of the Securities Act in
connection with the issuance of the warrant.
(l) On March 15, 1999, the Registrant sold 3,783,046 shares of unregistered
Series E Preferred Stock at a price per share of $3.533 to nineteen investors
for aggregate cash consideration of $13,365,501. The Registrant relied upon
Section 4(2) of the Securities Act in connection with the sale of the shares.
II-2
(m) On March 15, 1999, the Registrant issued a warrant to purchase up to
90,000 shares of Series C Preferred Stock at an exercise price per share of
$2.20 to one investor. The Registrant relied upon Section 4(2) of the
Securities Act in connection with the issuance of the shares.
(n) On April 8, 1999, the Registrant sold 444,475 shares of unregistered
Series E Preferred Stock at a price per share of $3.533 to nineteen investors
for aggregate cash consideration of $1,570,330. The Registrant relied upon
Section 4(2) of the Securities Act in connection with the sale of the shares.
(o) On August 12, 1999, the Registrant issued a warrant to purchase up to
30,000 shares of common stock at an exercise price of $15.00 to one investor.
The Registrant relied upon Section 4(2) of the Securities Act in connection
with the issuance of the warrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated September 18, 1998 by and among
Registrant, LikeMinds, Inc. and LM Acquisition Corp.
3.1 Articles of Incorporation of the Registrant, as currently in effect.
3.2* Form of Certificate of Incorporation, in connection with the
reincorporation of the Registrant in Delaware.
3.3 Bylaws of the Registrant, as currently in effect.
3.4* Form of Bylaws of the Registrant, in connection with the reincorporation
of the Registrant in Delaware.
4.1* Specimen Common Stock certificate.
4.2 Amended and Restated Investors' Rights Agreement dated as of March 15,
1999 among the Registrant and certain of the Registrant's security
holders.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding the legality of the securities being issued.
10.1* Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2 1996 Stock Plan.
10.3 1997 Stock Plan.
10.4 1999 Stock Plan.
10.5 1999 Employee Stock Purchase Plan.
10.6 Office lease dated February 5, 1998 between the Registrant and Ahdi
Nashashibi.
10.7* Sublease Agreement dated August 12, 1999 between the Registrant and
Patrick & Co., Inc.
10.8* Value Added Reseller Agreement dated April 29, 1996, as amended, between
the Registrant and Object Design, Inc.
10.9 Form of Change of Control Agreement between the Registrant and certain
of the Registrant's officers.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants, relating
to Andromedia, Inc.
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants, relating
to LikeMinds, Inc.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
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* To be filed by amendment.
II-3
(b) Financial Statement Schedules
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
Item 17. Undertakings
(a) The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this Registration Statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on this 24th day of August, 1999.
ANDROMEDIA, INC.
/s/ Kent B. Godfrey
By: _________________________________
Kent B. Godfrey
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Kent B.
Godfrey and Paul Gifford and each one of them as attorneys-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendment
to this Registration Statement (including post-effective amendments and
registration statements filed pursuant to Rule 462 and otherwise), and to file
the same, with exhibits thereto and other documents in connection therewith,
with the SEC, granting to said attorneys-in-fact, 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 he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact or each of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kent B. Godfrey Chief Executive Officer and August 24, 1999
____________________________________ Chairman of the Board
Kent B. Godfrey (Principal Executive
Officer)
/s/ Stephen F. Ghiglieri Vice President of Finance August 24, 1999
____________________________________ and Chief Financial Officer
Stephen F. Ghiglieri (Principal Financial and
Accounting Officer)
/s/ Paul R. Gifford President and Director August 24, 1999
____________________________________
Paul R. Gifford
/s/ L. William Krause Director August 24, 1999
____________________________________
L. William Krause
/s/ Hyunja F. Laskin Director August 24, 1999
____________________________________
Hyunja F. Laskin
/s/ Jack L. Rivkin Director August 24, 1999
____________________________________
Jack L. Rivkin
/s/ Robert J. Saldich Director August 24, 1999
____________________________________
Robert J. Saldich
/s/ Richard Wolpert Director August 24, 1999
____________________________________
Richard Wolpert
/s/ Kristopher A. Wood Director August 24, 1999
____________________________________
Kristopher A. Wood
II-5
EXHIBIT INDEX
Exhibit
Number Description
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated September 18, 1998 by and among
Registrant, LikeMinds, Inc. and LM Acquisition Corp.
3.1 Articles of Incorporation of the Registrant, as currently in effect.
3.2* Form of Certificate of Incorporation, in connection with the
reincorporation of the Registrant in Delaware.
3.3 Bylaws of the Registrant, as currently in effect.
3.4* Form of Bylaws of the Registrant, in connection with the
reincorporation of the Registrant in Delaware.
4.1* Specimen Common Stock certificate.
4.2 Amended and Restated Investors' Rights Agreement dated as of March 15,
1999 among the Registrant and certain of the Registrant's security
holders.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding the legality of the securities being issued.
10.1* Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2 1996 Stock Plan.
10.3 1997 Stock Plan.
10.4 1999 Stock Plan.
10.5 1999 Employee Stock Purchase Plan.
10.6 Office lease dated February 5, 1998 between the Registrant and Ahdi
Nashashibi.
10.7* Sublease Agreement dated August 12, 1999 between the Registrant and
Patrick & Co., Inc.
10.8* Value Added Reseller Agreement dated April 29, 1996, as amended,
between the Registrant and Object Design, Inc.
10.9 Form of Change of Control Agreement between the Registrant and certain
of the Registrant's officers.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants,
relating to Andromedia, Inc.
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants,
relating to LikeMinds, Inc.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
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* To be filed by amendment.