Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 95 474K
2: EX-3.1(A) Amended & Restated Certificate of Incorporation 17 64K
3: EX-3.2(A) By-Laws 14 63K
12: EX-4.10 Warrant to Purchase Series B Dated 9/28/1999 9 35K
4: EX-4.2 Investor Rights Agreement Dated 12/28/1998 18 85K
5: EX-4.3 Investor Rights Agreement Dated 11/19/1999 21 89K
6: EX-4.4 Investor Rights Agreement Dated 12/30/1999 17 87K
7: EX-4.5 Warrant Agreement to Purchase Dated 6/8/1999 12 60K
8: EX-4.6 Warrant Agreement to Purchase Dated 7/23/1999 12 61K
9: EX-4.7 Warrant to Purchase Series B Dated 9/28/1999 9 34K
10: EX-4.8 Warrant to Purchase Series B Dated 9/28/1999 9 35K
11: EX-4.9 Warrant to Purchase Series B Dated 9/28/1999 9 34K
13: EX-10.4 Office Lease 39 163K
14: EX-10.5 Form of Officer & Director Indemnity Agreement 9 44K
15: EX-23.1 Consent of Price Waterhouse Coopers LLP 1 7K
16: EX-27.1 Financial Data Schedule 2 9K
As filed with the Securities and Exchange Commission on January 26, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COMMERX, INC.
(Exact name of registrant as specified in its charter)
Delaware 5162 36-4040449
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
350 North LaSalle Street, Suite 1000
Chicago, Illinois 60610
(312) 832-9330
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
TIM STOJKA, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COMMERX, INC.
350 North LaSalle Street, Suite 1000
Chicago, Illinois 60610
(312) 464-7340
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
JOHN L. EISEL, ESQ. KEITH F. HIGGINS, ESQ.
CHARLES C. KIM, ESQ. Ropes & Gray
GEOFFREY C. COCKRELL, ESQ. One International Place
Wildman, Harrold, Allen & Dixon Boston, Massachusetts 02110
225 West Wacker Drive (617) 951-7000
Chicago, Illinois 60606-1229 (617) 951-7050 (fax)
(312) 201-2000
(312) 201-2555 (fax)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed maximum
Title of each class of securities aggregate offering Amount of
to be registered price (1)(2) registration fee
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Common Stock, $.001 par value per share................. $100,000,000 $26,400
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(1) Includes shares of common stock issuable upon exercise of the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
Registration Fee in accordance with Rule 457(o) of the Securities Act of
1933.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated January 26, 2000
Shares
Commerx, Inc.
[LOGO]
Common Stock
-----------
This is an initial public offering of shares of common stock of Commerx, Inc.
All of the shares of common stock are being sold by Commerx.
Prior to this offering, there has been no public market for the common stock.
Commerx anticipates that the public offering price will be between $ and
$ per share. Application has been made for quotation of the common stock
on the Nasdaq National Market under the symbol "CMRX".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of our common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
[Download Table]
Per
Share Total
----- -----
Initial public offering price........................... $ $
Underwriting discount................................... $ $
Proceeds, before expenses, to Commerx................... $ $
To the extent that the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from Commerx at the initial public offering price less the underwriting
discount.
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co.
Merrill Lynch & Co.
Chase H&Q
Robertson Stephens
Prospectus dated , 2000
[INSIDE FRONT COVER OF PROSPECTUS]
Front of Gatefold:
-----------------
The front of the gatefold includes the following: Commerx logo appears at the
top of the page, followed by: "e-volved industrial marketplace solutions."
"Through the PlasticsNet.Com marketplace we have gained a first mover advantage
in the domestic e-commerce plastics industry."
"Next we'll focus on ways we can improve other industrial processing markets."
Inside Gatefold:
---------------
The first page of the inside gatefold includes:
At the top of the page there is a PlasticsNet.Com logo, with "a Commerx
marketplace" underneath.
Below the logo, the following paragraphs act as lead-off text to inside
gatefold. "PlasticsNet.Com, Commerx's flagship electronic marketplace for the
$400 billion domestic plastics industry, is changing the way plastics processors
and suppliers do business. PlasticsNet provides a secure, supplier-neutral,
buyer focused marketplace that streamlines the procurement of plastics products
and services."
Starting in the middle of the page and going down to the bottom there are four
PlasticsNet.Com screen shots, two across, with pull-out text boxes. Text
appears over the screen shots: "PlasticsNet.Com, Commerx's flagship vertical
marketplace."
The first screen shot appears on the left hand side of the page. This is the
home screen.
The following text appears as a pull-out text box from the home page screen:
"PlasticsNet.Com brings new efficiency to how plastics processors and suppliers
do business right from their desktops - making buying, selling, and finding
industry information as easy as a few clicks."
The next screen shot appears to the right of the home screen. This is the
procurement screen.
The following text appears as pull-out text box from the procurement page
screen: "The PlasticsNet.Com online procurement process enables buyers to order
multiple products from multiple suppliers with a single, consolidated purchase
order."
The next screen shot appears below the home screen. This is the auction screen.
The following text appears as a pull-out text box from the auction page screen:
"PlasticsNet.Com's auction functions help suppliers sell surplus inventory,
commodity resins, machinery and used equipment while providing attractive
pricing for buyers."
The last screen shot appears to the right of the auction screen and below the
procurement screen. This is the technical forum screen.
The following text appears as a pull-out text box from the technical forum
screen: "As an active online community for plastics professionals,
PlasticsNet.Com offers technical forums as a convenient venue to share expert
insights and discuss industry issues."
The second page of the gatefold includes:
At the top of the second page there is a headline that says: "The
PlasticsNet.Com Business Model." After the heading, the following diagram
appears at the top of the inside gatefold, illustrating the foundation on which
PlasticsNet.Com is built, and on which other vertical marketplaces could/would
be based. There may be a short text pull-out text box explaining this.
The diagram is in the form of a box with "hosted procurement" across the top,
"suppliers" running down the left, "buyers" running down the right and "content
and community" across the bottom. Under each of these headings (except
content and community) there is text going down the page as shown below.
[Download Table]
Suppliers Hosted Procurement Buyers
--------- ------------------ ------
* Direct materials * Custom catalogs * Small-to-medium sized enterprises
* Equipment * Auctions * Larger OEMs
* MRO * Contract pricing * End users
* Services * Workflow management
* Order tracking
* Reporting functions
Supply Chain Management
-----------------------
* Integration
* Technical services
* Online financing
In the middle of the second page there is a headline: "A Look at How Commerx
Can Build on the PlasticsNet.Com Model"
Following the headline there is an illustration of a three dimensional "cube."
The bottom layer of the cube (width) lists: "Procurement", "Content/Community"
and "Supply Chain Management."
The height of the cube has text in vertical columns that lists various vertical
markets: "Plastics", "Industrial Processing Buyer Segment1", "Industrial
Processing Buyer Segment2" and "Industrial Processing Buyer Segment3."
The depth of the cube has text in horizontal rows that lists various geographic
markets: "United States", "Market Number 1", "Market Number 2", Market Number 3"
and "Market Number 4."
The following text appears at the bottom right of the inside gatefold:
Commerx/TM/ and PlasticsNet.Com/TM/ are registered trademarks of Commerx, Inc.
in the United States.
PROSPECTUS SUMMARY
The following summary highlights some of the important information in the
prospectus. It may not contain all of the information that is important to you.
You should read this summary together with the more detailed information about
us and our financial statements and related notes appearing elsewhere in this
prospectus.
Commerx, Inc.
Commerx creates business-to-business electronic marketplaces that enable
buyers and sellers in industrial processing markets to transact business on the
Internet. We target industrial processing markets characterized by large
numbers of buyers and sellers, high levels of fragmentation, inefficient supply
chains and large transaction volume. Our first marketplace is PlasticsNet.
PlasticsNet provides a secure, supplier-neutral, buyer-focused marketplace
that streamlines the procurement of plastics products and services. We
currently offer for sale on our procurement center over 30,000 plastics
products, or SKU's, from approximately 50 suppliers. We also have recently
signed strategic agreements with suppliers that provide us access to additional
products that we are currently adding to the PlasticsNet marketplace. These
agreements will provide us with over 1,000 direct materials products, such as
resins and additives, from a relationship with Ashland Inc. and over 400,000
maintenance, repair and operations, or MRO, products from a relationship with
MSC Industrial Direct Co. Inc. Our marketplace had approximately 73,000 user
sessions during December 1999 and currently has over 35,000 registered user
accounts. In 1999, Business Marketing, an Advertising Age publication, ranked
PlasticsNet as the fourth-best business-to-business Web site out of 300
surveyed in the U.S. based on a variety of criteria, including ease of
navigation, design, presentation of information and e-commerce capabilities.
The plastics industry, which we estimate represented over one trillion
dollars in annual product shipments worldwide in 1999, is one of the largest
manufacturing industries in the world. According to The Society of Plastics
Industry's latest available data, the plastics industry ranked fourth in U.S.
product shipments by dollar volume among top manufacturing industry groups in
1996. The plastics industry is characterized by a complex supply chain, a high
degree of fragmentation among buyers and sellers, large transaction volume and
a significant dependence on information exchange. As a result, traditional
information flows and purchasing methods are inefficient, costly and time
consuming. These dynamics create the need for a business-to-business e-commerce
solution that provides a marketplace for buyers and sellers of plastics
products and services.
Our solution, the PlasticsNet marketplace, enables buyers and sellers to
execute transactions on the Internet and provides the tools, content and
community to help them make more informed decisions. Through the PlasticsNet
marketplace, suppliers can cost-effectively provide current product offering
and pricing information to a large pool of buyers. In addition, buyers can
efficiently search for products, identify suppliers, compare product prices and
specifications, and complete a purchase.
We seek to capitalize upon our position as the first company to offer a
comprehensive Internet-based e-commerce solution to the plastics industry. Our
strategy is to gain market share aggressively by continuing to expand the
selection of plastics products, services and related content offered on our
marketplace. We will also continue to concentrate our efforts to attract new
participants and increase usage by current participants in our marketplace. We
intend to leverage our expertise and leadership in the plastics industry to
target other industrial processing and international markets that represent
significant business-to-business e-commerce opportunities.
3
Corporate Information
We were incorporated in Illinois in July 1995 and reincorporated in
Delaware in December 1998. Our principal executive offices are located at 350
North LaSalle Street, Suite 1000, Chicago, Illinois 60610, and our telephone
number at that address is (312) 464-7340. Our address on the World Wide Web is
http://www.commerx.com, and the address of the PlasticsNet marketplace is
http://www.plasticsnet.com. References to our Web site do not incorporate by
reference the information contained at our Web site into this prospectus.
Unless otherwise indicated, this prospectus reflects a -for-one split of our
outstanding shares of common stock prior to the closing of this offering and
assumes the automatic conversion of all of our outstanding preferred stock into
shares of common stock upon the closing of this offering. This prospectus also
assumes no exercise of the underwriters' over-allotment option.
The Offering
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Common stock offered by Commerx................... shares
Common stock to be outstanding after this
offering......................................... shares
Proposed Nasdaq National Market symbol............ "CMRX"
Use of proceeds................................... For working capital and general
corporate purposes. See "Use of
Proceeds".
The number of shares to be outstanding excludes 4,058,875 shares of common
stock issuable upon exercise of options outstanding under our stock option plan
on December 31, 1999 at a weighted average exercise price of $1.32 per share
and 137,648 shares of common stock which will be issuable upon exercise of
warrants at a weighted average exercise price of $3.10 per share.
4
SUMMARY FINANCIAL DATA
The following summary financial data are derived from our financial
statements. You should read this summary financial information in conjunction
with our financial statements and the related notes. Pro forma per share data
reflect the conversion of all outstanding preferred stock into common stock,
even if the effect of the conversion is antidilutive. The pro forma balance
sheet data give effect to our issuance and sale of 3,128,732 shares of Series B
preferred stock in November and December 1999 for net proceeds of approximately
$36.9 million. The net proceeds include approximately $2.1 million that reflect
the November 1999 conversion of all management notes and accrued interest into
shares of Series B preferred. The pro forma balance sheet data also includes
the write-off of $185,747 of remaining management loan discounts, and the
conversion of all Series A and Series B preferred stock into 11,698,732 shares
of common stock upon the closing of this offering. The pro forma as adjusted
balance sheet data give effect to our sale of the shares of common stock in
this offering at an assumed initial public offering price of $ per share and
after deducting the estimated underwriting discounts and commissions and our
estimated offering expenses.
[Enlarge/Download Table]
July 1995
(inception) Nine Months Ended
through Year Ended December 31, September 30,
December 31, ---------------------------------- -----------------------
1995 1996 1997 1998 1998 1999
------------ ---------- ---------- ---------- ----------- ----------
(unaudited) (unaudited)
(in thousands, except per share data)
Statement of Operations
Data:
Total revenue............. $ 3 $ 53 $ 305 $ 375 $ 264 $ 833
Cost of revenue........... -- -- -- -- -- 426
---------- ---------- ---------- ---------- ---------- ----------
Gross profit.............. 3 53 305 375 264 407
Total operating expenses.. 302 955 1,081 2,367 1,364 8,507
---------- ---------- ---------- ---------- ---------- ----------
Net loss.................. $ (312) $ (952) $ (894) $ (2,178) $ (1,234) $ (8,080)
========== ========== ========== ========== ========== ==========
Historical basic and
diluted loss per common
share.................... $ (0.02) $ (0.06) $ (0.05) $ (0.13) $ (0.07) $ (1.09)
========== ========== ========== ========== ========== ==========
Pro forma loss per share
(unaudited).............. $ (0.15) $ (0.54)
========== ==========
Weighted average shares
used to compute
historical basic and
diluted loss per share... 16,950,000 16,950,000 16,950,000 16,897,835 16,950,000 7,430,000
Weighted average shares
used to compute pro forma
loss per share
(unaudited).............. 14,095,000 14,836,096
[Download Table]
As of September 30, 1999
-------------------------
Pro
Pro Forma As
Actual Forma Adjusted
------- ------- --------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents............................. $ 1,800 $36,642 $
Working capital (deficit)............................. (3,035) 33,613
Total assets.......................................... 3,927 38,769
Long-term debt, net of current portion................ 997 997
Redeemable convertible preferred stock................ 7,010 --
Total stockholders' equity (deficit).................. (9,506) 34,152
5
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risks before making an
investment decision. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment. You also
should refer to the other information appearing elsewhere in this prospectus,
including our financial statements and the related notes.
We have a limited operating history and face difficulties encountered by early
stage companies in new and rapidly evolving markets
We have only a limited operating history. We were formed in July 1995 and
have not yet generated a significant amount of revenue. For this reason it is
difficult to evaluate our business and our prospects. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies engaged in new and rapidly evolving markets such as electronic
commerce, or e-commerce. In order to overcome these risks we must be able to,
among other things:
. establish and increase awareness of our PlasticsNet brand and strengthen
customer loyalty;
. attract and retain customers at a reasonable cost;
. attract a sufficient number of new suppliers to sell their products
through our electronic marketplace;
. reliably process transactions through our Web site;
. manage rapidly changing and expanding operations;
. maintain our current strategic relationships and develop new ones;
. implement and successfully execute our business and marketing strategy;
. provide superior customer service;
. respond effectively to competitive pressures and developments;
. continue to develop and enhance our technology and systems; and
. attract, retain and motivate qualified personnel.
Because of our limited operating history and the early stage of development
of our market, we have limited insight into trends that may emerge and affect
our business. We cannot be certain that our business strategy will be
successful or that we will successfully address these risks.
We have a history of losses that may continue in the future
We incurred net losses of $952,000 in 1996, $894,000 in 1997, $2.2 million
in 1998 and $8.1 million in the nine months ended September 30, 1999. As of
September 30, 1999 we had an accumulated deficit of $12.4 million, and we
expect to continue to incur losses on a quarterly basis through the foreseeable
future. We expect these losses to increase significantly from current levels.
We believe that our business depends on our ability to significantly increase
revenue. If our revenue fails to grow at anticipated rates or our operating
expenses increase without a commensurate increase in our revenue, or we fail to
adjust operating expense levels accordingly, the imbalance between revenue and
operating expenses will negatively impact our business, revenue, results of
operations and financial condition.
The unpredictability of our quarterly revenue may negatively affect the trading
price of our common stock
As a result of our limited operating history in e-commerce and the emerging
nature of the markets in which we compete, we may be unable to accurately
forecast our revenue. If our
6
revenue for a quarter falls below our expectations and we are not able to
quickly reduce our spending in response, our operating results for that quarter
would be harmed. We currently intend to increase substantially our operating
expenses to develop new service offerings, fund increased sales and marketing,
enter into strategic relationships with new suppliers and further develop our
technology and transaction-processing systems. To the extent these expenses
precede or are not subsequently followed by increased revenue, our operating
results will fluctuate and net losses in a given quarter may be greater than
expected.
As a result of the foregoing factors, our annual or quarterly operating
results may be below the expectations of securities analysts and investors,
which would adversely affect the trading price of our common stock.
We expect that our gross margins will be low and if we are not able to increase
the dollar volume of transactions made through our online site, we will not be
able to generate an operating profit
Our transaction-based model is a low margin model. Unexpected costs or
expenses we incur would substantially affect our ability to achieve or maintain
operating profits. In order to meet our expected earnings targets, we must
increase the dollar volume of transactions on our marketplace. We can achieve
this either by generating significantly higher and continuously increasing
levels of traffic to our online site, or by increasing the percentage of
visitors to our online site who purchase plastics products, or through some
combination of the two. We must also increase the number of repeat purchasers
of plastics products through our online site. In addition, we must deliver a
high level of customer service and a full array of products and services in
order to attract users with demographic characteristics valuable to
advertisers. Although we have implemented strategies designed to accomplish
these objectives, we cannot assure you that these strategies will be effective
in increasing the dollar volume of products purchased through our online site.
The failure to do so would likely have a material adverse effect on our
operating margins.
If we do not build a critical mass of suppliers and buyers, we will not be able
to increase our product offerings and draw more suppliers and buyers
Our business model depends in large part on our ability to build a critical
mass of products and suppliers. To attract and maintain suppliers, we must
build a critical mass of buyers. However, buyers must perceive value in our
electronic marketplace, which in part depends upon the breadth of our product
offerings from our suppliers. If we are unable to increase the number of
suppliers and draw more buyers to the PlasticsNet marketplace, we will not be
able to benefit from any network effect where the value to each participant in
the PlasticsNet marketplace increases with the addition of each new
participant. As a result, the overall value of the PlasticsNet marketplace
would be harmed, which would negatively affect our revenue.
We depend on suppliers to provide the products that we sell in our marketplace
Our future success depends in large part upon our ability to offer and
deliver a broad base of plastics products. To do so, we rely on independent
suppliers, manufacturers and distributors. We carry no inventory and rely
exclusively on rapid fulfillment of orders from these suppliers. We have
contracts or arrangements with our suppliers that do not guarantee the
availability of products, do not establish guaranteed prices and do not provide
for the continuation of particular pricing practices. We have not established
alternative sources for all of the products we sell in the PlasticsNet
marketplace in the event a supplier is unwilling or unable to supply the type
and quantity of product requested by buyers or us. Our contracts with our
suppliers typically do not restrict them from selling products to other buyers.
We cannot assure you that our current suppliers will continue to sell products
to us on
7
current terms or that we will be able to establish new or extend current supply
relationships to ensure acquisitions of products in an efficient manner on
acceptable commercial terms. Our ability to establish relationships with
reputable suppliers and to obtain adequate products from those suppliers at
competitive prices and the ability of the suppliers to deliver these products
to buyers are critical to our success. If we are unable to satisfy any of these
elements or are unable to develop and maintain relationships with suppliers
that will allow us to obtain sufficient quantities of products on acceptable
commercial terms, our business, operating results and financial condition would
be materially adversely affected.
We rely on our suppliers to deliver defect-free plastics products to buyers
in the PlasticsNet marketplace in a professional, safe and timely manner. If
our suppliers do not deliver quality products to buyers in a professional, safe
and timely manner, then our service will not meet expectations and our
reputation and brand will be damaged. In addition, deliveries that are non-
conforming or late could expose us to liability or result in decreased adoption
and use of our electronic marketplace, which could have a negative effect on
our business, results of operations and financial condition.
Our strategic supplier relationships, on which we expect to be dependent for
the foreseeable future, are subject to cancellation and may deter other
suppliers from developing relationships with us
We recently entered into certain strategic supplier agreements. The extent
to which our operations are integrated with these suppliers and the potential
financial impact on us of these strategic relationships make us very dependent
on these suppliers for the foreseeable future. In addition, some of our
agreements with these suppliers are not exclusive and have a limited term. We
cannot be certain that these strategic suppliers will not enter into similar
relationships with one or more of our competitors or that they will renew our
agreements at the end of their terms.
In addition, our current or future strategic supplier relationships may
lead to conflicts that could be detrimental to us. For example, we plan to
provide the greatest number and variety of products from the greatest number of
suppliers possible; however, our strategic supplier relationships may deter
other suppliers from entering into agreements with us.
To the extent that we are perceived to favor one supplier over another, we may
not be viewed as a neutral marketplace
The plastics products market consists of a complex set of relationships
among suppliers, distributors and buyers. To the extent that our buyers or
suppliers perceive that we favor one supplier over another, they may lose
confidence in the PlasticsNet marketplace as a fair and neutral marketplace and
choose alternative solutions. The fact that we maintain relationships with some
suppliers, but not others, and the fact that some of these suppliers are
stockholders, may compromise the perception that we provide a neutral and
unbiased marketplace for plastics products. Any bias, whether perceived or
actual, could have a negative impact on our ability to maintain or increase our
supplier base, which in turn may limit our ability to attract and retain
buyers. This would reduce revenue and therefore have a negative impact on our
business, results of operations and financial condition.
It takes a long time to increase the use of our marketplace by buyers, which
could negatively affect our revenue growth and make it difficult to predict our
revenue and results of operations
A key element of our strategy is to promote our marketplace directly to
plastics processors. To succeed we must integrate our electronic marketplace
with the purchasing and information technology infrastructure of our buyers.
Because we offer a new method of industrial purchasing, the time it takes to
sell our electronic marketplace is long and we expect to devote significant
sales, marketing and management resources to the sales process without any
assurance that a buyer
8
will use the PlasticsNet marketplace. We must generally educate buyers and
potential buyers about the use and benefits of our electronic marketplace. The
sale and implementation of our electronic marketplace are subject to delays due
to buyers' internal budgeting and procedures for approving capital expenditures
and deploying new technologies within their networks. These delays also could
impair our ability to generate revenue. Even if buyers integrate our
marketplace with their internal systems, we may not increase our revenue if the
employees responsible for purchasing plastics products do not use the
PlasticsNet marketplace.
Our business model is unproven and may not be successful
Our business-to-business e-commerce model is based on the development of
the PlasticsNet marketplace for the purchase and sale of plastics products over
the Internet. This business model is new and unproven. We cannot be certain
that our business model will be successful or that we can achieve or sustain
revenue growth or generate any profits. The success of this business model will
require, among other things, that we develop a marketplace with broad market
acceptance by our buyers, suppliers, users and strategic partners. We cannot be
certain that business-to-business commerce on the Internet generally, or our
marketplace, services and brand in particular, will achieve broad market
acceptance. For example, plastics processors may continue purchasing products
through their existing channels and may not adopt an electronic marketplace
because of their comfort with existing purchasing habits and direct supplier
relationships. The costs and resources required to switch purchasing methods,
the need for products not offered through the PlasticsNet marketplace, security
and privacy concerns, or general reluctance to use technology or the Internet
may also deter or discourage some companies.
If we do not succeed in establishing and strengthening the PlasticsNet brand,
we will not attract as many buyers and suppliers to our site
We believe that establishing, maintaining and enhancing the PlasticsNet
brand is a critical aspect of our efforts to attract and expand our online
traffic. Promotion of the PlasticsNet brand will depend largely on our success
in providing a high-quality online experience supported by a high level of
customer service, which cannot be assured. In addition, to attract and retain
online users and suppliers, and to promote and maintain the PlasticsNet brand
in response to competitive pressures, we may find it necessary to increase
substantially our financial commitment to creating and maintaining strong brand
loyalty among buyers. If we are unable to provide high-quality online services
or customer support, or otherwise fail to promote and maintain our brand, or if
we incur excessive expenses in an attempt to promote and maintain our brand,
our business, operating results and financial condition would be materially
adversely affected.
If we are not able to integrate the PlasticsNet marketplace with buyers'
information technology systems, we may be unsuccessful in winning these buyers
We may incur significant expense to integrate our electronic marketplace
with buyers' purchasing systems and business rules, and to maintain this
integration as our buyers' purchasing systems and our own marketplace
technologically evolve. Failure to provide this integration may delay or
altogether dissuade buyers from using our electronic marketplace, which could
negatively affect our revenue and, therefore, have a material adverse effect on
our business, results of operations and financial condition.
We may not be able to implement new technologies acquired from third parties
We will be integrating new technology into our electronic marketplace that
will include significant enhancements to the exchange capabilities and search
technology of our marketplace. Enhancing and introducing new technology into
our electronic marketplace involve numerous technical challenges and
substantial personnel resources, and often take many months to complete. We
9
cannot be certain that we will be successful at enhancing or integrating new
technologies into our electronic marketplace on a timely basis, or in
accordance with our objectives. In addition, we cannot be certain that, once
integrated, the new technologies or our electronic marketplace will function as
expected. If we are unable to enhance and integrate new technologies into our
electronic marketplace on a timely basis, buyers may discontinue use of the
PlasticsNet marketplace or we may experience difficulty attracting new buyers,
which could adversely affect our business, revenue, financial condition and
results of operations. In addition, our electronic marketplace is complex and,
despite testing and quality control procedures, new technology that we
integrate with the marketplace may contain undetected errors or "bugs" when
first introduced. Any inability to deliver quality services on a timely basis
could have a negative effect on our business, revenue, financial condition and
results of operations.
New service introductions may be unsuccessful and thus negatively impact our
business
We plan to introduce new and expanded services to our customers and to
enter into new relationships with third parties in order to generate additional
revenue, attract more customers and respond to competition. We cannot assure
you that we will be able to offer these services in a cost-effective or timely
manner or that any of these efforts will be successful. Furthermore, any new
service that is not favorably received by our customers could damage our
reputation or our brand name. Expansion of services in this manner will also
require significant additional expense and development and may strain
management, financial and operational resources. Inability to generate revenue
from expanded services sufficient to offset their cost could have a material
adverse effect on our business, operating results and financial condition.
We will need to manage the growth of our business effectively in order to meet
customer and investor expectations
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and we expect will continue to
place, significant demands on our sales, marketing, managerial, operational,
financial and other resources. If we cannot manage our growth effectively, it
is likely that our revenue and results of operations will not meet customer and
investor expectations.
We expect to hire a significant number of new employees to support our
business. Our current information systems, procedures and controls may not
continue to support our operations and may hinder our ability to exploit the
market for selling products to the plastics industry. In addition, we
anticipate requiring additional space to accommodate our growth in the next
three months. We could experience interruptions to our business if we relocate
to new facilities. Even after we implement our new system and relocate to new
facilities, our personnel, systems, procedures, controls and facilities may be
inadequate to support our future operations.
Because we bear the risk of collection, the failure to collect on product sales
would adversely affect our liquidity
Since we take title to many of the products that we sell, we bear the risk
of loss of revenue from the sale of these products if a buyer does not pay for
a product. While our suppliers may indemnify us if a product is defective, we
ultimately bear the risk of collection on all buyer accounts.
Our plan to expand into international sales and operations will require
significant management attention; and if we fail to execute this strategy,
eventually our growth will be limited, and our operating results will be harmed
In order to enter international markets, we plan to establish international
operations, hire additional personnel and establish relationships with
additional suppliers and strategic partners. This
10
expansion will require significant management attention and financial resources
and could have a negative impact on our business. We cannot assure you that we
will be able to create or sustain international demand for our electronic
marketplace. In addition, our international business may be subject to a
variety of risks, including applicable government regulation, difficulties in
collecting international accounts receivable, the introduction of non-tariff
barriers and higher duty rates. Currency fluctuations, price controls,
potential adverse tax consequences and difficulties in enforcement of
contractual obligations may also present problems.
Our plan to expand by offering additional marketplaces in other industries will
require significant management attention, and if we fail to execute this
strategy, eventually our growth will be limited and our operating results will
be harmed
In order to create new marketplaces in industries other than plastics, we
plan to hire additional personnel and establish relationships with additional
suppliers and strategic partners. This expansion will require significant
management attention and financial resources and could have a negative impact
on our business. The members of our management team have spent most of their
careers working in the plastics industry and have significant expertise in that
industry. We cannot assure you that we will be able to successfully recruit
skilled managers with expertise and business relationships in other industries
to implement our plan to introduce additional marketplaces. Nor can we assure
you that without such expertise and industry relationships our current
management team will be able to create successful marketplaces in other
industries.
If others use domain names that are similar to ours, traffic to our site could
be affected, and we could lose revenue
We currently hold the Internet domain names "Commerx.Com" and
"PlasticsNet.Com". Domain names generally are regulated by Internet regulatory
bodies. The regulation of domain names in the United States and in foreign
countries is subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may not acquire or
maintain the "Commerx.Com" or "PlasticsNet.Com" domain names in all of the
countries in which we conduct business. The relationships among regulations
governing domain names and laws protecting trademarks and similar proprietary
names are unclear. Therefore, we could be unable to prevent third parties from
acquiring domain names that are similar to ours, or that infringe or otherwise
decrease the value of our trademarks and other proprietary rights. Also, there
are risks that in the future third parties could prevent us from continuing to
use one or more of our domain names.
If we lose our key personnel, we may have difficulty managing our business
effectively in a rapidly changing market
Our performance is substantially dependent on the performance of our
executive officers and other key employees. We do not have any employment
agreements with our executive officers and key employees. Our failure to
successfully manage our personnel requirements would have a negative effect on
our business, revenue, financial condition and results of operations. We have
experienced difficulty from time to time in hiring the personnel necessary to
support the growth of our business, and we may experience similar difficulty in
hiring and retaining personnel in the future. Competition for senior
management, experienced sales and marketing personnel, software developers,
qualified engineers and other employees is intense, and we cannot be certain
that we will be successful in attracting and retaining personnel. The loss of
the services of any of our executive officers or other key employees could have
a negative effect on our business. In particular, the loss of services of Tim
Stojka, our Chairman and Chief Executive Officer, would have a detrimental
effect on our business. Mr. Stojka is one of our co-founders and is responsible
for our vision and future direction.
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Our market is highly competitive, and if we are unable to compete effectively,
our business will not grow
E-commerce is new, rapidly evolving and intensely competitive, and we
expect competition to intensify in the future. Barriers to entry are minimal,
and current and new competitors can launch new sites at a relatively low cost.
In addition, the wholesale plastics industry in general is intensely
competitive. We compete primarily with traditional plastics supply distributors
and direct material suppliers who sell most products via direct sales forces
and mail order catalogs and have broad product lines. They normally have
experience with direct marketing, established brand names and both fulfillment
and operations capacity. Traditionally, the distribution channels have been
based on strong interpersonal relationships, which we may not be able to
replace with our online marketplace.
General Electric, a major supplier in the plastics industry, has also
developed Polymerland, a resin distribution and online sales arm for its
products and the products of other suppliers. Polymerland is a substantial
competitor of the PlasticsNet marketplace. As the market for online plastics
products services grows, other companies, including other established suppliers
and distributors, are expected to develop online services that compete with our
marketplace. In addition, technology companies, such as Internet software and
enterprise software providers, are developing or offering purchasing solutions
that directly link suppliers with buyers in the plastics industry. Furthermore,
there are several existing and emerging vertical Internet marketplaces that
currently serve or could expand their offerings to compete in the plastics
industry. We cannot assure you that we will be able to compete successfully
against current and future competitors, and competitive pressures faced by us
may have a material adverse effect on our business, operating results and
financial condition.
There has been no prior market for our common stock and we expect the price of
our common stock to be volatile
Prior to this offering, you could not buy or sell our common stock publicly
and an active public market for our common stock may not develop or be
sustained after the offering. Although the initial public offering price will
be determined based on several factors, the market price after the offering may
decline from the initial offering price. The market price of our common stock
may fluctuate significantly in response to a number of factors, some of which
are beyond our control, including:
. quarterly variations in our operating results;
. changes in estimates of our financial performance by securities
analysts;
. changes in market valuation of Internet commerce companies generally;
. announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
. loss of a major buyer, supplier or strategic partner;
. additions or departures of any of our key personnel;
. future sales of our common stock; and
. stock market price and volume fluctuations, which are particularly
common among highly volatile securities of Internet companies.
If the Internet does not continue to grow as a medium for commerce, our
business plan will fail
Our long-term viability is substantially dependent upon the development of
the Internet as an effective medium of commerce, especially for the purchase of
plastics products. This development
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depends upon a number of factors including continued growth in the number of
users, concerns about transaction security, continued development of the
necessary technological infrastructure, development of enabling technologies,
uncertain and increasing government regulation and the development of
complementary services and products.
Use of the Internet as a means of effecting business transactions is at an
early stage of development. For us to be successful, businesses must accept and
utilize novel ways of conducting business and exchanging information.
Convincing businesses to buy and sell plastics products online may be
particularly difficult, as these businesses have historically relied on
traditional distribution channels. We cannot assure you that acceptance and use
of the Web will continue to develop or that a sufficiently broad base of
businesses will adopt, and continue to use, the Internet and commercial online
services as a medium of commerce.
Growth in the demand for our electronic marketplace and services depends on
the adoption of e-commerce and Internet solutions by plastics industry
participants, who must accept a new way of conducting business and purchasing
supplies. Our business could suffer dramatically if e-commerce and Internet
solutions are not accepted or not perceived to be effective by participants in
the plastics industry.
The Internet may not prove to be a viable commercial marketplace for the
plastics industry for a number of reasons, including:
. inadequate development of the necessary infrastructure for Internet-
based communications by plastics processors;
. security and confidentiality concerns of buyers and suppliers;
. lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
. implementation of competing purchasing solutions;
. lack of human contact that traditional suppliers provide; and
. governmental regulation.
The accelerated growth and increasing volume of Internet traffic may cause
performance problems that may slow adoption of our electronic marketplace
The growth of Internet traffic to very high volumes of use over a
relatively short period of time has caused frequent periods of decreased
Internet performance, delays and, in some cases, system outages. This decreased
performance is caused by limitations inherent in the technology infrastructure
supporting the Internet and the internal networks of Internet users. If
Internet usage continues to grow rapidly, the infrastructure of the Internet
and its users may be unable to support the demands of growing e-commerce usage,
and the Internet's performance and reliability may decline. If our existing or
potential buyers experience frequent outages or delays on the Internet, the
adoption or use of our electronic marketplace may grow more slowly than we
expect or even decline. Our ability to increase the speed and reliability of
our electronic marketplace is limited by and depends upon the reliability of
both the Internet and the internal networks of our existing and potential
buyers. As a result, if improvements in the infrastructure supporting both the
Internet and the internal networks of buyers are not made in a timely fashion,
we may experience difficulty obtaining new buyers or maintaining our existing
buyers. Either of these could reduce our potential revenue and have a negative
impact on our business, results of operations and financial condition.
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If Internet security concerns hinder the adoption of e-commerce, the
development of our marketplace will also be impeded
Concern about the security of the transmission of confidential information
over public networks is a significant barrier to electronic commerce and
communication. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments could result in compromises or
breaches of Internet security systems that protect proprietary information. If
any well-publicized compromises of security were to occur, they could
substantially reduce the use of the Internet for commerce and communications.
Anyone who circumvents our security measures could misappropriate
proprietary information or cause interruptions in our services or operations.
Our activities involve the storage and transmission of proprietary information,
such as confidential buyer and supplier specifications. The Internet is a
public network, and data is sent over this network from many sources. In the
past, computer viruses have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
clients or suppliers, which could disrupt our electronic marketplace or make it
inaccessible to our clients or suppliers. We may be required to devote
significant capital and other resources to protect against the threat of, or to
alleviate problems caused by, security breaches and the introduction of
computer viruses. Our security measures may be inadequate to prevent security
breaches or combat the introduction of computer viruses, either of which may
result in loss of data, increased operating costs, litigation and possible
liability.
System failure or delay may cause interruption and disruption of our services
Our revenue depends on the number of suppliers and processors who use our
marketplace to purchase and sell plastics products. Accordingly, the
satisfactory performance, reliability and availability of our online site,
transaction-processing systems and network infrastructure are critical to our
operating results, as well as our ability to attract and retain buyers and
suppliers and to maintain adequate customer service levels. Substantially all
of our computer and communications systems are located in either Chicago or
Oakbrook, Illinois. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-
ins and similar events. Despite our implementation of network security
measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and confirm
buyer purchases. Any system interruptions that result in the unavailability of
our online site or reduced performance of the transaction system would reduce
the volume of sales and the attractiveness of our service offerings. This could
have a material adverse effect on our business, operating results and financial
condition.
Any substantial increase in the volume of traffic or the number of
transactions processed through our Web site will require us to expand and to
upgrade further our technology, transaction-processing systems and network
infrastructure. We cannot assure you that these upgrades will prevent
unanticipated system disruptions, slower response times or degradation in
levels of customer service. Our insurance policies may not adequately
compensate us for any issues that may arise due to any failures or
interruptions in our systems.
We cannot assure you that our transaction-processing systems and network
infrastructure will be able to accommodate increases in traffic in the future.
In general, we may not be able to project accurately the rate or timing of
these increases or successfully upgrade our systems and infrastructure to
accommodate future traffic levels on our online site. In addition, we cannot
assure you that we will be able to, in a timely manner, effectively upgrade and
expand our transaction-processing systems or successfully integrate any newly
developed or purchased modules with our existing systems. Any inability to do
so could have a material adverse effect on our business, operating results and
financial condition.
14
The failure of computer systems and software products to be Year 2000 compliant
could negatively impact our business
We have been able to build our internal business systems with Year 2000
compliance in mind and to date have not suffered any disruptions in our systems
due to the inability to properly process dates after December 31, 1999.
However, we cannot assure you that our systems or the technology we license
from third-party vendors for certain equipment and software included within our
systems are Year 2000 compliant. In addition, buyers' and suppliers' internal
operating systems and other software applications must operate effectively for
them to use our electronic marketplace. Further, if suppliers' internal
operating systems and software applications are not compliant, they may not be
able to supply high quality products to buyers in a timely manner.
Additionally, some of our suppliers have informed us that they have experienced
Year 2000-related difficulties. Failure of our internal computer systems, or of
third-party equipment or software, or of systems maintained by our suppliers to
operate properly with regard to the Year 2000 and thereafter could require us
to incur significant unanticipated expenses to remedy any problems. This could
have a material adverse effect on our customers, which could have a material
adverse effect on our business, financial condition and results of operations.
Regulation or taxation of the Internet or transacting business over the
Internet may inhibit the growth of our electronic marketplace
Due to the increasing popularity and use of the Internet and of e-commerce,
it is possible that governments in the U.S. and abroad may adopt a number of
taxes, laws and regulations with particular applicability to the Internet and
e-commerce transactions. Governments may adopt taxes and enact legislation
applicable to us in areas such as content, product distribution and network
security. Encryption and the use of key escrow, data and privacy protection,
electronic authentication or "digital" signatures, illegal and harmful content,
access charges and re-transmission activities may be regulated in the future.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, content, taxation, defamation and personal privacy
is uncertain. Taxes, laws or regulations may limit the growth of the Internet,
inhibit e-commerce and reduce the number of transactions on our marketplace,
increase our cost of doing business or increase our legal exposure. Any of
these factors could have a negative effect on our business, revenue, results of
operations and financial condition.
We are subject to government regulation applicable to suppliers that exposes us
to potential liability and negative publicity
We currently rely upon our suppliers to meet all packaging, distribution,
labeling, hazard information notices to purchasers, record keeping and
licensing requirements applicable to our business during the entire
transaction. Our reliance on suppliers' regulatory due diligence assessment of
purchasers and the compliance by suppliers and purchasers with applicable
governmental regulations may not be sufficient if the government requires us to
have our own licenses. For example, if we are held to be a seller or a
distributor of products because we took legal title to the products, we may
have violated some governmental regulations by not having the appropriate
license or permit and may be subject to potentially severe civil or criminal
penalties and fines for each offense. In addition, we are unable to verify that
our suppliers have in the past complied, or will in the future comply, with
applicable governmental regulatory requirements, or that their actions satisfy
all governmental or other legal requirements that may be applicable to our
sales. We could be fined or exposed to civil or criminal liability, including
monetary fines and injunctions, and we potentially could receive negative
publicity if we or our suppliers have not met or are not meeting applicable
governmental regulatory requirements. We do not maintain any reserve for
potential liabilities resulting from government regulation.
15
We may be exposed to product liability claims
We face potential liability for claims based on the type and adequacy of
the information and data that we obtain from suppliers and make available and
based on the nature, use or merchantability of the products that we sell and
distribute utilizing the Internet. This includes claims for breach of warranty,
product or environmental liability, misrepresentation, violation of
governmental regulations and other commercial claims. In particular, during
periods where we hold title to products or are otherwise liable for the
disposition or transfer of the products, we bear the risk of liability for
product loss, spill or release, and resulting damages to persons and property
during delivery by the supplier to the buyer and return by the buyer to the
supplier. In some instances, we pass through the manufacturers' warranties on
the products we distribute; however, those warranties are generally limited in
terms of scope and liability. Although we maintain commercial general liability
insurance, including products liability and completed operations liability, our
insurance may not cover some claims, penalties or spills. It is also subject to
policy limits and exclusions, and may not fully indemnify us or our employees
for any civil, governmental or criminal liability that may be imposed.
Furthermore, this insurance may not be available at commercially reasonable
rates in the future. Any liability not covered by our insurance or in excess of
our insurance coverage could have a negative effect on our business, results of
operations and financial condition. While we attempt to limit our liability to
buyers in our contracts, some object to limits on liability and these
contractual provisions may not absolve us of liability.
We also seek to obtain insurance coverage and indemnification from our
suppliers against some of these claims; however, the scope of the
indemnification is limited. All of our suppliers may not agree to indemnify us.
In addition, we are generally not in a position to monitor our suppliers'
activities. Therefore, we are exposed to liability and risk for these claims.
We may be sued for information and products retrieved from the Web
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute. These claims have been brought, and sometimes
successfully pressed, against online services. We do not and cannot practically
screen all of the content generated by our users on the bulletin board system
on our online site, and we could be exposed to liability with respect to that
content. We could also be subjected to claims based upon the content that is
accessible from PlasticsNet through links to other Web sites or through content
and materials that members may post in chat rooms or bulletin boards. Although
we carry general liability insurance, our insurance may not cover claims of
these types or may not be adequate to indemnify us for all liability that may
be imposed. Any imposition of liability, particularly liability that is not
covered by insurance or is in excess of insurance coverage, could have a
material adverse effect on our reputation and our business, operating results
and financial condition.
Protection of our intellectual property is limited and uncertain
Our intellectual property is important to our business. We seek to protect
our intellectual property through trademark and copyright law, trade secret
protection and confidentiality or license agreements with our employees,
buyers, suppliers and others. We cannot assure you that our means of protecting
our intellectual property rights in the United States or abroad will be
adequate or that others, including our competitors, will not use our
proprietary technology without our consent.
We have registered trademarks in the United States for "PlasticsNet" and
"Commerx, Inc." and have filed a trademark application for "PlasticsNet.Com".
However, we cannot guarantee that this trademark application will be granted or
that our registered trademarks will be upheld. If we are unable to secure or
maintain registration of these marks, we may be required to change the names
16
of our Web sites, stop using these marks to identify our brand or change our
domain name, all of which could cause confusion to current and potential buyers
and suppliers or disrupt our business. In addition, any name change could cause
confusion to potential investors, which could cause the value of our stock to
decline.
Furthermore, litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determinate the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of resources and could harm our business, operating results and
financial condition.
In the future, we may license certain of our intellectual property, such as
trademarks or copyrighted material, to third parties. While we would attempt to
ensure that any licensees maintain the quality and value of our brand, we
cannot ensure that they would refrain from actions which might diminish this
quality and value.
If others assert that our technology infringes their intellectual property
rights, resolving the dispute could divert our management team and financial
resources
Recently, many patents have been granted in the United States involving
business methods relating to e-commerce. We may be subject to claims that one
or more of the business methods on our marketplace infringe patents held by
others. The defense of any claims of infringement made against us by third
parties could involve significant legal costs and require our management to
divert time from our business operations. Either of these consequences of an
infringement claim could have a material adverse effect on our operating
results. If we are unsuccessful in defending any claims of infringement, we may
be forced to obtain licenses or pay royalties to continue to use our
technology. We may not be able to obtain any necessary licenses on commercially
reasonable terms or at all. If we fail to obtain necessary licenses or other
rights, or if these licenses are costly, our operating results may suffer
either from reductions in revenue through our inability to serve clients or
from increases in costs to license third-party technology.
If software and content that we license from third parties is not available, we
may not be able to provide the services on our marketplace
We rely on third parties to provide us with software and hardware, for
which we pay fees. This software has been readily available, and to date we
have not paid significant fees for its use. These third parties may increase
their fees significantly or refuse to license their software or provide their
hardware to us. While other vendors may provide the same or similar technology,
we cannot be certain that we can obtain the required technology on favorable
terms, if at all. If we are unable to obtain required technology at a
reasonable cost, our growth prospects and operating results may be harmed
through impairment of our ability to conduct business or through increased
cost.
We also intend to continue to license certain content for our Web site from
third parties, including content which is integrated with internally-developed
content and used on our Web site to provide key services. We cannot ensure that
third parties will continue to license this content to us on commercially
reasonable terms or that we will be able to successfully integrate third party
content. Licensing content from third parties exposes us to risks associated
with the assimilation of new content, the diversion of resources from the
development of our content, the inability to generate revenue from new content
sufficient to offset associated acquisition costs and the maintenance of
uniform, appealing content. The inability to obtain any of these licenses could
delay site development or services until we can identify, license and integrate
equivalent content. Any delays in site development or services could have a
material adverse effect on our business, operating results and financial
condition.
17
Officers and directors and their affiliates will continue to have substantial
control over us after the offering
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately % of the
shares of common stock ( % if the underwriters exercise the over-
allotment option in full). As a result, our officers, directors and their
affiliates will have the ability to influence the election of our Board of
Directors and the outcome of corporate actions requiring stockholder approval.
This concentration of ownership may have the effect of delaying or preventing a
change in control.
We may require additional capital for our operations
We currently anticipate that the net proceeds of the offering, together
with our existing borrowing arrangements and available funds, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 18 months. We may need to raise additional
funds in the future in order to develop new or enhanced services, to respond to
competitive pressures or to acquire complementary businesses, technologies or
services. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced. These securities may have powers, preferences and rights that are
senior to those of the rights of our common stock.
We cannot be certain that additional financing will be available on terms
favorable to us, if at all. If adequate funds are not available on acceptable
terms, we may be unable to fund our expansion, promote our brand identity, take
advantage of unanticipated acquisition opportunities, develop or enhance
services or respond to competitive pressures. Any inability to do so could have
a negative effect on our business, revenue, financial condition and results of
operations.
Other companies may have difficulty acquiring us, even if doing so would
benefit our stockholders, due to provisions of our corporate charter and bylaws
and Delaware law
Provisions in our Certificate of Incorporation, in our Bylaws and under
Delaware law could make it more difficult for other companies to acquire us,
even if doing so would benefit our stockholders. Our Certificate of
Incorporation and Bylaws contain the following provisions, among others, which
may inhibit an acquisition of our company by a third party:
. a staggered Board of Directors, where stockholders elect only a minority
of the Board each year;
. undesignated preferred stock, which the Board of Directors may set the
terms of and issue without stockholder approval;
. advance notification procedures for matters to be brought before
stockholder meetings;
. a limitation on who may call stockholder meetings; and
. a prohibition on stockholder action by written consent.
We are also subject to provisions of Delaware law that prohibit us from
engaging in any business combination with any "interested stockholder," meaning
generally a stockholder who beneficially owns more than 15% of our stock, for a
period of three years from the date this person became an interested
stockholder, unless various conditions are met, such as approval of the
transaction by our board. This could have the effect of delaying or preventing
a change in control.
Our management has broad discretion over how to use the proceeds of this
offering; we may not use the proceeds in ways that help our business succeed
We estimate that our net proceeds from this offering will be $ million,
at an assumed initial public offering price of $ per share after deducting
estimated underwriting discount and offering
18
expenses. Our primary purposes in making this offering are to increase our
working capital, create a public market for our common stock, facilitate our
future access to the public capital markets and increase our visibility in the
marketplace. We have no specific plans for the net proceeds of this offering
other than working capital and general corporate purposes. Accordingly, our
management will have broad discretion as to how to apply the net proceeds of
this offering. If we fail to use these proceeds effectively, our business may
not grow and our revenue and net income may decline.
The trading market price of our stock may decline as a result of substantial
sales of our common stock after the offering
Sales of a substantial number of shares of our common stock after the
offering could negatively affect the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. Upon completion of this offering, we will have
shares of common stock outstanding or subject to currently exercisable options
( shares if the underwriters' over-allotment option is
exercised in full). The shares sold in this offering
( shares if the underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the federal securities laws unless purchased by our
"affiliates" as that term is defined in Rule 144. The remaining
shares of common stock outstanding upon completion of the
offering will be "restricted securities" as that term is defined in Rule 144.
Stockholders holding approximately % of the outstanding common stock
and options to purchase common stock exercisable within 180 days after the date
of this prospectus have executed lock-up agreements that limit their ability to
sell common stock. These stockholders and option holders have agreed not to
sell or otherwise dispose of any shares of common stock for a period of at
least 180 days after the date of this prospectus without the prior written
approval of Goldman Sachs. When the lock-up agreements expire, these shares and
the shares underlying the options will become eligible for sale, in some cases
only pursuant to the volume, manner of sale and notice requirements of Rule
144.
You will suffer immediate and substantial dilution in the book value of your
investment
The initial public offering price per share will significantly exceed our
net tangible book value per share. If we were to liquidate immediately after
the offering, investors purchasing shares in this offering would receive a per
share amount of tangible assets net of liabilities that would be less than the
initial public offering price per share. Investors purchasing shares in this
offering will suffer dilution of $ per share from their investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. These statements
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different than those expressed or implied by
these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
these statements to actual results.
19
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the shares being
offered will be approximately $ million, at an assumed initial public
offering price of $ per share, after deducting the estimated underwriting
discount and offering expenses payable by us. If the underwriters exercise
their over-allotment option in full, we estimate that the net proceeds to us
from the sale of the shares being offered will be approximately $ million.
The principal purposes of this offering are to increase our working
capital, create a public market for our common stock, facilitate our future
access to the public capital markets and increase our visibility in the
marketplace. We have no specific plans for the net proceeds of this offering
other than general corporate purposes and working capital, and our use of these
proceeds will be in the discretion of our management. Pending deployment of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
20
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the authorization of additional common
and preferred stock and our issuance and sale of 3,128,732 shares of
Series B preferred in November and December 1999 for net proceeds of
approximately $36.9 million. The net proceeds include approximately $2.1
million that reflect the November 1999 conversion of all management
notes and accrued interest into shares of Series B preferred. The pro
forma balance sheet data also includes the write-off of $185,747 of
remaining management loan discounts, and the conversion of all Series A
and Series B preferred stock into 11,698,732 shares of common stock upon
the closing of this offering.
. on a pro forma basis as adjusted to reflect our issuance and sale of
shares of common stock in this offering at an assumed initial
public offering price of $ per share and after deducting the
estimated underwriting discount and offering expenses, and the
application of the net proceeds as described in "Use of Proceeds".
None of the amounts reflects 3,820,500 shares of common stock issuable upon
exercise of options outstanding under our stock option plan as of September 30,
1999 at a weighted average exercise price of $0.84 per share or 137,648 shares
of common stock, which will be issuable upon the exercise of warrants at a
weighted average exercise price of $3.10 per share.
You should read the table below along with our balance sheet as of
September 30, 1999 and the related notes to the financial statements, which are
included elsewhere in this prospectus.
[Download Table]
September 30, 1999
----------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- -------- --------
(in thousands)
Notes payable, net of current portion............ $ 184 $ 184 $
Capital lease obligations, net of current
portion......................................... 813 813
-------- -------- ---
Long-term debt, net of current portion........... 997 997
Redeemable convertible Series A preferred stock,
$.001 par value per share, 8,682,858 shares
authorized, 8,570,000 shares issued and
outstanding actual and no shares issued and
outstanding pro forma or pro forma as adjusted.. 7,010 --
Stockholders' equity (deficit)
Convertible Series B preferred stock, $.001 par
value per share, 3,218,021 authorized, no
shares issued or outstanding actual, pro forma
or pro forma as adjusted....................... -- --
Common stock, $.001 par value per share;
20,000,000 shares authorized, 7,430,000 shares
issued and outstanding actual; 19,128,732
shares issued and outstanding pro forma;
shares issued and outstanding pro forma as
adjusted....................................... 7 19
Deferred compensation........................... (592) (592)
Additional paid-in capital...................... 3,495 47,352
Accumulated deficit............................. (12,416) (12,627)
-------- -------- ---
Total stockholders' equity (deficit).......... (9,506) 34,152
-------- -------- ---
Total capitalization (deficit)................ $ (1,499) $ 35,149 $
======== ======== ===
21
DILUTION
Our pro forma net tangible book value as of December 31, 1999, was
approximately $ million, or per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities and then divided by the total number of
shares of common stock outstanding on December 31, 1999 after giving effect to
the conversion of all shares of outstanding Series A and Series B preferred
stock effective as of the closing of this offering. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
forma as adjusted net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to the sale of the
shares of common stock offered by us at an assumed initial public
offering price of $ per share, and after deducting the estimated
underwriting discount and estimated offering expenses payable by us, our pro
forma as adjusted net tangible book value on December 31, 1999 would have been
approximately $ million, or $ per share of common stock. This
represents an immediate increase in pro forma as adjusted net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors purchasing shares of common stock. The
following table illustrates this dilution on a per share basis:
[Download Table]
Assumed initial public offering price per share............... $
Pro forma net tangible book value per share before this
offering................................................... $
Increase per share attributable to new investors............
--------
Adjusted pro forma net tangible book value per share after
this offering................................................
--------
Dilution per share to new investors........................... $
========
The following table summarizes on a pro forma as adjusted basis, after
giving effect to the differences between the existing stockholders and new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid by investors and the average price per share
paid by existing stockholders and by new investors at an assumed initial
offering price of $ per share before deducting estimated underwriting
discount and offering expenses:
[Download Table]
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
Existing stockholders..................... % $ % $
New investors.............................
----- ------ ------ ------ ------
Totals.................................. 100.0% 100.0%
===== ====== ====== ======
The preceding tables exclude 4,058,875 shares of common stock issuable upon
exercise of options outstanding under our stock option plan on December 31,
1999 at a weighted average exercise price of $1.32 per share and 137,648 shares
of common stock which will be issuable upon exercise of warrants at a weighted
average exercise price of $3.10 per share. To the extent outstanding options
and warrants are exercised, there will be further dilution to new investors.
22
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes. We have derived
the statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the nine months ended September 30, 1999, and the balance sheet
data as of December 31, 1996, 1997 and 1998 and September 30, 1999 from our
financial statements that have been audited by PricewaterhouseCoopers LLP. We
have derived all other data in this table from unaudited financial statements.
We believe the unaudited results shown in the table below include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of such information. Operating results for
the nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for all of 1999.
[Enlarge/Download Table]
July 1995
(inception) Nine Months Ended
through Year Ended December 31, September 30,
December 31, ------------------------------------- ----------------------------
1995 1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- ----------- ----------
(in thousands, except share and per share data)
Statement of Operations
Data:
Revenue..................... $ 3 $ 53 $ 305 $ 375 $ 264 $ 833
Cost of revenue............. -- -- -- -- -- 426
----------- ----------- ----------- ----------- ----------- ----------
Gross profit................ 3 53 305 375 264 407
Operating expenses:
Sales and marketing........ 68 331 451 577 318 2,643
Information technology..... 78 336 274 515 298 2,344
Production and operations.. -- 129 139 140 113 849
General and
administrative............ 156 159 217 1,135 635 2,284
Amortization of deferred
stock compensation........ -- -- -- -- -- 387
----------- ----------- ----------- ----------- ----------- ----------
Total operating expenses. 302 955 1,081 2,367 1,364 8,507
----------- ----------- ----------- ----------- ----------- ----------
Loss from operations........ (299) (902) (776) (1,992) (1,100) (8,100)
Interest income (expense),
net........................ (13) (50) (118) (186) (134) 20
----------- ----------- ----------- ----------- ----------- ----------
Net loss.................... $ (312) $ (952) $ (894) $ (2,178) $ (1,234) $ (8,080)
=========== =========== =========== =========== =========== ==========
Historical basic and diluted
loss per common share...... $ (0.02) $ (0.06) $ (0.05) $ (0.13) $ (0.07) $ (1.09)
=========== =========== =========== =========== =========== ==========
Pro forma loss per share.... $ (0.15) $ (0.54)
=========== ==========
Weighted average shares used
to compute historical basic
and diluted loss per share
........................... 16,950,000 16,950,000 16,950,000 16,897,835 16,950,000 7,430,000
Weighted average shares used
to compute pro forma net
loss per share ............ 14,095,000 14,836,096
Potentially dilutive common shares have been excluded from the shares used
to compute earnings per share in each loss year because their inclusion would
be antidilutive. Pro forma loss per share data reflect the conversion of all
outstanding preferred stock into common stock, even if the effect of the
conversion is antidilutive.
The following pro forma balance sheet data give effect to our issuance and
sale of 3,128,732 shares of Series B preferred in November and December 1999
for net proceeds of approximately $36.9 million. The net proceeds include
approximately $2.1 million that reflects the November 1999 conversion of all
management notes and accrued interest into shares of Series B preferred. The
pro forma balance sheet data also includes the write-off of $185,747 of
remaining management loan discounts, and the conversion of all Series A and
Series B preferred stock into 11,698,732 shares of common stock upon the
closing of this offering.
[Download Table]
As of
As of December 31, September 30, 1999
-------------------------------- --------------------
1995 1996 1997 1998 Actual Pro Forma
----- ------- ------- ------- -------- ----------
(in thousands)
Balance Sheet Data:
Cash and cash
equivalents............ $ 249 $ -- $ 52 $ 3,303 $ 1,800 $ 36,642
Working capital
(deficit).............. (195) (1,168) (2,066) 2,531 (3,035) 33,613
Total assets............ 363 123 186 3,752 3,927 38,769
Long-term debt, net of
current portion........ -- -- -- -- 997 997
Redeemable convertible
preferred stock........ -- -- -- 5,010 7,010 --
Total stockholders'
equity (deficit)....... (112) (1,065) (1,958) (2,073) (9,506) 34,152
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that include risks and uncertainty. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, such as those set forth under "Risk
Factors" and elsewhere in this prospectus.
Overview
Commerx is a provider of business-to-business e-commerce solutions for
vertical, industrial processing markets. Our first marketplace is PlasticsNet,
a secure, supplier-neutral, buyer-focused marketplace on the Internet that is
used for the procurement of plastics products and services. We began developing
the PlasticsNet marketplace in 1995 with the goal of establishing the first
Internet-based e-commerce marketplace for the plastics industry.
From inception through March 1999, we were a development-stage enterprise
and did not have significant revenue. Our operating activities during this
period related primarily to designing and developing the PlasticsNet community,
building our corporate infrastructure, establishing relationships with
suppliers of plastics products and services and raising capital. From September
1995 through March 1999, we derived revenue primarily from fees for services
for the creation and production of advertising on our Web site. We began
conducting transactions on our marketplace in April 1999, and we intend to
continue developing the site's functionality and service offerings.
We have generated nominal revenue to date, and our ability to generate
significant revenue is uncertain. We have incurred significant losses since
inception and, as of September 30, 1999, we had an accumulated deficit of
approximately $12.4 million. We currently anticipate our losses to increase in
the future and cannot assure you that we will achieve or sustain profitability.
From inception, we have increased our level of spending to build our
corporate infrastructure, develop the PlasticsNet marketplace and attract an
experienced management team. We intend to increase our marketing, sales,
technology, administrative and other operating expenses as required to continue
to build the PlasticsNet marketplace, as well as to enter other vertical
industrial processing markets and expand into international markets. We
anticipate that these expenses could significantly precede any revenue
generated by our increased spending.
Revenue
From inception through March 1999, we derived our revenue solely from fees
paid for establishing and maintaining supplier business centers and other
advertising content on the PlasticsNet marketplace. We contract for the
establishment and renewal of business centers generally on an annual basis and
recognize revenue equally over each of the twelve months. Other advertising
revenue, such as banner ads, is contracted generally on a quarterly basis, and
we recognize revenue equally over each of the three months of the agreement. We
expect that both of these sources of revenue will continue to grow, but will
account for a smaller share of our total revenue in the future. Historically,
we have collected substantially all of our accounts receivable for advertising
services; however, we provide an allowance for doubtful accounts.
Beginning in the second quarter of 1999, we began generating transactional
revenue, derived from the sale of plastics products to buyers through our
Internet-based e-commerce marketplace. By the end of 1999, we derived revenue
predominantly from sales of products on our marketplace. Under the majority of
our current supplier agreements, we act as the principal by purchasing products
from suppliers and reselling them to buyers. We recognize revenue at the time
of title
24
transfer, which is typically at the time of shipment. Suppliers ship products
directly to buyers based on their delivery specifications. Under these
principal-based agreements, we are responsible for selling products, collecting
payment, ensuring that shipments reach buyers and processing returns. We take
title to products upon shipment and bear the risk of loss for collection,
delivery and product returns. We provide an allowance for sales returns, which
have been inconsequential to date. We also provide an allowance for doubtful
accounts, but have not deemed any transaction-based receivables uncollectable
to date.
We also intend to engage in agency transactions where we will neither take
title to products nor bear the risk of loss for collection or product returns.
Under these agency-based transactions, we will recognize revenue equal to a
percentage of the purchase price of products sold at the time the products are
shipped to the buyer. We have not had any agency transactions to date, but
these transactions may ultimately constitute an important part of our business.
We also intend to provide information technology, fulfillment and
consulting services, such as integrated procurement technology services that
are required to integrate buyers' and suppliers' systems with the PlasticsNet
marketplace. We will recognize service revenue upon complete fulfillment or
degree of completion of the service.
We exclude revenue and related expenses resulting from barter transactions
from our financial records.
During the year ended December 31, 1999, Endura Plastics, Inc. accounted
for approximately 23% of our revenue, National Plastics Network accounted for
approximately 20% of our revenue, and Borneo, Inc. accounted for approximately
14% of our revenue. The percentage of our revenue generated by each of these
buyers is expected to decline in 2000.
Cost of Revenue
Cost of revenue varies widely depending upon the type of transaction.
Advertising revenue does not have associated direct costs of sales; therefore,
gross profit is equal to revenue. When we act as the principal in a procurement
transaction, our cost of revenue consists of the cost of acquiring products
from our distributors and suppliers for sale to our buyers. When we act as an
agent, transactional revenue does not have associated direct costs of sales.
The cost of revenue for consulting services will include personnel costs that
we will incur in providing these services. We anticipate earning higher gross
profit as we build our agency and service revenue; however, we expect our
overall gross profit as a percent of revenue will decrease as we derive a
larger percentage of our revenue from principal-based transactions on our
marketplace.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
payroll, benefits and travel expenses for employees engaged in our sales and
marketing activities and for our advertising and promotion activities. Sales
and marketing expenses have increased since inception as we have expanded our
sales and marketing efforts. We expect that sales and marketing expenses will
increase significantly in future periods as we hire additional sales and
marketing personnel to drive user adoption among buyers and sellers in the
plastics industry, develop our branding strategy and pursue new vertical and
international markets.
Information Technology. Information technology expenses consist primarily
of payroll, benefits, consultant fees and various communication expenses
associated with developing, maintaining and enhancing the PlasticsNet
marketplace. Increased information technology spending has resulted from
additional staffing and associated costs incurred to enhance the features,
content and functionality of the PlasticsNet marketplace. Research and
development expenditures are expensed as incurred. Software development costs
are required to be capitalized when a product's technological feasibility
25
has been established either by completion of a detailed program design or a
working model of the product and ending when a product is available for general
release to consumers. To date, attainment of technological feasibility and
general release of our products have substantially coincided. As a result, we
have not capitalized any software development costs. We believe that continued
spending on product development is critical to achieving success, and therefore
expect product development costs to increase in future periods.
Production and Operations. Production and operations expenses consist
primarily of payroll, benefits and consulting fees that are incurred to provide
integration, content management and order management services to users of the
PlasticsNet marketplace. We expect these costs to increase as our user base
grows and our services expand within the domestic plastics industry as well as
to other vertical industrial markets and geographic markets.
General and Administrative. General and administrative expenses consist
primarily of payroll, benefits and professional service fees. We allocate
overhead costs pro rata to each functional department. We expect general and
administrative expenses to increase in future periods to support our expanded
operations and the expenses of being a public company.
Stock-Based Compensation. Stock-based compensation expense consists of
expense related to employee stock option grants issued with exercise prices
lower than the deemed fair value of the underlying shares at the time of grant.
We amortize stock-based compensation for employee stock options on an
accelerated basis over the vesting period of each individual award.
Results of Operations
Due to our limited operating history, we believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as an indication of future performance.
Nine Months Ended September 30, 1998 and 1999
Revenue
Total revenue increased 216% from $264,000 in the nine months ended
September 30, 1998 to $833,000 in the same period during 1999. This increase
reflects an increase in advertising revenue of 47% from $264,000 to $388,000.
In addition, transaction revenue was $445,000 for the nine months ended
September 30, 1999.
Quarterly Revenue Analysis
[Download Table]
Three Months Ended
--------------------------------
March 31, June 30, September 30,
1999 1999 1999
--------- -------- -------------
(in thousands)
Transaction revenue:
Principal-based.............................. $ -- $112 $333
Agency-based................................. -- -- --
------ ---- ----
Total transaction revenue...................... -- 112 333
Advertising and other revenue.................. 112 134 142
------ ---- ----
Total revenue.................................. $ 112 $246 $475
====== ==== ====
26
Cost of Revenue
During the nine months ended September 30, 1999, cost of revenue increased
from zero to $426,000 due to the introduction of principal-based transaction
revenue. We expect that cost of revenue will increase in future periods due to
increases in principal-based transaction volume through our procurement center.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 718% from
$318,000 for the nine months ended September 30, 1998 to $2.6 million for the
same period in 1999. The increase reflects continued investment in sales and
marketing activities and growth in staffing levels that increased from three as
of September 30, 1998 to 23 as of September 30, 1999.
Information Technology. Information technology expenses increased 672% from
$298,000 for the nine months ended September 30, 1998 to $2.3 million for the
same period in 1999. The increase is primarily attributable to higher costs
associated with staffing levels that increased from three as of September 30,
1998 to 15 as of September 30, 1999 and consulting fees related to Web site
development and system integration.
Production and Operations. Production and operations expenses increased
651% from $113,000 for the nine months ended September 30, 1998 to $849,000 for
the same period in 1999. The increase is primarily attributable to higher costs
associated with staffing levels that increased from two as of September 30,
1998 to 13 as of September 30, 1999 and consulting fees.
General and Administrative. General and administrative expenses increased
262% from $635,000 for the nine months ended September 30, 1998 to $2.3 million
for the same period in 1999. This increase is primarily attributable to the
addition of personnel in the areas of human resources, finance and executive
management that increased from three as of September 30, 1998 to 15 as of
September 30, 1999 to support the growth of our business in the current period
and in future years. Overhead costs, including rent, depreciation, utilities
and recruiting costs, increased 524% from $109,000 in the nine months ended
September 30, 1998 to $680,000 in the same period in 1999.
Amortization of Deferred Compensation. In connection with the grant of
options under our employee stock option plan in March 1999, we recorded
aggregate deferred compensation expense of $979,000 for options granted during
the nine months ended September 30, 1999. We are amortizing the deferred
compensation expense over the full vesting period of the stock options. We
amortized approximately $387,000 during the nine months ended September 30,
1999.
Other Income (Expense), net
Other expense decreased 71% from $133,000 for the nine months ended
September 30, 1998 to $39,000 for the same period in 1999, reflecting lower
interest expense on related party obligations. Interest income of $59,000 for
the nine months ended September 30, 1999 represented interest income earned on
invested funds received from the December 1998 financing.
Years Ended December 31, 1996, 1997 and 1998
Revenue and Gross Profit
Total revenue increased 475% from $53,000 in 1996 to $305,000 in 1997 and
23% to $375,000 in 1998. The increase in revenue from 1996 to 1998 is primarily
attributable to the increase in advertisers on our site. Advertising, including
the development of supplier business centers, was our sole source of revenue
through March 1999. Since all of our revenue during this time period was
derived from advertising fees, our gross profit is equal to revenue.
27
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 36% from
$331,000 in 1996 to $451,000 in 1997 and 28% to $577,000 in 1998. The increase
from 1996 to 1998 resulted primarily from continued investment in sales and
marketing activities and increased staffing levels as our business developed.
Information Technology. Information technology expenses decreased 18% from
$336,000 in 1996 to $274,000 in 1997 and increased 88% to $515,000 in 1998. The
decrease from 1996 to 1997 was primarily due to a decrease in consulting costs
incurred during 1996 in connection with launching the PlasticsNet Web site. The
increase from 1997 to 1998 primarily relates to higher costs associated with
increased staffing levels, consulting fees and software costs in support of
enhancing the features, content and functionality of the PlasticsNet
marketplace.
Production and Operations. Production and operations expenses increased 8%
from $129,000 in 1996 to $139,000 in 1997 and increased to $140,000 in 1998.
Production and operations costs were primarily related to graphics content
development for our Web site from 1996 to 1998.
General and Administrative. General and administrative expenses increased
36% from $159,000 in 1996 to $217,000 in 1997 and increased 407% to $1.1
million in 1998. The increase from 1996 to 1998 was primarily due to increased
consulting fees, recruiting fees associated with increased staffing levels and
legal fees.
Other Income (Expense), net
Other expense increased 136% from $50,000 in 1996 to $118,000 in 1997 and
increased 58% to $186,000 in 1998. The increases in all periods were generated
from interest expense incurred on an increasing loan balance from a related
party.
Income Taxes
On December 27, 1998, in connection with a private placement of preferred
stock, we were required to change our corporate tax status from an S-
Corporation to a C-Corporation, which subjected us to federal and state
corporate income taxes. At December 31, 1998, we recorded a deferred tax asset
and, as a result of uncertainties regarding the realization of the assets due
to our lack of earnings history, also recorded a full valuation allowance. See
Note 8 of Notes to Financial Statements.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through
operating loans from a related party and from the private sale of our equity
securities. We used related party advances as our primary source of funding
from inception through December 1998, at which time substantially all of the
outstanding balances were extinguished, except for approximately $100,000,
which we repaid in November 1999. Since December 1998, we have raised net
proceeds through the private sale of our equity securities of approximately
$38.9 million. We have also financed our operations through secured equipment
lease financing and an unsecured note. At September 30, 1999, our principal
sources of liquidity included approximately $1.8 million of cash and cash
equivalents, $1.0 million of available credit line with a commercial bank and
$300,000 of equipment financing arrangements.
We had outstanding loans from related parties of approximately $1,970,000
as of December 31, 1997 and approximately $93,000 as of December 31, 1998. As
of September 30, 1999 we had approximately $1.1 million outstanding under the
equipment financing arrangements, $300,000 outstanding on a three-year note due
to a financing company and $2.0 million outstanding on six-
28
month, convertible notes due to certain officers of the company. Subsequent to
September 30, 1999, we raised approximately $36.9 million in net proceeds from
the private sale of our Series B preferred stock, after conversion of the six-
month notes referenced above.
Net cash used in operating activities was $900,000 in 1996, $800,000 in
1997, $1.6 million in 1998 and $5.6 million for the nine months ended September
30, 1999. Net cash used in operating activities primarily resulted from
personnel, consulting and overhead costs.
Net cash used in investing activities was $41,000 in 1996, $32,000 in 1997,
$144,000 in 1998 and $388,000 for the nine months ended September 30, 1999. We
have made substantial investments in computer equipment, computer software,
office furniture and leasehold improvements, primarily through the financing
lease agreements referenced above.
Net cash provided by financing activities was $700,000 in 1996, $900,000 in
1997, $5.0 million in 1998 and $4.5 million for the nine months ended September
30, 1999. Net cash from financing activities was initially derived from
operating loans from a related party and thereafter from the sale of our
preferred stock and convertible notes. We currently anticipate that the net
proceeds from this offering, together with our current cash, cash equivalents
and equipment lease line, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 18 months.
However, we may need to raise additional funds in future periods through public
or private financings, or other arrangements to fund our operations and
potential acquisitions, if any, over a long-term basis until we achieve
profitability, if ever. Any additional financing activities, if needed, might
not be available on reasonable terms or at all. Failure to raise capital when
needed could seriously harm our business and results of operations. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage of ownership of our stockholders will be further diluted.
Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
29
Quarterly Results of Operations
The following table presents our unaudited quarterly operating results for
the four quarters in the twelve months ended September 30, 1999. You should
read the following table together with our financial statements and related
notes in this prospectus. We have prepared this unaudited information on the
same basis as the audited financial statements. This table includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the operating results of any quarter.
[Download Table]
Three Months Ended
-------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
------------ --------- -------- -------------
(in thousands)
Statement of Operations
Data:
Revenue.................... $ 111 $ 112 $ 246 $ 475
Cost of revenue............ -- -- 106 320
------ -------- -------- --------
Gross profit............... 111 112 140 155
------ -------- -------- --------
Operating expenses:
Sales and marketing....... 259 406 781 1,456
Information technology.... 217 396 628 1,320
Production and
operations............... 27 121 273 455
General and
administrative........... 500 504 632 1,148
Amortization of deferred
stock compensation....... -- 190 96 101
------ -------- -------- --------
Total operating
expenses............... 1,003 1,617 2,410 4,480
------ -------- -------- --------
Operating loss............. (892) (1,505) (2,270) (4,325)
Other income (expense),
net....................... (52) 26 13 (19)
------ -------- -------- --------
Net loss................... $ (944) $ (1,479) $ (2,257) $ (4,344)
====== ======== ======== ========
Three Months Ended
-------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
------------ --------- -------- -------------
As a Percentage of Revenue:
Revenue.................... 100% 100% 100% 100%
Cost of revenue............ -- -- 43 67
------ -------- -------- --------
Gross profit............... 100 100 57 33
------ -------- -------- --------
Operating expenses:
Sales and marketing....... 233 362 318 306
Information technology.... 196 354 255 278
Production and
operations............... 24 108 111 96
General and
administrative........... 451 450 257 242
Amortization of deferred
stock compensation....... -- 170 39 21
------ -------- -------- --------
Total operating
expenses............... 904 1,444 980 943
------ -------- -------- --------
Operating loss............. (804) (1,344) (923) (910)
Other income (expense),
net....................... (46) 23 6 (4)
------ -------- -------- --------
Net loss................... (850)% (1,321)% (917)% (914)%
====== ======== ======== ========
30
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to
distinguish 21st century dates from 20th century dates, the date code field
must be modified to distinguish between 21st and 20th century dates. As a
result, many companies upgraded or replaced their software and computer systems
in order to comply with these Year 2000 requirements. The use of software and
computer systems that are not Year 2000 compliant could result in system
failures or miscalculations resulting in disruptions of operations, including
among other things, a temporary inability to process transactions, send
invoices or engage in normal business activities.
We have been able to build our internal business systems with Year 2000
compliance in mind and, as a result, to date we have not suffered any
disruptions in our systems following December 31, 1999. In addition, to date,
we have not been made aware that any of our technology or communications
vendors have suffered disruptions in their systems; however, some of our
suppliers have informed us that they have experienced Year 2000-related
difficulties. Failure of our internal computer systems, third-party equipment
or software, or systems maintained by our suppliers to operate properly with
regard to the Year 2000 could require us to incur significant unanticipated
expenses to remedy any problems.
Market Risk
All of our revenue recognized to date has been denominated in United States
dollars and is primarily from buyers in the United States. We intend to
establish foreign subsidiaries in the future. We have not yet had any revenue
from international transactions. In the future, a portion of the revenue we
derive from international operations may be denominated in foreign currencies.
As a result, our operating results could become subject to significant
fluctuations based upon changes in the exchange rates of those currencies in
relation to the United States dollar. Furthermore, to the extent that we engage
in international sales denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make our
services less competitive in international markets. Although currency
fluctuations are currently not a material risk to our operating results, we
intend to continue to monitor our exposure to currency fluctuations and, when
appropriate, use financial hedging techniques to minimize the effect of these
fluctuations in the future. We cannot assure you that exchange rate
fluctuations will not harm our business in the future. We do not currently
utilize any derivative financial instruments or derivative commodity
instruments.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are
in short-term instruments. Borrowings under our existing credit lines are also
interest rate sensitive, since the interest rate charged by our bank varies
with changes in the prime rate of lending. We believe, however, that we are
currently not subject to material interest rate risk.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133,
which is effective, as amended, for all quarters in fiscal years beginning
after June 15, 2000, establishes accounting and reporting standards for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. As we do not currently engage
in derivative or hedging activities, we do not expect the adoption of this
standard to have a significant impact on our consolidated financial statements.
31
BUSINESS
Company Overview
Commerx creates business-to-business electronic marketplaces that enable
buyers and sellers in industrial processing markets to transact business on the
Internet. We target industrial processing markets characterized by large
numbers of buyers and sellers, high levels of fragmentation, inefficient supply
chains and large transaction volume. Our first marketplace is PlasticsNet.
PlasticsNet provides a secure, supplier-neutral, buyer-focused marketplace
that streamlines the procurement of plastics products and services. The
PlasticsNet marketplace enables buyers and sellers to execute transactions on
the Internet and provides the tools, content and community to help them make
more informed decisions. Through the PlasticsNet marketplace, sellers can cost-
effectively provide current pricing and product information to a large pool of
buyers. In addition, buyers can efficiently search for products, identify
suppliers, compare product prices and specifications, and complete a purchase.
Led by a management team with extensive experience in the plastics, industrial
processing and technology industries, PlasticsNet has emerged as a leading
business-to-business electronic marketplace for the procurement of plastics.
We currently offer for sale on our procurement center over 30,000 plastics
products, or SKU's, from approximately 50 suppliers. We also have recently
signed strategic agreements with suppliers that provide us access to additional
products that we are currently adding to the PlasticsNet marketplace. These
agreements will provide us with over 1,000 direct materials products, such as
resins and additives, from a relationship with Ashland Inc. and over 400,000
maintenance, repair and operations, or MRO, products from a relationship with
MSC Industrial Direct Co. Inc. Our marketplace had approximately 73,000 user
sessions during December 1999 and currently has over 35,000 registered user
accounts. In 1999, Business Marketing, an Advertising Age publication, ranked
PlasticsNet as the fourth-best business-to-business Web site out of 300
surveyed in the U.S. based on a variety of criteria, including ease of
navigation, design, presentation of information and e-commerce capabilities.
Industry Background
Growth of Business-to-Business Internet Commerce
The Internet has emerged as the fastest growing communications medium in
history and is dramatically changing how businesses and individuals
communicate, share information and conduct commerce. Initially, the growth of
the Internet created opportunities for conducting business-to-consumer and
consumer-to-consumer e-commerce. More recently, the widespread adoption of
intranets, the acceptance of the Internet as a business communications
platform, and increased and secure bandwidth have created a foundation for
business-to-business e-commerce. This offers the potential for organizations to
increase revenue, streamline complex business processes and supply chains,
reduce costs and improve productivity. According to Forrester Research,
Internet-based business-to-business e-commerce is expected to grow from $109
billion in 1999 to $1.3 trillion in 2003, accounting for more than 90% of the
dollar value of e-commerce in the United States by 2003.
The dynamics of business-to-business e-commerce relationships differ
significantly from those of other e-commerce relationships. Business-to-
business e-commerce solutions frequently automate or otherwise impact workflows
or processes that are fundamental to business operations by replacing various
paper-based transactions with electronic communications. These solutions are
most effective when integrated with a company's existing information systems, a
process that can be complex and time consuming, often requiring personnel to be
trained to use the solution. Consequently, selection
32
and implementation of a business-to-business e-commerce solution represents a
significant commitment by an enterprise. However, because business transactions
are typically recurring and non-discretionary, we believe the lifetime value of
a business-to-business e-commerce customer is substantial.
As business-to-business e-commerce continues to grow, industry-specific or
"vertical" marketplaces are achieving increasing acceptance. These vertical
marketplaces bring together buyers, sellers, and information in open, online
marketplaces that automate complex business processes and supply chains. We
believe business-to-business e-commerce marketplaces are most likely to be
successful in industries characterized by:
. large numbers of buyers and sellers,
. a high degree of fragmentation among buyers, sellers or both,
. complex supply chains,
. significant dependence on information exchange,
. large transaction volume, and
. large product selection.
The Plastics Industry Supply Chain
The plastics industry, which we estimate represented over one trillion
dollars in annual product shipments worldwide in 1999, is one of the largest
manufacturing industries in the world. According to The Society of Plastics
Industry's latest available data, the plastics industry ranked fourth in U.S.
product shipments by dollar volume among top manufacturing industry groups in
1996. We estimate that the domestic shipments related to the U.S. plastics
industry, including products, services and other activities, reached over $400
billion in 1999.
The plastics industry supply chain is comprised of suppliers, plastics
processors and original equipment manufacturers ("OEMs") as illustrated below.
[SUPPLY CHAIN CHART]
Based on our extrapolations of publicly available data, we estimate that the
1999 domestic supplier-to-plastics processor segment of the plastics industry
supply chain represented over a $100 billion market. We also estimate that the
domestic plastics processor-to-OEM market represented over a $190 billion
market in 1999. We believe that both of these segments represent opportunities
for e-commerce solutions.
33
At the base of the supply chain are an estimated 6,000 companies that
supply plastics processors with the following materials, equipment, supplies
and services:
. Direct Materials. Direct materials such as resins and additives are used
in the production of plastics components and parts. Resins, which are
shipped as small plastic pellets, include polycarbonates, polyetheylene,
polyvinyl chloride and polypropylene. Additives, such as colorants and
antioxidants, affect the appearance and other characteristics of
plastics products.
. Processing Equipment. Processing equipment is used in the production of
plastic components and parts. Examples of processing equipment include
injection and blow molding machines, process controls, chillers,
software and information systems, and molding systems.
. Industrial Supplies. Maintenance, repair and operations, or MRO,
supplies include items such as cutting tools, mold-cleaning compounds,
mold materials, drills, abrasives and office supplies.
. Services. Typical services provided by suppliers include product design,
mold building and die cut stamping.
Suppliers have traditionally used multiple distribution channels, including
direct sales, distributors and brokers, to distribute these different products
to plastics processors.
. Direct Sales. Suppliers currently sell large bulk quantities of products
directly to plastics processors. Direct sales arrangements include both
spot purchases and contracts for repetitive scheduled purchases, such as
railcar or truckload quantities, over a specific period of time.
Suppliers typically maintain their own sales forces to facilitate these
direct sales.
. Distributors. Plastics processors generally purchase smaller direct
material lots and MRO supplies through distributors. For example,
distributors often divide bulk quantities of resin into smaller lots for
shipment.
. Brokers. Brokers and commissioned representatives act as agents in the
sale of a variety of product categories, such as resins and new and used
equipment. Unlike distributors, brokers and commissioned representatives
do not typically carry inventory or break larger lots for shipment.
Although direct materials, equipment and supplies are sold through each of
these distribution channels, the concentration of sales through each channel
varies by product. In general, we believe the majority of direct materials are
sold through the direct sales forces of manufacturers and through distributors;
processing equipment is sold both directly and through brokers; and industrial
supplies are sold through distributors.
Plastics processors are the primary purchasers of these direct materials,
equipment, supplies and services. These plastics processors are usually
specialized, medium- to small-sized companies that manufacture a large variety
of interim components under specifications from OEMs. The interim plastics
components are then sold directly to these OEMs. We believe that the number of
plastics processors has grown substantially in recent years as OEMs have
outsourced an increasing amount of their plastics component manufacturing.
OEMs are traditionally medium- to large-sized companies that manufacture a
broad selection of end products across a wide range of industries, including:
. Automotive: bumpers, wheel covers and mirror cases
. Building and construction: pipe fittings, siding and flooring
. Consumer electronics: computers, cellular phones and compact discs
34
. Household goods: kitchen appliances, power tools, major appliances and
utensils
. Packaging: packaging materials and food wraps
We also define OEMs to include commercial end users and retailers that purchase
finished plastics products made by plastics processors for resale or use within
their businesses. These plastics products are usually simpler products such as
plastic cups or straws that do not require any additional assembly.
Inefficiencies in the Traditional Plastics Industry Supply Chain
The traditional purchasing methods in the plastics industry are
inefficient, costly and time consuming for both the buyers and sellers of
plastics products and services. The current plastics market environment,
particularly in the supplier-to-plastics processor segment, is characterized by
the following limitations:
Fragmented Market of Suppliers. The fragmentation of the supplier base
creates inefficiencies for buyers. Currently, there are approximately 6,000
suppliers of direct materials, machinery, equipment and supplies for plastics
processors in the United States. The large number of suppliers makes it
cumbersome for buyers to determine which suppliers are offering the best
products and prices. In addition, none of these suppliers is able to offer the
full spectrum of products and services that plastics processors need.
Consequently, plastics processors must seek out and purchase from multiple
suppliers.
Fragmented Market of Buyers. The fragmentation of the buyer base creates
inefficiencies for suppliers. Of the estimated 20,000 plastics processors in
the United States, approximately 15,000 are smaller molders with annual sales
of less than $10 million. Due to the large number of plastics processors and
their relatively small size, it is difficult for suppliers to locate potential
customers and provide them with relevant product and pricing information.
Additionally, we believe suppliers have recently scaled back their direct sales
forces and have become primarily focused on serving their larger plastics
processor customers. As a result, we believe suppliers are searching for more
effective and efficient means to service the fragmented community of buyers.
Inefficient Information Management Processes. Product orders are
traditionally handled through internal, paper-based purchasing processes that
require manual preparation of purchase orders and manual order tracking,
billing and reporting. These paper-based systems are cumbersome and time
consuming and make it difficult for buyers to obtain information relating to
product availability, pricing and shipment. In addition, plastics processors
often must submit multiple purchase orders to multiple suppliers, resulting in
higher costs and difficulty tracking orders. Buyers often lack the resources or
expertise to streamline these processes. While some suppliers have developed
Web sites to communicate with individual buyers, few have invested the
significant time and money required to establish an effective e-commerce
channel with their customer base. We believe many suppliers will prefer to
outsource these processes, allowing them to focus on their core competencies.
Regional Nature of the Global Plastics Industry. The fragmented and
inefficient nature of the plastics industry at a global level often hinders
buyers and suppliers from accessing the opportunities that exist outside their
domestic markets. We believe the primary reason is the difficulty buyers and
suppliers encounter in obtaining reliable, timely information about product
availability and market information across regions and national borders. In
addition, inefficiencies in distribution make it difficult for suppliers to
cost-effectively market and distribute their products internationally.
Need for a Business-to-Business e-Commerce Solution in the Plastics Industry
The fragmentation and supply chain complexities of the plastics industry
create the need for a business-to-business e-commerce solution that provides a
vertical marketplace for the buyers and
35
suppliers of plastics products and services. Buyers need a solution that
provides increased and unbiased access to a large number of suppliers, valuable
information about plastics products and services, simplified order processing
and fulfillment, and reduced procurement costs. Suppliers of plastics products
need a solution that provides increased exposure to a large number of potential
buyers, incremental sales, reduced costs of sales, improved forecasting methods
and working capital efficiencies. Both buyers and suppliers need a solution
that provides a fair and neutral marketplace for procurement and an
information-rich community for the exchange of product knowledge.
The PlasticsNet Solution
Our solution, the PlasticsNet marketplace, provides a secure, supplier-
neutral, buyer-focused marketplace that streamlines the procurement of plastics
products and services. The PlasticsNet marketplace enables buyers and sellers
to execute transactions on the Internet and provides the tools, content and
community to help them make more informed decisions. Through the PlasticsNet
marketplace, suppliers can cost-effectively provide current product offering
and pricing information to a large pool of buyers. In addition, buyers can
efficiently search for products, identify suppliers, compare product prices and
specifications, and complete a purchase.
Benefits to Buyers
Reduced Transaction Costs and Order Simplicity. Our solution automates
manual, paper-based business processes, allowing buyers to purchase products
online. Using our marketplace, buyers are able to purchase multiple items from
multiple suppliers with a single purchase order sent electronically to
PlasticsNet. These features benefit the buyer by reducing the administrative
effort and expense of evaluating and managing multiple suppliers.
Accurate and Detailed Product Information. We provide buyers with single-
source, Web-based access to an accurate, detailed and current catalog of
specifications and pricing information for over 30,000 products from
approximately 50 suppliers. This information is organized in a detailed
directory that provides quick and convenient access to product information. In
addition, we provide buyers with the tools to compare and contrast supplier
prices and specifications.
Integration with Existing Business Processes. We have designed our
marketplace to integrate with buyers' business processes and business rules.
For example, companies can assign spending limits to individuals within their
organizations. We also have the ability to route selected purchase orders to an
individual's managing supervisor for approval. In addition, once our
marketplace has been integrated with a buyer's information systems, a purchase
order entered anywhere within the buyer's system may be modified and submitted
directly to our marketplace without unnecessary re-entry of data.
Buyer Customization. Our marketplace allows buyers to customize their
interface to include their own purchasing information, preferred suppliers and
pre-negotiated pricing from suppliers. System customization allows buyers to
streamline product sourcing and order processing to ensure that they receive
the best price for a given product. The PlasticsNet marketplace also provides
buyers with reporting capabilities that allow them to review details of
previous purchases. Access to this historical information allows buyers to make
purchasing decisions more effectively in the future.
High-Quality Technical Content. We provide technical information on the
PlasticsNet marketplace, such as timely industry information and discussion
groups. In addition, we give buyers access to material data sheets and product
specifications that are useful for comparing and understanding products.
36
Benefits to Suppliers
Reduced Transaction and Administrative Costs. Suppliers are able to post
their products and related specifications on our online catalog, which can
significantly reduce the costs of maintaining, updating, publishing and
distributing paper-based catalogs. The PlasticsNet marketplace also allows
suppliers to receive and process orders online, thereby reducing costs
associated with order processing and tracking, accounts receivable collection
and customer service. Furthermore, we provide an Internet-based e-commerce
solution that is designed to reduce the need for suppliers to develop and
maintain their own online ordering systems.
Increased Access to Pool of Qualified Buyers. The PlasticsNet marketplace
provides suppliers with access to a large pool of potential buyers. Registered
buyers provide us with all relevant purchasing information for efficient
execution of transactions. We then qualify buyers by performing credit checks
and establishing business rules. By having access to this pool of qualified
buyers, suppliers can more effectively target their sales efforts. As more
buyers register on the PlasticsNet marketplace, we expect this benefit will
continue to grow.
Efficient Marketing and Distribution. Suppliers have traditionally used
multiple distribution channels designed to meet diverse customer needs. The
PlasticsNet marketplace allows suppliers to market and distribute different
types of products, including standard catalog items, negotiated items, and
limited supply products, through a single marketplace. We believe this enables
suppliers to reduce the complexity and cost of their distribution systems. In
addition, suppliers are able to market surplus direct materials and used
processing equipment, helping them to manage their inventory more efficiently.
Furthermore, by outsourcing many sales functions to PlasticsNet, suppliers are
able to shift their existing sales organizations and personnel to other market
segments or customer bases.
Targeted, Cost-effective Advertising Opportunity. We offer individual
suppliers the opportunity to market their products by creating and maintaining
customized, branded "business centers" on our marketplace. These business
centers typically contain product information, services offerings and company
profiles, and allow suppliers to reach a targeted audience of potential buyers
in a cost-effective fashion. Over 230 industry suppliers currently maintain
business centers on our marketplace.
Strategy
Our objectives are to be the leading electronic marketplace for the
plastics industry and to use that leadership position to target other vertical
industrial processing markets. Our strategy to achieve these objectives
includes the following key elements:
Capitalize On First Mover Advantage. We plan to capitalize fully upon our
position as the first company to offer a comprehensive Internet-based e-
commerce solution to the plastics industry. We intend to gain market share
aggressively by continuing to expand the selection of plastics products,
services and related content offered through our Web site. We have established
strategic relationships with several industry-leading participants, including
Ashland, MSC, Van Dorn Demag and Schneider Logistics. We are continuing to
pursue other key strategic alliances around the world that we believe will
allow us to increase our market share. Additionally, as more suppliers use the
PlasticsNet marketplace, we believe buyers will increasingly view our
marketplace as a primary point of contact with a broad array of plastics
suppliers. We also believe that once participants become integrated into our e-
commerce solution, its ongoing benefits and the costs of switching to an
alternative buying solution will encourage them to continue to use our
marketplace.
Accelerate User Adoption. We will continue to concentrate our efforts on
attracting new participants to our marketplace through a targeted sales and
marketing effort. Our sales strategy
37
includes an initially high degree of personal contact with both buyers and
suppliers to explain the benefits of the PlasticsNet marketplace. In addition,
our sales team works closely with our implementation team to assist new buyers
and sellers with fully integrating our solution into their existing systems.
Our marketing campaign will include event sponsorships, advertising in trade
publications and participation in trade shows and industry conferences. In
addition, we will continue to drive user adoption and awareness of the
PlasticsNet marketplace by leveraging the relationships, reputation and
expertise of members of both our management team and our advisory board. We
believe that these focused efforts will continue to lead to increased use of
our marketplace offerings and services.
Enhance Technology and Service Offerings. We intend to continue to enhance
the technology and service offerings available on our marketplace. These
enhancements will include increasing the functionality of our procurement
center, further enabling our participants to integrate their systems with our
marketplace and providing integrated supply chain services. For example, we
believe that there is a large market opportunity for providing technology and
integrated supply chain management functions on an outsourced or hosted basis.
Plastics processors often do not have the resources to purchase or develop
sophisticated electronic systems needed to effectively manage inventory,
production planning, logistics and other supply chain operations. We are
currently developing the technologies needed to host many of these capabilities
on the PlasticsNet marketplace.
Expand into the Plastics Processor-to-OEM Market Segment. We believe that
the approximately $190 billion plastics processor-to-OEM segment represents a
large market opportunity. We intend to become the preferred place for OEMs to
purchase plastics products by leveraging many of the same procurement solutions
and technical and integrated supply chain services that we currently provide in
the supplier-to-plastics processor segment. In addition, we intend to focus our
efforts on developing solutions for the complex sourcing and ordering processes
specific to the OEM segment. For example, OEMs expend significant resources
procuring plastic parts and interim components. OEMs typically must design
plastic parts, send out requests for quotations to plastics processors and
coordinate the delivery and integration of these parts with their own
production schedules. We intend to offer a variety of functions and services to
make the parts procurement process more efficient, including online material
selection, online project development, forecasting and order management.
Equally important, we intend to drive and develop user participation by
leveraging our existing relationships with plastics processors and by further
developing our relationships with OEMs.
Pursue New Vertical Markets. We believe that many industrial processing
markets provide significant e-commerce growth opportunities. We intend to
target those markets characterized by complex supply chains, a high degree of
fragmentation among buyers and sellers, large transaction volumes and a
significant dependence on information exchange. We believe that we are well
positioned for these opportunities given our experience in creating the
PlasticsNet marketplace. For example, conducting e-commerce in these industrial
processing markets will require technologies and procurement functions similar
to those that we have already developed. These include catalog content
management, online ordering, consolidated invoicing and shipment tracking. As
we develop marketplaces for these industrial processing markets, a key part of
our strategy includes forming strategic relationships with suppliers of direct
materials in these industries. In addition, we will continue to hire management
team members with the requisite industry-specific knowledge, experience and
relationships needed to execute our strategy effectively.
Pursue New Geographies. Currently, U.S. domestic plastics products
shipments make up less than half of the estimated one trillion dollar plastics
opportunity worldwide. Furthermore, the fragmented and inefficient nature of
the plastics industry hinders buyers and suppliers from effectively accessing
international markets. We intend to leverage our established reputation,
technology and strategic relationships to penetrate this large international
market opportunity. In addition, we will continue to hire individuals with the
requisite knowledge, experience and relationships in these new geographic
markets.
38
The PlasticsNet Marketplace
Our PlasticsNet marketplace consists of a broad database of approximately
30,000 plastics products and search engine capabilities that enable users to
easily identify, locate and purchase the products they need. Both buyers and
suppliers access the PlasticsNet marketplace using standard Internet
connections and browsers. We also provide implementation services that help our
customers take full advantage of the capabilities of the PlasticsNet
marketplace. In addition, our customer support and sales force help customers
understand both the business and technical benefits of the PlasticsNet
marketplace and, when necessary, provide one-on-one education and training to
increase user adoption.
The PlasticsNet marketplace currently offers three services:
The PlasticsNet Marketplace
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------
Procurement Center .Currently offers over 30,000 products.
.Launched in April 1999.
. Provides the opportunity to buy and sell catalog items and
access pricing information online.
-----------------------------------------------------------------------------------------------
Auction Exchange . Currently offers over 350 products.
. Launched in July 1999.
. Provides an online auction and exchange forum for
excess inventory, commodity and off-grade resins and
used equipment.
-----------------------------------------------------------------------------------------------
Technical Resources and Content . Launched in 1995.
. Currently offers discussion groups, material data sheets,
events calendar, supplier directories, job listings and
educational and training resources.
Procurement Center
The PlasticsNet procurement center is the transactional component that
enables plastics processors to buy direct materials, processing equipment, MRO
supplies and services directly from our growing online marketplace of catalog
items.
Once registered as a PlasticsNet user, a buyer can search for products from
the online catalog, place product orders and choose a preferred method of
payment. Upon order acceptance, the PlasticsNet marketplace automatically sends
an e-mail to the buyer advising that the order has been received and is being
processed. Our system then automatically generates a purchase order that is
sent to each listed supplier. Upon receipt of the order, suppliers provide
fulfillment information to us, enabling the buyer to track order and shipment
status through the procurement center at any time during the fulfillment
process.
Once the shipment occurs, the functions we perform depend on whether we act
as a principal or an agent in the transaction. We recognize revenue and related
costs at the time the invoice is generated, which coincides with shipment. In a
principal role, we purchase products from suppliers and resell them to buyers,
taking responsibility for invoicing, accounts receivable and customer service,
while suppliers take responsibility for shipping and fulfillment. In an agency
role, which we have not undertaken to date, we would bring buyers and sellers
together, facilitate transaction processing and earn revenue from commissions
based on transaction value.
We have designed the procurement center so that it can be customized for
buyer-specific requirements, such as pre-negotiated price agreements with
suppliers, and tools that enable online
39
work flow procedures. In addition to our current features, we are working with
leading software and systems integration firms to continue enhancing the
capabilities of our procurement center.
Auction Exchange
We provide an online auction exchange where sellers can offer surplus
inventory, commodity resins, off-grade resins, machinery and used equipment.
Over 350 products are currently offered for sale on the auction exchange.
In a typical auction sale, suppliers establish the asking price of the
product and provide us with a schedule of price discounts to be implemented
according to the length of time the product remains on the auction. We then
post the item on our auction exchange, where buyers can view the product's
specifications and current asking price, but do not have access to the schedule
of price discounts. The auction remains open as long as the product is
available, or until the seller terminates the auction. When a buyer decides to
purchase an item through the auction exchange, invoicing and fulfillment occur
in the same manner as in transactions executed through the procurement center.
We act as either principal or agent in auction transactions, depending on the
type of product sold or the specifics of the transaction.
In response to demand from our market participants, we are currently
expanding the auction capabilities and purchasing alternatives available in our
marketplace. Through software licensing agreements with third-party providers,
we are implementing software applications that will enable dynamic auctions,
reverse auctions and bid/ask exchanges. We intend to integrate these
applications into our order processing system to provide buyers and sellers
with a complete transactional services solution.
Technical Resources and Content
We have created an information-rich site geared toward technical resources
for the plastics industry, including the following areas:
Technical Discussion Groups. In technical discussion groups, plastics
industry participants can communicate with peers and access the collective
knowledge of their professional community. These discussion groups cover a
broad range of technical topics.
Industry Information and Education. The PlasticsNet marketplace
features a broad range of industry information and content. Through
relationships with industry-leading publications, we are able to provide
users with access to "how to" articles, industry news and other features.
For example, our strategic relationship with Injection Molding Magazine
allows us to provide users with direct access to the magazine's database
of articles. In addition, we have developed an education center where
users have access to over 495 educational resources including information
on seminars and in-plant training sessions, as well as videos, books, and
CD-ROMs. Through the calendar of events and bulletin board sections, users
may both post events and receive up-to-date information on upcoming
industry expositions and conferences.
"Your Office". "Your Office" enables buyers to create customized Web
sites located on the PlasticsNet marketplace with buyer-specific displays,
supplier and products listings, news links and buyer profile information.
For suppliers, "Your Office" provides administrative features and access
to a secure area in which they can receive inquiries and requests for
product information and pricing.
Career Center. The career center allows users to post and explore job
opportunities in the plastics industry. Since the career center opened in
May 1999, participants have posted over 800 plastics-related jobs.
40
Future Service Offerings
We plan on adding the following value-added services that will provide
additional revenue and profit opportunities:
Financing. We plan to offer buyers on the PlasticsNet marketplace the
opportunity to finance purchases online. This service will permit buyers
purchasing equipment through the PlasticsNet marketplace to use our
financing service to electronically contact financial institutions and
make arrangements for financing buyers' equipment purchases. We believe
our online financing services will substantially reduce the time required
to process the financing of an equipment purchase.
Logistics. We are in the process of developing a complete online
logistics management service through our strategic relationship with
Schneider Integrated Logistics, a leading logistics provider. These
services will enable plastics processors to make shipping arrangements on
the PlasticsNet marketplace for the delivery of outbound shipments of
finished components to OEMs as well as products purchased through our
procurement center. While this service will initially be available only in
domestic markets, we are working with Schneider and other logistics
providers to offer these logistics services worldwide. Our online
logistics service will include shipping cost information, the ability to
track deliveries and electronic delivery verification.
Integrated Supply Chain Services. We believe there is a large market
for providing outsourced supply and inventory management services hosted
on the PlasticsNet marketplace. Plastics processors often do not have the
resources to purchase or develop sophisticated electronic systems needed
to effectively manage inventory, production planning, logistics and other
supply chain operations. We are currently implementing the technologies
needed to host many of these capabilities on the PlasticsNet marketplace.
Participants in Our Marketplace
The PlasticsNet marketplace allows visitors, buyers and sellers to obtain
information and procure equipment, materials and services for the production of
plastics.
Visitors. Visitors have free access to all of the product and supplier
information on the PlasticsNet marketplace. They can also access all of the
content and community functions and technical information that we offer.
Currently we have over 35,000 registered users from over 6,400 companies and
145 countries. Our goal is to convert these registered users into buyers in the
PlasticsNet marketplace.
Buyers. Once registered and qualified, potential buyers are able to use our
marketplace to make purchases from our selection of products. To date,
approximately 50 buyers have purchased products on our marketplace.
Sellers. Currently, there are approximately 50 active suppliers offering
their products on our marketplace covering a majority of the product categories
in the plastics industry. In 1999 the largest suppliers on the PlasticsNet
marketplace, based on the dollar volume of products shipped, include:
. A-Top Polymers . JSE Plastics
. Ashland's General Polymers Division . Marvin Halpren Plastics
. BP Amoco . Matrix Polymers
. Eastman Chemical . National Plastics Network
. Jim Palmer Associates . Washington Penn Plastics
These companies represent various supplier segments including direct materials
and new and used equipment.
41
Advertisers. We currently host over 230 business centers where plastics
industry suppliers have set up their own sites within the PlasticsNet
marketplace. The business centers contain product and pricing information and
company profiles.
During the year ended December 31, 1999, Endura Plastics, Inc. accounted
for approximately 23% of our revenue, National Plastics Network accounted for
approximately 20% of our revenue, and Borneo, Inc. accounted for approximately
14% of our revenue. The percentage of our revenue generated by each of these
buyers is expected to decline in 2000.
Technology
The PlasticsNet marketplace can be accessed with a standard Internet
connection and browser. The architecture has been designed to be highly
scalable to accommodate the expected growth in transactions and other
offerings. Our electronic marketplace can be integrated into buyers' and
suppliers' internal systems in order to provide customized user interfaces,
compatibility with business rules and workflows, access to proprietary search
engine technologies and transaction automation and execution services.
The four layers of the PlasticsNet architecture are:
Presentation and Communication Layer. This layer is responsible for
rendering content and transmitting it to users' browsers based on standard
Internet protocols. Using these protocols, data can pass through an enterprise
firewall while supporting security standards such as Secure Sockets Layer and
digital certificates. This layer is implemented using standard Web servers.
Application Layer. This layer is responsible for executing our proprietary
business logic and functionality. We have combined commercially-available,
licensed software with proprietary software to provide a unique set of
applications including content aggregation, catalog searching, procurement,
auctions, discussion groups, e-mail newsletters, personalization, membership
directory and free home pages, custom reporting, lead generation and online
resources such as our career center, education center and supplier directory.
Data Layer. This layer is responsible for the storage and retrieval of
information via online transaction processing and online analytical processing.
One database contains our catalog information, and a separate data warehouse
aggregates our proprietary user activity tracking and demographic information.
Integration Layer. This layer is responsible for the electronic back-end
communications with our buyers, suppliers and vendors. It uses technologies and
protocols such as MQSeries, ANSI X.12 EDI, EDIFACT EDI and XML. Through this
layer, we can communicate data such as purchase orders, pricing and logistics
information.
We currently host our Web site from an Exodus data center in Oak Brook,
Illinois, which provides 24-hour systems support and connectivity to major
Internet backbones and provides bandwidth via redundant high-speed connections.
Sales and Marketing
Our sales approach is designed to help both buyers and suppliers understand
the business and technical benefits of the PlasticsNet marketplace. We have
developed a sales strategy for each group. Currently, we have 30 employees on
the sales and marketing team.
Buyer Side. Our buyer-side sales force is responsible for targeting
plastics processors and OEMs and focuses on explaining to buyers the benefits
of electronic procurement. The sales force then works closely with buyers to
define specific product requirements and implement customized solutions that
streamline buyers' procurement processes. Our buyer-side sales force is made up
of
42
industry specialists with extensive experience in selling materials and
services to plastics processors. We have organized a buyer advisory board made
up of leading experts in the plastics industry to advise us on the needs of
plastics processors.
Supplier Side. Our supplier-side sales force is responsible for targeting
the suppliers of direct materials, processing equipment, industrial supplies
and services. The sales force focuses on introducing leading industry suppliers
to the benefits of participating in the PlasticsNet marketplace, including
increased sales, reduced costs, and improved use of working capital. Our
supplier-side sales force is made up of industry specialists with extensive
experience in the plastics industry.
Once these buyers and sellers have become users of the PlasticsNet
marketplace, we believe that our marketplace will become an integral part of
buyers' procurement processes and suppliers' sales and distribution processes.
While our sales strategy initially involves a high degree of personal contact
by our sales force, we believe that over time we will be able to maintain these
relationships using the automated support functions of the PlasticsNet
marketplace and, therefore, reduce the amount of direct personal contact needed
by these established buyers and suppliers.
Our marketing strategy is designed to raise awareness of PlasticsNet among
all the different participants in the plastics industry. In particular, our
marketing campaigns aim to position PlasticsNet as the leading electronic
marketplace and information source for buyers and sellers in the plastics
industry. We are investing heavily in a marketing campaign that will include
print advertising in leading trade publications such as Plastics News, Modern
Plastics and Injection Molding Magazine, online marketing, buyer seminars
around the country, a direct mail campaign and a major presence at the National
Plastics Exposition, the industry's largest trade show, in June 2000.
Strategic Agreements
Ashland Distribution Company. In November 1999, we entered into a strategic
agreement with Ashland Distribution Company, a division of Ashland Inc., the
largest distributor of resins and additives in the United States. Under the
terms of this agreement, we are able to market and sell over 1,000 products of
Ashland's General Polymers Division to our buyers through our PlasticsNet
marketplace. These products include thermoplastic resins and additives
distributed by General Polymers. The initial term of this agreement expires
November 2002. Until November 2001, Ashland has agreed to make us its
exclusive, third party e-commerce solution for the sale of these products over
the Internet. In return, we have agreed to make Ashland our primary
distribution supplier of these resins and additives; however, our agreement
with Ashland does not prohibit us from selling any resin or additive product
that is:
. not available from Ashland,
. obtained by us directly from the producer of the resin and additive,
even if Ashland also distributes that product, or
. obtained by us from Channel Polymers, a plastics products distributor
owned by H. Muehlstein & Co.
Many of these products are currently available through our PlasticsNet
marketplace. We are jointly developing an Internet marketing program with
Ashland to expand the use of the PlasticsNet marketplace by Ashland's
customers. Ashland has invested in our Series B preferred stock.
Under the terms of this agreement, we will act as principal when selling
products distributed by Ashland. We will recognize revenue equal to the amount
paid by buyers and cost of revenue equal to the amount we pay to Ashland for
these products. We will be responsible for selling the products, collecting
payment, ensuring that the shipment reaches buyers and processing returns. We
will take
43
title to the products upon shipment and will bear the risk of loss for
collection, delivery and merchandise returns. Products will be sourced,
inventoried and shipped directly to our buyers by Ashland, based on buyer
delivery specifications.
MSC Industrial Direct Co. Inc. In November 1999, we entered into a
strategic agreement with MSC Industrial Direct Co. Inc., a leading provider of
MRO products, to become a non-exclusive, e-commerce solution for selling and
marketing all of MSC's approximately 400,000 commercial catalog products on the
Internet through our PlasticsNet marketplace. These products include industrial
supplies, electronic parts, safety products and metal cutting tools. We expect
to make these products available through the PlasticsNet marketplace in the
first half of 2000. The initial term of the agreement ends November 2000.
Under the MSC contract, we will act as principal by recognizing revenue and
cost of revenue in the same manner and accepting the same responsibilities as
under our strategic agreement with Ashland discussed above. MSC has invested in
our Series B preferred stock.
Schneider Logistics. In December 1999, we entered into a thirteen-month
agreement with Schneider Logistics, a subsidiary of Schneider National, Inc.,
one of the largest trucking and logistics companies in North America.
We are jointly developing with Schneider a complete online logistics
management service that will enable plastics processors to make shipping
arrangements on the PlasticsNet marketplace for the delivery of outbound
shipments of finished components to OEMs as well as inbound shipments of
products purchased through our procurement center. We believe that these
services, including real-time rate quotes, order tracking and delivery
confirmation over the Internet, will significantly reduce supply costs for
users of the PlasticsNet marketplace. We anticipate that the initial release
being developed for packaged freight will be available on the PlasticsNet
marketplace in the second quarter of 2000. Although initially Schneider's
services will be available only in domestic markets, we are working with
Schneider and other logistics providers to offer these logistics services
worldwide. We will earn fees for transactions in which participants select
shipping services on the PlasticsNet marketplace.
Our agreement with Schneider has an initial term expiring in January 2001
and prohibits Schneider from providing comparable services to any entity whose
primary business is to conduct electronic commerce in the plastics industry.
Competition
Business-to-business e-commerce is new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. We face
competition from existing suppliers and distributors as well as other Internet
and e-commerce companies. We currently compete primarily with traditional
distributors of plastics products, as well as direct materials suppliers who
sell most products via direct sales forces and mail order catalogs. These
companies normally have experience with direct marketing, relationships with
direct materials manufacturers, and both fulfillment and operations
capabilities.
General Electric, a major supplier in the plastics industry, has developed
Polymerland, a resin distribution and online sales arm for its products and the
products of other suppliers. Polymerland is a substantial competitor of the
PlasticsNet marketplace. As the market for online plastics products services
grows, other companies, including other established suppliers and distributors,
are expected to develop online services that compete with our marketplace. In
addition, technology companies, such as Internet software and enterprise
software providers, are developing or offering purchasing solutions that
directly link suppliers with buyers in the plastics industry. Furthermore,
there are
44
several existing and emerging vertical Internet marketplaces that currently
serve or could expand their offerings to compete in the plastics industry.
The principal competitive factors that affect our business are breadth of
products offered, supplier selection, depth of the pool of available buyers,
usefulness of service offerings, brand loyalty and strategic relationships. We
believe that we compete favorably with respect to each of these factors. If we
fail to effectively compete in any one of these areas, we may lose existing
and potential buyers and suppliers. This would have a material adverse effect
on our business and results of operations.
Facilities
Our corporate headquarters, a 14,700 square foot leased facility, is
located in Chicago, Illinois.
Intellectual Property
Our success and ability to compete will be affected by our ability to
develop and maintain the proprietary aspects of our technology. We rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. Finally, we
seek to avoid disclosure of our intellectual property by requiring employees
and consultants with access to proprietary information to execute
confidentiality agreements with us and by restricting access to our source
code.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, and to determine the validity and scope of the proprietary rights of
others. Any resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our
business and results of operations.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability
to license the infringed technology, our business and results of operations
would be significantly harmed.
Employees
As of December 31, 1999, we employed 100 people, including 30 in sales and
marketing, seven in business development, 28 in information technology, 22 in
operations/customer service, nine in finance and four in human resources and
administration.
45
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of December 31, 1999.
[Download Table]
Name Age Position(s)
---- --- ----------
Tim J. Stojka (1)....... 33 Chairman of the Board and Chief Executive Officer
Nick J. Stojka (1)...... 28 Executive Vice President and Director
Jeffrey R. Garwood...... 38 Chief Operating Officer
David A. Dill........... 48 Senior Vice President, Chief Financial Officer
David P. Franco......... 43 Vice President, Supply Management
James T. Morelli........ 45 Vice President, Sales and Marketing
Christopher F. Lange.... 37 Vice President, Operations
Donald E. Figliulo...... 47 Vice President, General Counsel
Deborah A. Fell......... 32 Vice President, Human Resources
Christopher A. Borneman. 30 Chief Technology Officer
Kenneth A. Fox (2)...... 29 Director
Robert A. Pollan (3).... 38 Director
Timothy K. Ozark (2)(3). 50 Director
Charles W. Fritz (2)(3). 43 Director
--------
(1) Tim Stojka and Nick Stojka are brothers.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Tim J. Stojka co-founded Commerx in 1995 and has served as our Chairman and
Chief Executive Officer since our inception. From 1990 to 1998, Mr. Stojka
served as President and CEO of Fast Heat, Inc., a related party that is a
multinational manufacturing company serving the plastics industry. Mr. Stojka
serves as Chairman of the International Division of The Society of Plastics
Industry ("SPI") and has participated in three trade missions sponsored by the
U.S. Department of Commerce to promote the plastics industry worldwide. He is
the Vice Chairman of the Midwest Division of SPI and a member of its national
board, Operations Chairman of the National Plastics Exposition and treasurer of
the Chicago chapter of the Young President's Organization. Mr. Stojka is also
currently a director of divine interVentures, Inc.
Nick J. Stojka co-founded Commerx in 1995 and has served as Executive Vice
President and a director since our inception. Mr. Stojka is responsible for
leading our critical business development activities in new markets,
partnerships and business-to-business e-commerce systems. From May 1994 to June
1995, Mr. Stojka served as Director of Business Development at Fast Heat, Inc.,
a related party, where he was responsible for evaluating and leading expansion
and development opportunities in Fast Heat's core industrial markets through
the implementation of various supply chain and e-commerce initiatives.
Jeffrey R. Garwood has served as our Chief Operating Officer since July
1999. He is responsible for day-to-day operations of the PlasticsNet
marketplace. Prior to joining us, Mr. Garwood held a number of senior-level
management positions with General Electric Company from 1992 to July 1999, most
recently as General Manager of the Engineered Styrenic Resins Business Unit of
46
GE Plastics. He also served as assistant to GE's vice chairman, in which
capacity he worked with several business units to develop and implement
globalization and customer service initiatives. Prior to his work with GE, Mr.
Garwood spent five years as a management consultant with McKinsey & Co. where
he held the position of Senior Engagement Manager, focusing on change
management strategies. He also worked as a project/process engineer in the
petrochemicals division of DuPont.
David A. Dill has served as our Senior Vice President and Chief Financial
Officer since August 1999 and is responsible for all financial activities.
Prior to joining us, from October 1995 to August 1999, Mr. Dill was the CFO of
WorldGate Communications, a publicly-traded company providing high-speed
Internet television services via cable. Prior to his position at WorldGate,
from July 1994 to October 1995, Mr. Dill was the Vice President of Finance for
the Communications Division of General Instrument Corporation. Mr. Dill began
his career in 1975 with International Business Machines and spent 19 years with
IBM and related companies. His executive positions at IBM included Controller
(Personal Systems Business) and Assistant General Manager, Finance and Planning
(RISC System/6000 Division). He previously spent two years as Vice President
and Controller for the ROLM Company, an IBM/Siemens joint venture. Prior to
joining ROLM, Mr. Dill held other executive positions with IBM, culminating in
his role as Director of Finance (Communications Systems Group).
David P. Franco has served as our Vice President, Supply Management since
April 1999. He is responsible for managing and developing our supply
relationships. Prior to joining us, from April 1998 to April 1999, Mr. Franco
held the position of Commercial Manager at the General Polymers Division of
Ashland Distribution Company. His responsibilities included business strategy
and supply plan development for base resin materials, including its trading
business. He was also Vice President of Sales for Transource Polymers of Long
Island, N.Y. and territory manager at the Chevron Polyethylene business group
from January 1998 to March 1998. From 1987 to January 1998, Mr. Franco held
various source management, business management and sales management positions
with Ashland in the Thermoplastics and Thermosett Plastic Distribution
Enterprises.
James T. Morelli has served as our Vice President, Sales and Marketing
since March 1999. He directs our efforts to recruit buyers for our PlasticNet
marketplace. Prior to joining us, from 1993 to March 1999, Mr. Morelli held
several management positions at AlliedSignal Corporation's Plastics Division,
including Director of Sales and Marketing for the Americas and, most recently,
as Managing Director for Europe. Prior to AlliedSignal, Mr. Morelli designed
and developed a global commercial organization for Warner Lambert Company's
Novon Division. Earlier, he held several management positions during his 15-
year career with General Electric Company, including northeast district
business manager for GE Plastics.
Christopher F. Lange has served as our Vice President, Operations since
June 1999. He is responsible for customer service, supply chain management and
content pricing management. Prior to joining us, from 1991 to June 1999, Mr.
Lange held several positions at Andersen Consulting, LLP, where he was
responsible for supply chain management and logistics consultation services
through oversight of the Global Corporate Transportation Management Practice
Area. From September 1997 to June 1999, he served as an Associate Partner.
Prior to Andersen Consulting, Mr. Lange founded several logistics-related
ventures including Lange Truck Lines Inc. and Lange Enterprises, an air freight
forwarder.
Donald E. Figliulo has served as our Vice President, General Counsel since
December 1999. He is responsible for managing our legal affairs. Prior to
joining us in December 1999, from 1991 through 1999, Mr. Figliulo was a partner
in the law firm of Wildman, Harrold, Allen & Dixon. Since 1978, Mr. Figliulo
has practiced corporate and securities law, concentrating on debt and equity
financing transactions, corporate governance matters, and mergers and
acquisitions.
47
Deborah A. Fell has served as our Vice President, Human Resources since
November 1999. Prior to joining us, Mrs. Fell held a number of senior-level
human resource management positions within the packaging, consumer products and
retail industries. Most recently, from November 1995 to November 1999, Mrs.
Fell held several human resource positions at Algroup Lawson Mardon North
America. From December 1993 to November 1995, Mrs. Fell held positions with
Pepsico's Frito-Lay division, most recently as Area Human Resources Manager.
Previously, she was employed by Pearle Vision.
Christopher A. Borneman has served as our Chief Technology Officer since
January 1996. He is responsible for defining technology requirements and
processes that support our business strategy, as well as the development of
long-term technology strategies. Prior to joining us, from June 1994 to January
1996, Mr. Borneman held several positions, including most recently
Programmer/Analyst III, with Ameritech Library Services where he concentrated
on the development of Web server architecture for commercial use. He also held
multiple positions at Meridian Leasing Corporation, a computer leasing company,
where he led the development and implementation of the organization's
proprietary WAN database replication system. Previously, he was employed by
Dynatec Systems.
Kenneth A. Fox has served as a director since December 1998. He co-founded
and has been Managing Director of Internet Capital Group, Inc., a publicly-
traded Internet holding company, since its inception in March 1996 and served
as a director since February 1999. From 1994 to 1996, Mr. Fox served as
Director of West Coast Operations for Safeguard Scientifics, Inc., a publicly-
traded holding company and Technology Leaders II, L.P., a venture capital
partnership. In this capacity, Mr. Fox led the development of and managed the
west coast operations for these companies. Mr. Fox serves as a director of
Internet Capital Group, AUTOVIA Corporation, Bidcom, Inc., Deja.com, Inc.,
Entegrity Solutions Corporation, ONVIA.com, Inc. and Vivant! Corporation.
Robert A. Pollan has served as a director since December 1998. He has
served as Managing Director of Operations of Internet Capital Group, Inc. since
June 1998. Prior to joining Internet Capital Group, Mr. Pollan served as Chief
Technology Officer and Vice President of Business Development at General
Electric Capital Corporation from August 1995 to June 1998. During his tenure
at General Electric Capital Corporation, Mr. Pollan co-founded and served as
President of two supply chain ventures. He also led several acquisitions in
Europe, Asia and the United States. Mr. Pollan was co-founder and, from
September 1991 to July 1995, Managing Director of OFR, Ltd., an advisory firm
focused on the organizational and financial restructuring of industrial
enterprises in Central Europe. Mr. Pollan serves as a director of
CommerceQuest, Inc., EmployeeLife.com, Internet Commerce Systems, Inc., iParts,
Purchasing Solutions, Inc., United Messaging, Inc. and Universal Access, Inc.
Timothy K. Ozark has served as a director since November 1998. He is the
Chairman of AIM Financial Corporation, a mezzanine funding and leasing company
he founded in 1992. In addition, he is President and Chief Executive Officer of
TKO Finance Corporation, a lender to financial services and manufacturing
companies. Prior to his current positions, Mr. Ozark served in a variety of
executive roles. From 1984 to 1992, Mr. Ozark was President, Chief Executive
Officer and Director of Meridian Leasing Corporation. From 1980 to 1983, he was
Executive Vice President of Great American Management Services, a subsidiary of
American Financial Corporation. Prior to his tenure at Great American
Management, he held positions in marketing and management with IBM and ITEL
Corporation. Mr. Ozark also spent several years of distinguished service in the
United States Marine Corps as an officer. He currently serves on the boards of
directors for 1st Source Corporation and a number of privately held
corporations and is a member of the Board of Trustees for the University of
Chicago HospitalsHealth System.
Charles W. Fritz has served as a director since November 1998. He is the
founder of NeoMedia Technologies, Inc., a publicly-traded corporation providing
computer software and consulting services. Mr. Fritz has served as its Chief
Executive Officer and Chairman of the Board of Directors since August 1996.
From 1990 to August 1996, Mr. Fritz held various executive positions at Dev-Tek
Associates and Dev-Tek Migration, two companies he founded, which merged into
NeoMedia Technologies in August 1996.
48
Board Composition
Our Board of Directors currently consists of six members. Currently, each
director is elected for a period of one year at our annual meeting of
stockholders and serves until the next annual meeting or until his successor is
duly elected and qualified. Effective upon this offering, the Board will be
divided into three classes, with each class serving a staggered three-year
term. See "Description of Capital Stock--Anti-Takeover Provisions".
Board Committees
Our Board of Directors established the Audit Committee and the Compensation
Committee in September 1999. The Audit Committee reviews our financial
statements and accounting practices and makes recommendations to the Board of
Directors regarding the selection of independent accountants. It also reviews
the results and scope of audit and other services provided by our independent
accountants and reviews and evaluates our audit and control functions. The
Audit Committee currently consists of Messrs. Charles Fritz, Timothy Ozark and
Robert Pollan.
The Compensation Committee reviews and recommends to the Board of Directors
the compensation and benefits of all of our executive officers, administers our
stock option plan and establishes and reviews general policies relating to
compensation and benefits of our employees. The Compensation Committee
currently consists of Messrs. Kenneth Fox, Charles Fritz and Timothy Ozark.
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee has ever been an officer
or employee of Commerx. None of our executive officers serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving on our Board of Directors or Compensation
Committee.
Director Compensation
Our directors currently do not receive any cash compensation from us for
their services as members of the Board of Directors. We reimburse our directors
for travel and lodging expenses in connection with attendance at Board and
committee meetings. All of our directors, including non-employee directors, are
eligible to participate in our 1999 Combined Incentive and Non-statutory Stock
Option Plan. In March 1999, we granted options to purchase 100,000 shares of
common stock to both Mr. Fritz and Mr. Ozark.
49
Executive Compensation
The following table sets forth a summary of the compensation paid during
the fiscal year ended December 31, 1999 to our Chief Executive Officer and our
four other most highly compensated executive officers.
Summary Compensation Table
[Download Table]
Annual Compensation
---------------------------------
Long-Term
Compensation (Number
Name and Principal Other Annual of Securities Underlying
Positions Salary Bonus Compensation (1) Option Grants)
------------------ -------- ------- ---------------- ------------------------
Tim Stojka (2).......... $169,231 $50,769 $ -- 400,000
Chairman and Chief
Executive Officer
Nick Stojka............. 138,000 41,400 -- 400,000
Executive Vice
President
Jeffrey Garwood (3)..... 129,231 28,948 -- 400,000
Chief Operating
Officer
James Morelli (4)....... 144,742 21,711 23,339 (5) 200,000
Vice President, Sales
and Marketing
David Franco (6) ....... 101,814 25,454 75,066 (7) 140,000
Vice President, Supply
Management
--------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of these
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the named executive
officer for that year.
(2) Includes amounts paid from March 1999 through December 1999. Mr. Stojka's
base salary, on an annualized basis, for 1999 was $200,000.
(3) Includes amounts paid from July 1999 through December 1999. Mr. Garwood's
base salary on an annualized basis for 1999 was $300,000.
(4) Includes amounts paid from March 1999 through December 1999. Mr. Morelli's
base salary on an annualized basis for 1999 was $175,000.
(5) Other annual compensation for 1999 reflects a relocation allowance of
$12,962 and an automobile allowance of $10,377 for Mr. Morelli.
(6) Includes amounts paid from April 1999 through December 1999. Mr. Franco's
base salary on an annualized basis for 1999 was $145,000.
(7) Other annual compensation for 1999 reflects a relocation allowance of
$66,146 and an automobile allowance of $8,920 for Mr. Franco.
Option Grants in Last Fiscal Year
The following table provides summary information regarding stock options
granted to each of the executive officers named in the summary compensation
table above during 1999. Each of these options was granted pursuant to our 1999
Combined Incentive and Non-statutory Stock Option Plan and is subject to the
terms of that plan. These options were granted at an exercise price equal to
the fair market value or, for incentive stock options granted to Tim and Nick
Stojka, 110% of fair value, of our common stock as determined by our board of
directors on the date of grant, and generally vest over four years at the rate
of 25% of the shares subject to the options per year.
50
We calculated the potential realizable value of options in the table
assuming the exercise price on the date of grant appreciates at the indicated
rate for the entire term of the option and that the option holder exercises his
option on the last day of its term at the appreciated price. All options listed
have a term of 10 years, except that the term of incentive stock options
granted to Tim and Nick Stojka have a term of five years from the date of
grant. We assumed stock price appreciation of 5% and 10% pursuant to the rules
of the Securities and Exchange Commission. We cannot assure you that our actual
stock price will appreciate over the applicable 10-year or 5-year option terms
at the assumed 5% and 10% levels or at any other rate.
[Enlarge/Download Table]
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
------------------------------------------ -----------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Per Expiration
Name Granted in 1999 Share Date 5% 10%
---- ---------- ---------- --------- ---------- ----------- -----------
Tim Stojka.............. 303,030 6.54% $1.65 Sep-04 $ 138,141 $ 305,255
96,970 2.09 1.50 Sep-09 91,476 231,818
Nick Stojka............. 303,030 6.54 1.65 Sep-04 138,141 305,255
96,970 2.09 1.50 Sep-09 91,476 231,818
Jeffrey Garwood......... 400,000 8.63 0.75 Jul-09 188,668 478,123
James Morelli........... 200,000 4.32 0.50 Mar-09 62,889 159,374
David Franco............ 100,000 2.16 0.50 Mar-09 31,445 79,687
40,000 0.86 5.00 Dec-09 125,779 318,748
Option Grants in the Fiscal Year Ended December 31, 1999
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the
officers named in the above summary compensation table. We have calculated the
value of in-the-money options based upon the estimated fair value of our shares
of $5.00 per share on December 17, 1999, the date of our last option grants. No
options were exercised by the persons named in the following table during the
1999 fiscal year.
[Download Table]
Number of Securities Value of Unexercised
Underlying In-the-money
Unexercised Options at Options at December 31,
December 31, 1999 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Tim Stojka.................. 100,000 300,000 $340,909 $1,022,727
Nick Stojka................. 100,000 300,000 340,909 1,022,727
Jeffrey Garwood............. -- 400,000 -- 1,700,000
James Morelli............... -- 200,000 -- 900,000
David Franco................ -- 140,000 -- 450,000
1999 Combined Incentive and Non-statutory Stock Option Plan
Our 1999 Combined Incentive and Non-statutory Stock Option Plan was adopted
in March 1999. We have reserved 5,500,000 shares of common stock for issuance
under this plan. The plan terminates in September 2009, unless terminated
sooner by our Board of Directors. The plan authorizes the award of options and
restricted stock purchase rights.
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The plan is administered by the Compensation Committee of our Board of
Directors. The administrator has the authority to interpret the plan, to grant
awards and to make all other determinations necessary to administer the plan.
The plan provides for the grant of both incentive stock options, commonly
called ISOs, that qualify under Section 422 of the Internal Revenue Code, and
nonqualified stock options, commonly called NQSOs. ISOs may be granted only to
our employees or employees of a parent or subsidiary. NQSOs and restricted
stock purchase rights may be granted to our employees, directors and
consultants. Generally, the exercise price of ISOs must be at least equal to
the fair value of our common stock on the date of grant. Any grant of an ISO to
a holder of 10% or more of our outstanding shares of common stock must have an
exercise price of at least 110% of the fair value of our common stock on the
date of grant. The exercise price of NQSOs must be at least equal to 85% of the
fair value of our common stock on the date of grant. Options granted under the
plan have a maximum term of 10 years. Awards granted under the plan may not be
transferred other than to immediate family members or by will or by the laws of
descent and distribution. They generally also must be exercised during the
lifetime of the optionee and only by the optionee.
Options granted under the plan generally expire three months after the
termination of the optionee's service, except in the case of death or
disability, in which case the options generally may be exercised up to 12
months following the date of death or termination of service. If we are
dissolved or liquidated or have a "change in control" transaction, outstanding
awards may be assumed or substituted by the successor corporation, if any. If a
successor corporation does not assume or substitute the awards, the vesting of
the awards will be accelerated.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and shall indemnify other officers and
employees and our agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity,
regardless of whether the Bylaws would permit indemnification. We have director
and officer liability insurance that covers these matters, including matters
arising under the Securities Act.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for judgments, fines, settlement amounts and expenses,
including attorneys' fees, incurred by any of these persons in any action or
proceeding,
52
including any action by or in the right of Commerx, arising out of that
person's services as a director or executive officer of ours, any subsidiary of
ours, or any other company or enterprise to which the person provides services
at our request. We believe that these provisions and agreements are necessary
to attract and retain qualified persons as directors and executive officers. We
are not aware of any pending or threatened litigation or proceeding that might
result in a claim for indemnification.
RELATED PARTY AND OTHER TRANSACTIONS
Sales of Stock to Insiders
We have received operating financing from our four initial shareholders,
Tim Stojka, Nick Stojka, Dean Stojka and John Stojka, in the aggregate amount
of $2.3 million, as evidenced by 200,000 shares of common stock issued at a
price of $1.00 per share and by four $518,270 demand notes in favor of the
above-mentioned shareholders. In November 1998, the above mentioned
shareholders each contributed their respective demand notes to us as additional
paid-in capital.
In December 1998 and June 1999, we issued and sold 8,570,000 shares of our
Series A preferred stock at a price of $1.05 per share, including:
. 476,000 shares to Tim Stojka, our Chairman and Chief Executive Officer
and one of our directors, in exchange for the surrender of 2,380,000
shares of our common stock;
. 476,000 shares to Nick Stojka, our Executive Vice President and one of
our directors, in exchange for the surrender of 2,380,000 shares of our
common stock;
. 476,000 shares to John Stojka, the brother of Tim Stojka and Nick
Stojka, and a holder of more than 5% of our voting securities, in
exchange for the surrender of 2,380,000 shares of our common stock;
. 476,000 shares to Dean Stojka, the brother of Tim Stojka and Nick
Stojka, and a holder of more than 5% of our voting securities, in
exchange for the surrender of 2,380,000 shares of our common stock; and
. 6,666,000 shares to Internet Capital Group, Inc., a holder of more than
5% of our voting securities, in consideration of cash payments of
$6,750,000 and the extinguishment of a note payable in the amount of
$250,000.
In November and December 1999, we issued and sold 3,128,732 shares of our
Series B preferred stock at a price of $12.43 per share, including:
. 1,035,969 shares to Internet Capital Group, a holder of more than 5% of
our voting securities;
. 229,284 shares to B2B Investors, an entity with which Tim Stojka is
affiliated;
. 201,126 shares to divine interVentures, an entity with which Tim Stojka
is affiliated;
. 81,463 shares to David Dill, our Chief Financial Officer;
. 48,853 shares to Jeffrey Garwood, our Chief Operating Officer;
. 20,366 shares to James Morelli, our Vice President, Sales and Marketing;
. 14,584 shares to David Franco, our Vice President, Supply Management;
. an aggregate of 1,493,087 shares to Capital Research and Management, MC
Capital, Mitsui & Co. (U.S.A.), Palantir Associates, Pivotal Asset
Management, California Bank & Trust, as trustee, Ashland Distribution
Company, Eastman Chemical Company, EP Partners, Huntsman
53
Corporation, Mitsubishi International Corporation, MSC Industrial Direct
Co., H. Muehlstein & Co. and Hambrecht & Quist; and
. 4,000 shares to another party.
Each share of Series A preferred stock and Series B preferred stock will
convert into one share of common stock immediately prior to consummation of
this public offering.
In September 1999, we entered into six-month subordinated, convertible
borrowing agreements with the following officers of Commerx: David Dill, David
Franco, Jeffrey Garwood and James Morelli. Under the agreements, these
officers agreed to loan us a total of approximately $2.0 million. Each loan
was evidenced by a convertible promissory note. Upon the closing of the Series
B preferred stock offering, the notes, including all accrued interest,
automatically converted into shares of our Series B preferred stock at the
Series B preferred stock offering price of $12.43. Interest on the notes was
paid at the time of conversion of the note at an annual rate of prime plus 1%.
In connection with the debt financing, we also issued to each of the lenders
five-year warrants to purchase a total of 24,790 shares of our Series B
preferred stock at an exercise price of $12.43 per share. Upon consummation of
this offering, these warrants become null and void, and we must issue
replacement warrants to the holders on equitable terms.
Other Transactions
The Company and Fast Heat, Inc., an Illinois corporation, are related
entities. Fast Heat is owned in part by the Stojka family, including Tim
Stojka, Nick Stojka, Dean Stojka and John Stojka. From our inception through
December 1998, we have received operating financing in the aggregate of
$3,075,470 from Fast Heat. These operating loans have taken the form of (i) a
revolving demand note bearing interest at a fluctuating annual rate between
8.0% and 8.5% and (ii) a short-term payable with interest in favor of Fast
Heat in the amount of $99,000 as of September 30, 1999 representing (A) our
prior years' payroll taxes paid by Fast Heat and not reimbursed by us and (B)
payment by Fast Heat of expenses related to our employee medical benefits in
1995 and 1996. The above mentioned short-term payable is included in our
financial statements as amounts "Due to Related Party." In December 1998, we
repaid the demand note, which at that time had an outstanding balance of
$1,264,752, and in November 1999, we repaid the long-term payable, which at
that time had an outstanding balance of $100,000.
Fast Heat and Fast Heat International, an affiliate of Fast Heat, have
guaranteed all of our obligations under our current office lease.
Internet Capital Group has guaranteed a one year $1.0 million loan on our
behalf. At the present time, there is no outstanding balance on that loan.
Since inception, we have from time to time issued and sold shares of our
common stock and granted options to purchase common stock to our employees,
directors and consultants.
54
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership by the following persons of our common stock as of
December 31, 1999:
. each person or group of affiliated persons known by us to own
beneficially more than 5% of the outstanding shares of common stock;
. each of our directors;
. each of our executive officers named in the summary compensation table;
and
. all directors and executive officers as a group.
Percentage ownership in the following table is based on shares of common
stock outstanding as of December 31, 1999. Percentage ownership assumes
conversion of all shares of preferred stock outstanding as of December 31, 1999
into shares of common stock, which will occur immediately prior to the closing
of this offering.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of December 31, 1999, assuming that this offering occurs in that
60-day period, to be outstanding, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person. To our
knowledge, except as set forth in the footnotes below, each stockholder
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by that stockholder.
The address for each listed director and officer is c/o Commerx, Inc., 350
North LaSalle Street, Suite 1000, Chicago, Illinois 60610. The address of
Internet Capital Group, Inc. is 800 The Safeguard Building, 435 Devon Park
Drive, Wayne, PA 19087. The address for Dean Stojka is 776 Oaklawn Avenue,
Elmhurst, IL 60126. The address for John Stojka is 2372 Vallejo, San Francisco,
CA 94123.
[Download Table]
Beneficial Ownership
---------------------------------------------------------
Number of Options Percent
and Warrants -----------------
Number of Exercisable by Before After
Name of Beneficial Owner Shares February 29, 2000 Total Offering Offering
------------------------ ---------- ----------------- ---------- -------- --------
Internet Capital Group.. 7,701,969 -- 7,701,969 39.8%
Tim J. Stojka (1)....... 3,223,910 100,000 3,323,910 17.1
Nick J. Stojka.......... 2,793,500 100,000 2,893,500 14.9
Dean J. Stojka.......... 1,873,500 -- 1,873,500 9.7
John S. Stojka.......... 1,873,500 -- 1,873,500 9.7
Jeffrey R. Garwood...... 48,853 7,328 56,181 *
David P. Franco......... 14,584 2,188 16,772 *
James T. Morelli........ 20,366 3,055 23,421 *
Kenneth A. Fox (2)...... 7,701,969 -- 7,701,969 39.8
Robert A. Pollan........ -- -- -- *
Timothy K. Ozark........ 50,000 -- 50,000 *
Charles W. Fritz........ -- 50,000 50,000 *
All executive officers &
directors as a group
(14 persons) (2)....... 13,934,645 374,790 14,309,435 72.5
--------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 229,284 shares held by a limited liability company with which Tim
Stojka is affiliated and 201,126 shares held by a corporation with which
Tim Stojka is affiliated. Mr. Stojka disclaims beneficial ownership of
these shares.
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(2) Includes 7,701,969 shares held by Internet Capital Group, Inc. Kenneth Fox
is a Managing Director of Internet Capital Group. Mr. Fox disclaims
beneficial ownership of the shares held by Internet Capital Group, except
to the extent of his pecuniary interest therein.
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of undesignated preferred stock, $0.001 par value per share. The
following description of our capital stock does not purport to be complete and
is subject to, and qualified in its entirety by, our Certificate of
Incorporation and Bylaws, which we have included as exhibits to the
registration statement of which this prospectus forms a part.
Common Stock
As of December 31, 1999, there were 19,369,232 shares of common stock and
preferred stock outstanding, held of record by 40 stockholders. These amounts
assume the conversion of all outstanding shares of preferred stock into common
stock, which is to occur immediately prior to the closing of this offering. In
addition, as of December 31, 1999, there were 4,058,875 shares of common stock
subject to outstanding options. Upon completion of this offering, there will be
shares of common stock outstanding, assuming no exercise of
outstanding stock options.
Each share of common stock entitles its holder to one vote on all matters
to be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock may receive ratably any
dividends that the Board of Directors may declare out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and non-
assessable, and the shares of common stock that we will issue upon completion
of this offering will be fully paid and non-assessable.
Preferred Stock
As of December 31, 1999, we had two series of convertible preferred stock:
Series A and Series B. As of December 31, 1999, the number of outstanding
shares for each series of our preferred stock was:
. 8,570,000 shares of Series A; and
. 3,128,732 shares of Series B.
Immediately prior to the closing of this offering, all outstanding shares
of our preferred stock will be converted on a one-for-one basis into 11,698,732
shares of common stock. Thereafter, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to designate the rights,
preferences, privileges and restrictions of each series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock or delaying or preventing a change in control
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock after the completion of this offering.
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Warrants
As of December 31, 1999, there were warrants outstanding to purchase
112,858 shares of Series A preferred stock and 24,790 shares of Series B
preferred stock. Upon the closing of this offering, all outstanding warrants
for the purchase of our Series A preferred stock will be automatically
converted into warrants to purchase 112,858 shares of common stock. The Series
A warrants may be exercised until three years from the date of the closing of
this offering. Upon the closing of this offering, all outstanding warrants for
the purchase of our Series B preferred stock will become null and void. Upon
the closing of this offering, these warrants require us to reissue warrants to
purchase common stock to the holders of these warrants on equitable terms. We
plan to reissue warrants for the purchase of 24,790 shares of common stock.
Registration Rights
Set forth below is a summary of the registration rights of the holders of
our Series A preferred stock and Series B preferred stock that convert into
common stock upon the closing of this offering.
Demand Registrations. At any time on or after December 29, 2001, the
holders of at least 40% of the common stock issuable upon conversion of the
Series A preferred stock may request us to register shares of common stock
having a gross offering price of at least $5 million. At any time on or after
January 1, 2002, the holders of at least 66 2/3% of the common stock issuable
upon conversion of the Series B preferred stock may request us to register
shares of common stock having a gross offering price of at least $12.5 million.
The demand registrations are subject to our right, upon advice of our
underwriters, to reduce the number of shares proposed to be registered. We will
be obligated to effect only two registrations pursuant to a request by holders
of registration rights for each series of preferred stock. If shares requested
to be included in a registration must be excluded due to limitations on the
number of shares to be registered on behalf of the selling shareholders
pursuant to the underwriters' advice, the shares registered on behalf of the
selling shareholders will be allocated among all holders of shares with rights
to be included in the registration on the basis of the number of shares with
these rights held by these shareholders.
Piggyback Registration Rights. The holders who have registration rights
have unlimited rights to require us to register a holder's shares when we
undertake a public offering (except for this offering), subject to the
discretion of the managing underwriter of the offering to decrease the amount
that holders may register.
Form S-3 Registrations. After we have qualified for registration on Form S-
3, which will not be available until at least 12 months after we become a
publicly-reporting company, holders of registration rights may request in
writing that we effect an unlimited number of registrations of their shares on
Form S-3. However, the gross offering price of the shares to be so registered
in each registration must exceed $1.0 million in the case of holders of Series
A preferred stock and exceed $2.0 million in the case of holders of Series B
preferred stock. If the registration is to be an underwritten public offering,
the underwriters may reduce for marketing reasons the number of shares to be
registered on behalf of all shareholders having the right to request inclusion
in that registration. We are not obligated to effect more than one registration
on Form S-3 for each series of preferred stock in any twelve-month period.
Transferability. The registration rights are transferable, provided that
the transfer may otherwise be effected in accordance with applicable securities
laws and the investor rights agreement, the transfer is to a person or entity
holding at least 50,000 shares of the same series of preferred stock or to an
affiliate of the transferor and the transferee agrees in writing to be bound by
the terms of the investor rights agreement.
Termination. The registration rights will terminate on the later of the
third anniversary of our initial public offering, the date on which the holder
may sell all of the holder's remaining shares in a
57
single three-month period pursuant to Rule 144 or the date on which the holder
may sell all of the holder's remaining shares pursuant to Rule 144(k).
Expenses. If these registration rights are exercised by holders of Series A
preferred stock, we will bear all registration expenses, other than
underwriting discounts and commissions, of two demand registrations, three S-3
registrations and all piggyback registrations. If these registration rights are
exercised by holders of Series B preferred stock, we will bear all registration
expenses, other than underwriting discounts and commissions, of two demand
registrations, all piggyback registrations and one S-3 registration per year.
Anti-Takeover Provisions
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of some Delaware corporations. In general, Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person becomes an interested stockholder, unless:
. our Board of Directors approved the business combination or the
transaction in which the person became an interested stockholder prior
to the time the person attained this status;
. upon consummation of the transaction that resulted in the person
becoming an interested stockholder, the person owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. at or subsequent to the time the person became an interested
stockholder, our Board of Directors approved the business combination
and the stockholders, other than the interested stockholder, authorized
the transaction at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.
A "business combination" generally includes a merger, asset or stock sale
or other transaction with or caused by the interested stockholder. In general,
an "interested stockholder" is a person who, together with the person's
affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status did own, 15% or more of a
corporation's voting stock.
This statute could prohibit or delay mergers or other takeover or change-
in-control attempts with respect to Commerx and, accordingly, may discourage
attempts to acquire us.
Certificate of Incorporation and Bylaw Provisions
Our Certificate of Incorporation and Bylaws, to be effective upon the
closing of this offering, will divide the Board into three classes as nearly
equal in size as possible, with each class serving a three-year term. The terms
will be staggered, so that one-third of the Board will be elected each year.
The classification of the Board could have the effect of making it more
difficult for a third party to acquire control of us, because it would
typically take more than a year for a majority of the stockholders to elect a
majority of our Board. In addition, our Certificate of Incorporation and Bylaws
will provide that any action required or permitted to be taken by our
stockholders at an annual or special meeting may be taken only if it is
properly brought before the meeting, satisfies various advance notice
requirements and may not be taken by written consent in lieu of a meeting. The
Bylaws will also provide that special meetings of the stockholders may be
called only by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield
Park, New Jersey 07660.
58
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Sales of substantial amounts
of our common stock in the public market after any restrictions on sale lapse
could adversely affect the prevailing market price of our common stock and
impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares of
common stock, outstanding options to purchase shares of common stock
and outstanding warrants to purchase shares of common stock, assuming
no additional option or warrant grants or exercises after December 31, 1999. Of
the shares sold in the offering, shares will be subject to
the lock-up agreements described below, assuming that we sell all shares
reserved under our directed share program to the entities or persons for whom
these shares have been reserved. We expect that the remaining
shares, plus any shares issued upon exercise of the underwriters' over-
allotment option, will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act. In general, affiliates include officers,
directors and 10% or greater stockholders.
The remaining shares outstanding and shares subject
to outstanding options and warrants are "restricted securities" within the
meaning of Rule 144. Restricted securities may be sold in the public market
only if the sale is registered or if it qualifies for an exemption from
registration, such as those described in Rules 144, 144(k) or 701 promulgated
under the Securities Act, which are summarized below. Sales of restricted
securities in the public market, or the availability of these shares for sale,
could adversely affect the market price of the common stock.
Lock-Up Agreements
We and our directors, officers, and all of the holders of preferred stock
and certain holders of warrants, options and shares of common stock have
entered into lock-up agreements in connection with this offering. These lock-up
agreements generally provide that these holders will not offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of our common stock
or any securities exercisable for or convertible into our common stock owned by
them for a period of 180 days after the date of this prospectus without the
prior written consent of Goldman Sachs. The lock-up agreements executed by our
employees, directors and other stockholders also cover any shares they may
acquire through our directed share program. Notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares
subject to lock-up agreements may not be sold until these agreements expire or
their restrictions are waived by Goldman Sachs. Assuming that Goldman Sachs
does not release any security holders from the lock-up agreements, the
following shares will be eligible for sale in the public market at the
following times:
. Beginning on the effective date of the registration statement of which
this prospectus forms a part, of the shares sold in
this offering, and additional shares not subject to lock-up
agreements and eligible for sale under Rule 144(k), will be immediately
available for sale in the public market.
. Beginning 180 days after the effective date, an additional
shares will be eligible for sale pursuant to Rule 144, Rule 144(k) and
Rule 701.
Rule 144
In general, under Rule 144 as currently in effect, after the expiration of
any applicable lock-up agreement, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; and
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. the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate 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, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
Rule 701
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract, to resell these shares in reliance upon Rule
144, but without compliance with certain restrictions. Rule 701 provides that
affiliates may sell their Rule 701 shares under Rule 144 ninety days after
effectiveness without complying with the holding period requirement and that
non-affiliates may sell these shares in reliance on Rule 144 ninety days after
effectiveness without complying with the holding period, public information,
volume limitation or notice requirements of Rule 144.
Employee Plans
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our employee benefit plans. As a result, any shares of common stock acquired
upon exercise of options or rights granted under the 1999 Combined Incentive
and Non-qualified Stock Option Plan will also be freely tradable in the public
market. However, shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144, unless otherwise resaleable under Rule 701. As of December 31, 1999, we
had granted options to purchase 4,634,000 shares of common stock, of which
options to purchase 3,678,500 shares were not exercisable, 380,375 shares were
exercisable, 240,500 options had been exercised and 334,625 options were
returned to the option pool.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Commerx by Wildman, Harrold, Allen & Dixon, Chicago, Illinois. Legal matters
will be passed upon for the underwriters by Ropes & Gray, Boston,
Massachusetts.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and September 30,
1999, and for each of the three years in the period ending December 31, 1998,
and for the nine-month period ended September 30, 1999, included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
60
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act concerning the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement or its exhibits and
schedules. For further information about Commerx and our common stock, we refer
you to the registration statement and to its attached exhibits and schedules.
Statements made in this prospectus concerning the contents of any document are
not necessarily complete. With respect to each document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048, and at 500 West Madison Street, Suite 1400, Chicago,
IL 60661. You may obtain information on the operation of these reference
facilities by calling the Commission at 1 (800) SEC-0330. You may obtain copies
of all or any part of our registration statement from the Commission upon
payment of prescribed fees. You may also inspect reports, proxy and information
statements and other information that we file electronically with the
Commission without charge at the Commission's Internet site,
http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants.
61
UNDERWRITING
Commerx and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Hambrecht & Quist LLC and FleetBoston
Robertson Stephens Inc. are the representatives of the underwriters.
[Download Table]
Number of
Underwriters Shares
------------ -----------
Goldman, Sachs & Co...........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated............
Hambrecht & Quist LLC.........................................
FleetBoston Robertson Stephens Inc............................
-----------
Total.....................................................
===========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Commerx to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by Commerx. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
[Download Table]
No Full
Paid by Commerx Exercise Exercise
--------------- -------- --------
Per share............................................... $ $
Total...................................................
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Commerx and its directors, officers, all of the holders of preferred stock
and certain holders of warrants, options and shares of common stock have agreed
with the underwriters not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. See "Shares Eligible for Future Sale" for a discussion of
certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
negotiated among Commerx and the representatives of the underwriters. Among the
factors to be considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, are Commerx's
historical performance, estimates of Commerx's business potential and earnings
prospects, an assessment of Commerx's management and the consideration of the
above factors in relation to the market valuation of companies in related
businesses.
62
Commerx has applied for quotation of its common stock on the Nasdaq
National Market under the symbol "CMRX".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to other underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of that underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
In addition, at the request of Commerx, the underwriters have reserved, at
the initial public offering price, up to shares of common stock for
sale to directors, employees and other persons that have a relationship with
Commerx. The number of shares available for sale to the general public will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
basis as other shares offered hereby. There can be no assurance that any of the
reserved shares will be so purchased.
Hambrecht & Quist LLC acted as a placement agent for Commerx in connection
with the private placement of shares of Commerx's Series B preferred stock in
November and December 1999. Commerx paid customary placement fees to Hambrecht
& Quist LLC for such services. Commerx paid a portion of the fee in shares of
Series B preferred stock at the private placement price of $12.43 per share.
Hambrecht & Quist LLC received a total of $1,593,636 and 20,823 shares and
agree with Commerx not to sell, transfer, assign, pledge or hypothecate any
such shares within one year after this offering.
Commerx estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1.2 million.
Commerx has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
63
COMMERX, INC.
TABLE OF CONTENTS
[Download Table]
Page(s)
-------
Report of Independent Accountants...................................... F-1
Financial Statements:
Balance Sheets as of December 31, 1997 and 1998 and September 30,
1999................................................................ F-2
Statements of Operations for the years ended December 31, 1996, 1997
and 1998 and the nine months ended September 30, 1998 (unaudited)
and 1999............................................................ F-3
Statements of Changes in Stockholders' Deficit for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended September
30, 1999............................................................ F-4
Statements of Cash Flows for the years ended December 31, 1996, 1997
and 1998 and the nine months ended September 30, 1998 (unaudited)
and 1999............................................................ F-5
Notes to Financial Statements........................................ F-6
64
Report of Independent Accountants
To the Board of Directors and Stockholders
of Commerx, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Commerx, Inc. at
December 31, 1997, 1998 and September 30, 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 and for the nine months ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 28, 1999
F-1
COMMERX, INC.
BALANCE SHEETS
[Download Table]
As of December 31, As of September 30, 1999
------------------------ -------------------------
1997 1998 Actual Pro Forma
----------- ----------- ----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash
equivalents............. $ 52,162 $ 3,302,954 $ 1,799,915 $ 36,642,209
Trade accounts
receivable (net of
allowance of $12,800 at
December 31, 1997, $0
at December 31, 1998
and $26,363 at
September 30, 1999)..... 13,098 20,127 459,249 459,249
Other current assets..... 13,851 22,436 132,508 132,508
----------- ----------- ----------- ------------
Total current assets... 79,111 3,345,517 2,391,672 37,233,966
----------- ----------- ----------- ------------
Property and equipment,
net of accumulated
depreciation............. 107,209 206,026 1,307,003 1,307,003
Other assets (includes
security deposit of
$200,000 at December 31,
1998 and September 30,
1999).................... -- 200,000 228,180 228,180
----------- ----------- ----------- ------------
Total assets........... $ 186,320 $ 3,751,543 $ 3,926,855 $ 38,769,149
=========== =========== =========== ============
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable......... $ 3,163 $ 364,116 $ 1,476,226 $ 1,476,226
Due to related party..... 217,309 92,713 98,776 98,776
Accrued expenses......... 85,204 177,166 1,281,589 1,281,589
Deferred revenue......... 91,182 180,909 355,321 355,321
Notes payable--
stockholders............ 1,747,920 -- 1,806,062 --
Notes payable--current... -- -- 87,548 87,548
Obligation under capital
lease--current.......... -- -- 321,176 321,176
----------- ----------- ----------- ------------
Total current
liabilities........... 2,144,778 814,904 5,426,698 3,620,636
----------- ----------- ----------- ------------
Notes payable--noncurrent. -- -- 183,673 183,673
Obligation under capital
lease.................... -- -- 813,259 813,259
----------- ----------- ----------- ------------
Total liabilities...... 2,144,778 814,904 6,423,630 4,617,568
----------- ----------- ----------- ------------
Commitments and
contingencies (Note 9)...
Redeemable convertible
Series A preferred stock,
$.001 par value per
share, redeemable at
$1.05 per share,
8,682,858 shares
authorized; 6,665,428
(1998), 8,570,000
(September 30, 1999) and
zero (pro forma) shares
issued and outstanding
(aggregate liquidation
preference of $1.05 per
share)................... -- 5,009,520 7,009,520 --
Stockholders' (deficit)
equity:
Convertible Series B
preferred stock, $0.001
par value per share,
3,218,021 shares
authorized; zero shares
issued and outstanding
(aggregate liquidation
preference of $12.43
per share).............. -- -- -- --
Common stock, no par
value as of December
31, 1997 and $.001 as
of December 31, 1998
and September 30, 1999,
20,000,000 shares
authorized, 16,950,000
(1997) and 7,430,000
(December 31, 1998 and
September 30, 1999) and
19,128,732 (pro forma),
shares issued and
outstanding............. 200,000 7,430 7,430 19,129
Deferred compensation.... -- -- (592,262) (592,262)
Additional paid-in
capital................. -- 2,256,130 3,495,053 47,352,058
Accumulated deficit...... (2,158,458) (4,336,441) (12,416,516) (12,627,344)
----------- ----------- ----------- ------------
Total stockholders'
(deficit) equity...... (1,958,458) (2,072,881) (9,506,295) 34,151,581
----------- ----------- ----------- ------------
Total liabilities and
stockholders'
(deficit) equity...... $ 186,320 $ 3,751,543 $ 3,926,855 $ 38,769,149
=========== =========== =========== ============
The accompanying notes are an integral part of the financial statements.
F-2
COMMERX, INC.
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
Revenue:
Transaction............ $ -- $ -- $ -- $ -- $ 445,300
Advertising and other.. 52,770 305,125 375,037 263,568 388,179
----------- ----------- ----------- ----------- -----------
Total revenue........ 52,770 305,125 375,037 263,568 833,479
Cost of revenue......... -- -- -- -- 426,209
----------- ----------- ----------- ----------- -----------
Gross margin............ 52,770 305,125 375,037 263,568 407,270
Operating expenses:
Sales and marketing.... 330,474 451,448 577,324 317,645 2,643,483
Information
technology............ 335,530 273,939 514,946 298,001 2,343,712
Production and
operations............ 129,359 138,652 140,161 112,984 849,117
General and
administrative........ 159,231 216,937 1,134,764 635,426 2,284,448
Amortization of
deferred stock
compensation.......... -- -- -- -- 386,713
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 954,594 1,080,976 2,367,195 1,364,056 8,507,473
----------- ----------- ----------- ----------- -----------
Operating loss.......... (901,824) (775,851) (1,992,158) (1,100,488) (8,100,203)
Other income (expense):
Interest income........ -- -- -- -- 59,147
Interest expense....... (50,337) (118,022) (185,825) (133,210) (39,019)
----------- ----------- ----------- ----------- -----------
Total other income
(expense)........... (50,337) (118,022) (185,825) (133,210) 20,128
----------- ----------- ----------- ----------- -----------
Net loss................ $ (952,161) $ (893,873) $(2,177,983) $(1,233,698) $(8,080,075)
=========== =========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (0.06) $ (0.05) $ (0.13) $ (0.07) $ (1.09)
=========== =========== =========== =========== ===========
Weighted average shares
used in calculation of
basic and diluted net
loss per share......... 16,950,000 16,950,000 16,897,835 16,950,000 7,430,000
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.15) $ (0.54)
=========== ===========
Weighted average shares
used in calculation of
pro forma basic and
diluted net loss per
share (unaudited)...... 14,095,000 14,836,096
The accompanying notes are an integral part of the financial statements.
F-3
COMMERX, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
[Enlarge/Download Table]
Common Stock
-------------------- Unamortized Additional Total
Number Carrying Stock Paid-In Accumulated Stockholders'
of Shares Value Compensation Capital Deficit Deficit
---------- -------- ------------ ---------- ------------ -------------
Balance at January 1,
1996................... 16,950,000 $200,000 $ -- $ -- $ (312,424) $ (112,424)
Net loss................ -- -- -- -- (952,161) (952,161)
---------- -------- --------- ---------- ------------ -----------
Balance at December 31,
1996................... 16,950,000 200,000 -- -- (1,264,585) (1,064,585)
Net loss................ -- -- -- -- (893,873) (893,873)
---------- -------- --------- ---------- ------------ -----------
Balance at December 31,
1997................... 16,950,000 200,000 -- -- (2,158,458) (1,958,458)
Conversion of
shareholder notes and
accrued interest to
donated capital........ -- -- -- 2,073,080 -- 2,073,080
Conversion of common
stock, no par to $0.001
par value common stock. -- (183,050) -- 183,050 -- --
Exchange of common stock
for redeemable
convertible Series A
preferred stock........ (9,520,000) (9,520) -- -- -- (9,520)
Net loss................ -- -- -- -- (2,177,983) (2,177,983)
---------- -------- --------- ---------- ------------ -----------
Balance at December 31,
1998................... 7,430,000 7,430 -- 2,256,130 (4,336,441) (2,072,881)
Stock compensation
recognized............. -- -- 386,713 -- -- 386,713
Issuance of common stock
options................ -- -- (978,975) 978,975 -- --
Issuance of Series A
preferred stock
warrants............... -- -- -- 73,823 -- 73,823
Issuance of Series B
preferred stock
warrants............... -- -- -- 186,125 -- 186,125
Net loss................ -- -- -- -- (8,080,075) (8,080,075)
---------- -------- --------- ---------- ------------ -----------
Balance at September 30,
1999................... 7,430,000 $ 7,430 $(592,262) $3,495,053 $(12,416,516) $(9,506,295)
========== ======== ========= ========== ============ ===========
The accompanying notes are an integral part of the financial statements.
F-4
COMMERX, INC.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ----------- -----------
(unaudited)
Cash flows from
operating activities:
Net loss............... $ (952,161) $ (893,873) $ (2,177,983) $(1,233,698) $(8,080,075)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation......... 21,068 28,152 45,627 28,047 220,325
Interest expense on
shareholder notes... -- -- 225,160 133,210 6,063
Amortization of debt
discount............ -- -- -- -- 8,362
Amortization of
compensation
expense............. -- -- -- -- 386,713
Changes in operating
assets and
liabilities:
Increase in
accounts
receivable........ (10,625) (2,473) (7,029) (39,786) (439,122)
(Increase) decrease
in other current
assets............ 22,341 (4,914) (8,585) 4,914 (110,072)
Increase in other
non-current
assets............ -- -- (200,000) -- (28,180)
Increase (decrease)
in accounts
payable........... (66,137) (15,298) 360,953 214,375 1,112,110
Increase in accrued
expenses.......... 24,438 60,503 91,962 40,560 1,104,423
Increase in
deferred revenue.. 69,511 21,671 89,727 148,038 174,412
---------- ---------- ------------ ----------- -----------
Net cash used by
operations............. (891,565) (806,232) (1,580,168) (704,340) (5,645,041)
---------- ---------- ------------ ----------- -----------
Cash flows from
investing activities:
Acquisition of plant,
property, and
equipment............. (41,189) (32,298) (144,444) (88,767) (388,506)
---------- ---------- ------------ ----------- -----------
Net cash used in
investing activities... (41,189) (32,298) (144,444) (88,767) (388,506)
---------- ---------- ------------ ----------- -----------
Cash flows from
financing activities:
Bank overdraft......... 8,507 (8,507) -- -- --
Proceeds from
shareholder notes..... 400,000 1,047,920 100,000 100,000 1,991,809
Gross proceeds from
related party......... 275,539 -- 1,175,404 734,323 --
Repayments to related
party................. -- (148,721) (1,300,000) -- --
Gross proceeds from
issuance of note
payable............... -- -- -- -- 300,000
Repayments of note
payable............... -- -- -- -- (15,325)
Obligations under
capital lease......... -- -- -- -- 254,024
Proceeds from sale of
redeemable
convertible Series A
preferred stock....... -- -- 5,000,000 -- 2,000,000
---------- ---------- ------------ ----------- -----------
Net cash provided from
financing activities... 684,046 890,692 4,975,404 834,323 4,530,508
---------- ---------- ------------ ----------- -----------
Net increase (decrease)
in cash................ (248,708) 52,162 3,250,792 41,216 (1,503,039)
Cash and cash
equivalents at
beginning of period.... 248,708 -- 52,162 52,162 3,302,954
---------- ---------- ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ 52,162 $ 3,302,954 $ 93,378 $ 1,799,915
========== ========== ============ =========== ===========
Supplemental cash flow
information:
Interest paid.......... $ 25,636 $ 32,817 $ 45,868 $ -- $ 7,545
Non-cash financing
activities:
Conversion of
shareholder notes and
interest to
additional paid-in
capital............... $ -- $ -- $ 2,073,080 $ -- $ --
Exchange of common
stock for redeemable
convertible Series A
preferred stock ...... -- -- 9,520 -- --
Estimated fair value
of warrants--recorded
as debt discount...... -- -- -- -- 259,948
Equipment required
under capital lease... -- -- -- -- 932,796
Incentive plan stock
option issuances...... -- -- -- -- 978,975
The accompanying notes are an integral part of the financial statements.
F-5
COMMERX, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Organization
Commerx, Inc. ("Commerx" or the "Company") was formed as an Illinois
corporation in July 1995 and was subsequently reorganized as a Delaware
corporation in December 1998. All shares in the Illinois Corporation were
converted to the Delaware Corporation at a ratio of one to one.
Commerx is an Internet commerce company facilitating electronic business-
to-business commerce through the development and management of marketplaces for
industrial processing markets. Currently, the Company operates one marketplace,
PlasticsNet, which serves the plastics industry.
In 1996, 1997, 1998 and 1999, the Company derived its revenue from the
establishment and maintenance of supplier business centers (commercial
storefronts) on PlasticsNet along with advertising revenue. The Company also
earned fees from the production of advertising content. Additionally, in the
second quarter of 1999, the Company began deriving revenue from procurement
transactions through its Internet site.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's accompanying interim financial statements for the nine months
ended September 30, 1998 and the related notes have not been audited. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements of the years ended December 31, 1996, 1997 and
1998 and for the nine-month period September 30, 1999 and include all
adjustments, which were of a normal and recurring nature, which in the opinion
of management are necessary to present fairly the financial position of the
Company and results of operations and cash flows for the periods presented. The
operating results for the interim periods are not necessarily indicative of
results expected for the full years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Advertising revenue is contracted generally on a quarterly basis and
recognized equally over each of the three months in the quarter. Business
center set-ups and renewals are contracted generally on an annual basis and
recognized ratably over twelve months.
Transaction revenue consists primarily of product sales to buyers and
charges to buyers for outbound freight. Commerx acts as a principal when
purchasing products from suppliers and reselling them to buyers. Products are
shipped directly to buyers by suppliers based on buyers' delivery date
specifications. Under principal-based agreements, Commerx is responsible for
selling products, collecting payment from buyers, ensuring that the shipment
reaches buyers and processing returns. In addition, Commerx takes title to
products upon shipment and bears the risk of loss for collection, delivery and
product returns from buyers. Commerx provides an allowance for sales returns,
which has been insignificant to date, at the time of sale. Commerx recognizes
revenue from product sales when products are shipped to our buyers. Shipping
and handling costs are recorded as costs of revenue.
F-6
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located primarily in the United States and are
denominated in U.S. dollars. Management believes its credit policies are
prudent and reflect normal industry terms and business risk.
At December 31, 1996, three customers accounted for approximately 39.2%,
13.3% and 12.6% of the accounts receivable balance. At December 31, 1997, the
Company had four customers that accounted for 29.0%, 19.3%, 19.3% and 15.4% of
the accounts receivable balance. At December 31, 1998, five customers accounted
for approximately 26.0%, 17.0%, 12.2%, 12.0% and 11.7% of the accounts
receivable balance. At September 30, 1999, 38.2% and 20.2% of the Company's
accounts receivable were due from two customers.
During 1996 one customer accounted for 32.7% of the Company's revenue.
During 1997, there were no customers that accounted for 10% or greater of the
Company's revenue. During 1998 one customer accounted for 20.0% of the
Company's revenue. For the period ending September 30, 1999, two customers
accounted for 32.8% and 10.9% of the Company's revenue.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments. The carrying value for all long-term debt outstanding at
the end of all periods presented approximates fair value where fair value is
based on market prices for the same or similar debt and maturities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon estimated useful lives of three years for
computer software and equipment and five years for furniture and fixtures and
other equipment. Maintenance and repair charges are expensed as incurred.
F-7
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$112,340, $28,420 and $69,421 for the years ended December 31, 1996, 1997 and
1998, respectively, and $51,962 and $531,528 for the nine-month periods ended
September 30, 1998 and 1999, respectively.
Product Development Costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web sites. Product
development costs are expensed as incurred. The software development cost
components of product development costs are required to be capitalized
beginning when a product's technological feasibility has been established and
ending when a product is available for general release to customers. To date,
completion of a working model of the Company's products and the date of general
release have substantially coincided. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Additionally, development costs
associated with providing content for the Company's Web site are expensed as
incurred.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" encourages, but does not require, companies to
record compensation cost for stock-based compensation at fair value. The
Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair value of a share of the Company's stock at
the date of the grant over the amount that must be paid to acquire the stock.
Income Taxes
Deferred tax assets and liabilities are recorded to reflect the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based upon the differences between the financial
statement and tax bases of assets and liabilities and for tax carryforwards
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
In December 1998, in connection with the private placement of preferred
stock (see Note 6), the Company was required to change its corporate status
from an S-Corporation to a C-Corporation and, therefore, is subject to federal
and state income taxes effective December 27, 1998. As a result of the
conversion in tax status, the Company has recorded deferred tax assets and
liabilities as of December 31, 1998 and as of September 30, 1999.
Pro Forma Information (unaudited)
The pro forma balance sheet as of September 30, 1999 presents the estimated
effects of several transactions that have occured subsequent to September 30,
1999 and will occur prior to the closing of the proposed initial public
offering, including (i) the issuance of Series B convertible preferred stock
("Series B"), (ii) the conversion of all management notes and accrued
F-8
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
interest as of November 19, 1999 into Series B preferred stock and (iii) the
conversion of all outstanding preferred stock into common stock. In conjunction
with these transactions, the pro forma information reflects: (i) the write-off
of $185,747 in remaining management loan discounts as of September 30, 1999,
(ii) the accrual of interest on the management notes for the period October 1,
1999 to November 19, 1999 and (iii) the application of $2,030,955 of financing
fees against the proceeds of the Series B preferred stock offering.
Net Loss Per Share
The Company computes net loss per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"), and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS 128 and SAB 98, basic and diluted net loss per share
applicable to common stockholders is computed by dividing the net loss
applicable to common stockholders for the period by the weighted average number
of common shares outstanding for the period. The calculation of diluted net
loss per share excludes the number of shares of common stock issuable upon
exercise of employee stock options and warrants, and the shares of common stock
issuable upon the conversion of convertible preferred stock as the effect would
be antidilutive. Potential common shares consist of the incremental common
shares issuable upon the conversion of the redeemable convertible Series A
convertible preferred stock ("Series A") (using the incremental method) and
shares issuable upon the conversion of stock options and warrants (using the
treasury stock method). At September 30, 1999, Series A preferred stock was
convertible into 8,570,000 shares of common stock and options and warrants to
purchase 3,958,148 shares of common stock were outstanding. Pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding shares of preferred stock into common stock, as if the shares had
converted immediately upon their issuance. Refer to Note 10--Earnings per
share, for the reconciliation of the numerator and denominator of the basic and
diluted EPS computations.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Under SFAS 130, changes in net assets of an entity
resulting from transactions and other events and circumstances from non-owner
sources are reported in a financial statement for the period in which they are
recognized. Because there were no such changes, adoption of SFAS 130 did not
impact the financial statements of the Company.
Segment Reporting
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." The Company operates
as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
Recent Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The statement as amended is effective for fiscal years beginning after
June 15, 2000. As the Company does not have any derivative instruments or
hedging activities, SFAS No. 133 is not expected to have a material effect on
its financial results.
F-9
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Plant, property and equipment consists of the following at:
[Download Table]
December 31,
------------------- September 30,
1997 1998 1999
-------- --------- -------------
Equipment under capital leases:
Furniture and fixtures.................. $ -- $ -- $ 270,059
Computer equipment...................... -- -- 662,737
Equipment................................. 11,155 36,461 105,693
Furniture and fixtures.................... 28,448 28,448 28,448
Computer software and equipment........... 125,434 244,572 563,847
-------- --------- ----------
165,037 309,481 1,630,784
Less: Accumulated depreciation............ (57,828) (103,455) (323,781)
-------- --------- ----------
$107,209 $ 206,026 $1,307,003
======== ========= ==========
When property and equipment are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the account, and any gain
or loss is included in results of operations. Amounts expended for maintenance
and repairs are charged to expense as incurred.
As of September 30, 1999, the Company changed the estimated useful lives
for depreciation from 5 to 7 years to 3 to 5 years to better reflect the life
of the assets and to comply with industry standards. The effect of the change
in estimate was to increase the net loss by $113,142 for the nine-month period
ended September 30, 1999, or ($0.02) per share.
Depreciation expense for 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 was $21,068, $28,152 and $45,627, and $28,047 and
$220,326, respectively. Accumulated amortization and amortization expense
related to property and equipment acquired under capital lease arrangements
during 1999 was $72,612 for the nine months ended September 30, 1999. Interest
expense relating to capital lease obligations totaled $24,592 for the nine
months ended September 30, 1999.
In June 1999, the Company has entered into master lease agreements with two
separate financing companies for the lease of office furniture and fixtures and
computer equipment used in its business. Each borrowing under the lease has a
two- to five-year term and is collateralized by the assets purchased. Equipment
obtained pursuant to these leases is capitalized and is included in property
and equipment on the balance sheet.
In connection with the aforementioned arrangements, the Company issued
warrants to purchase certain of its equity securities to the lessor (Note 7).
4. Notes Payable to Related Parties
Prior to the Series A Financing (Note 6), the Company had been funded
internally through shareholder notes and advances from related parties. Notes
payable due to shareholders were $1,747,920 at December 31, 1997. The notes
were due on demand and accrued interest at 8%. In November 1998, the Board of
Directors approved a resolution under which outstanding shareholder demand
notes were contributed to the Company as additional paid-in capital. The total
amount of capital contributed was $2,073,080 which was comprised of $1,847,920
of outstanding principal and $225,160 of accrued interest due on the respective
notes.
F-10
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
On September 28, 1999, the Company entered into six-month subordinated,
convertible borrowing agreements with certain officers of the Company under
which such individuals agreed to loan the company $1,991,809. These loans are
carried at $1,806,062, net of debt discounts. The notes are required to be paid
on the earlier of March 28, 2000 or the completion of the next round of
financing in which the Company receives proceeds of at least $15 million. The
principal and interest due on the notes were automatically converted into the
Company's Series B preferred stock at the Series B preferred stock offering
price of $12.43 per share upon the closing of the Series B preferred stock
offering. Interest is payable upon maturity or conversion of the note and
accrues at an annual rate of prime plus 1% (9.25% at September 30, 1999). In
the event of default, this rate increases to prime plus 3%. In connection with
the debt financing, the Company issued warrants to purchase shares of the
Company's Series B preferred stock (Note 6 and 7).
Additionally, the Company has recorded amounts due to a related party of
$217,309 and $92,713 as of December 31, 1997 and 1998, respectively, and
$98,776 as of September 30, 1999 (Note 11).
5. Notes Payable
On August 16, 1999, the Company entered into a borrowing agreement with a
third party under which the lender agreed to loan $300,000 to the Company for a
period of 30 months. Such loan is reflected net of $14,017 of debt discount.
The proceeds were to be used to finance the acquisition of fixed assets and for
working capital purposes. Interest payments are due on a monthly basis at an
annual interest rate of 8.75% and the note is due on February 1, 2002. On
February 1, 2002, a $51,000 balloon payment is due. In connection with the
borrowing, the Company also issued warrants to purchase shares of the Company's
Series A preferred stock (Note 7).
6. Convertible Preferred Stock
Redeemable Series A
In December 1998, the Company authorized the sale and issuance of up to
8,570,000 shares of Series A preferred stock. Subject to the first closing as
defined in the Series A preferred stock purchase agreement, the Company issued
4,761,428 shares to a certain investment group in exchange for $5,000,000. The
purchase price consists of cash payments totaling $4,750,000 and the conversion
of a note payable in the amount of $250,000 into Series A preferred stock.
Additionally, in December 1998, the Company issued 1,904,000 Series A
preferred stock to certain related party common stockholders in exchange for
9,520,000 shares of common stock. The related party common stockholders are
members of the Stojka family, including Tim and Nick Stojka (Note 11).
In June 1999, the Company issued 1,904,572 additional shares of Series A
preferred stock to the same investment group as the December 1998 financing for
$2,000,000. The transaction fulfilled the second closing as defined in the
Series A preferred stock purchase agreement.
Holders of Series A preferred stock are entitled to receive non-cumulative
dividends in preference to holders of common stock at the rate of 8% per share
per annum if and when declared by the Board of Directors. The holders of Series
A preferred stock shall have the right to convert
F-11
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
the Series A preferred stock into equal shares of common stock at the option of
the holder and have the right to that number of votes equal to the number of
shares of common stock issuable upon conversion of the Series A preferred
stock. All series of preferred stock and common stock are required to vote
together as a class except that holders of Series A preferred stock are
entitled to elect two representatives to the Board of Directors.
Additionally, the Series A preferred stock automatically converts into
common stock at the then applicable conversion rate in the event of either (i)
the completion of an initial public offering with aggregate offering proceeds
to the Company of at least $5,000,000 and a per share price to the public of at
least 2.5 times the purchase price of the Series A preferred stock or (ii) the
election of the holders of at least two-thirds of the outstanding Series A
preferred stock.
Upon written election of holders of two-thirds of the Series A preferred
stock, the Series A preferred stock is required to be redeemed to the extent of
one-third of the shares of Series A preferred on the fifth, sixth and seventh
anniversary dates of the closing. The redemption price of $1.05 is to be
adjusted for any stock dividends, contributions or splits plus any accrued, but
unpaid dividends.
The consent of a majority of the Series A preferred stock is required for
any action that authorizes or issues shares of any class of stock having any
preference or priority as to dividends or assets superior to or on a parity
with the Series A preferred stock or that authorizes a merger, sale of
substantially all of the assets of the Company or a
recapitalization/reorganization of the Company.
Upon liquidation or dissolution, shareholders of Series A preferred stock
are to receive a distribution of available assets up to the sum of the original
purchase price plus any declared but unpaid dividends. This distribution has
preference over any distribution to common stockholders.
In November 1999, the Board of Directors authorized an increase in the
number of authorized shares of Series A preferred stock from 8,570,000 to
8,682,858.
Series B
In November 1999, the Board of Directors authorized the issuance of up to
3,218,021 shares of Series B preferred stock.
In November 1999, the Company issued 1,935,994 shares of Series B preferred
stock for gross proceeds of $23,900,000. The gross proceeds consist of cash
payments totaling $21,800,000 and the conversion of notes payable to
stockholders in the amount of $2,100,000. Of the total shares issued, 1,400,181
shares were to related parties.
Holders of Series B preferred stock are entitled to receive non-cumulative
dividends in preference to holders of common stock at the rate of $0.994 per
share per annum if and when declared by the Board of Directors. The holders of
Series B preferred stock shall have the right to convert the Series B preferred
stock into an equal number of shares of common stock at the option of the
holder and have the right to that number of votes equal to the number of shares
of common stock issuable upon conversion of the Series B preferred stock. All
series of preferred stock and common stock are required to vote together as a
class except that holders of Series B preferred stock and common stock vote
together as a class for the election of five members of the Company's Board of
Directors. As mentioned in Note 6, the remaining two members are elected by the
holders of Series A preferred stock voting as a separate class.
F-12
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Series B preferred stock automatically converts into common stock in the
event of either (i) the completion of an initial public offering with aggregate
offering proceeds to the Company of at least $15,000,000 and a per share price
to the public of at least 1.5 times the purchase price of the Series B
preferred stock or (ii) the election of the holders of at least two-thirds of
the outstanding Series B preferred stock to convert such shares.
The consent of a majority of the Series B preferred stock is required for
any action that authorizes or issues shares of any class of stock having any
preference or priority as to dividends or assets superior to or on a parity
with the Series B preferred stock or that authorizes a merger, sale of
substantially all of the assets of the Company or a
recapitalization/reorganization of the Company. The consent of a majority of
the Series B preferred stock is also required for the Company to purchase,
redeem or otherwise acquire for value any of their common stock or to declare
or pay dividends or make any other distribution on account of the common stock.
Upon liquidation or dissolution, shareholders of Series B preferred stock
are to receive a distribution of available assets up to the sum of the original
purchase price plus any declared but unpaid dividends. This distribution has
preference over any distribution to common stockholders.
In connection with the closing of the first round of Series B preferred
stock financing in November 1999, the Company entered into an Investors' Rights
Agreement with certain investors who purchased shares of the Series B preferred
stock. The agreement grants to designated investors certain information rights,
registration rights, and rights of first offer as defined by the agreement.
Some of the rights are subject to minimal investment thresholds and some rights
may terminate upon the completion of an initial public offering by the Company.
Holders of Series B preferred stock have the right the convert the Series B
preferred stock into shares of common stock at a one-to-one ratio. To the
extent that the fair market value of common stock is deemed to exceed the
$12.43 offering price for the Series B preferred stock, a beneficial conversion
feature exists. A deemed dividend to the preferred shareholders will be
reflected in the fourth quarter of 1999 to the extent of any beneficial
conversion feature and would increase net loss available to common
shareholders.
Two of the 23 purchasers of Series B preferred stock have entered into
strategic agreements with the Company. To the extent that such relationships go
beyond that of an investor-investee relationship, the agreement will be
accounted for at fair value in accordance with SFAS 123 and will be capitalized
as deferred contract acquisition cost and amortized over the term of the
contract.
7. Common Stock, Options and Warrants
In December 1998, the Board of Directors approved an amendment to the
Company's certificate of incorporation which increased the number of authorized
shares of common stock from 500,000 with no par value to 20,000,000 with $.001
par value and also authorized the issuance of up to 8,570,000 shares of Series
A preferred stock. The change in par value did not affect any of the existing
rights of shareholders and has been recorded as an adjustment to additional
paid-in capital and common stock. The Company subsequently effected an 84.75-
to-1 stock split of the issued and outstanding common stock of the Company as
of December 22, 1998. All share information retroactively reflects the effect
of this split. The Company has reserved 8,570,000 shares of common stock for
issuance upon conversion of the Series A preferred stock.
In November 1999, the Board of Directors approved an amendment to the
Company's certificate of incorporation which increased the number of authorized
shares of common stock from 20,000,000 to 100,000,000.
F-13
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
In March 1999, the Company's Board of Directors adopted a Combined
Incentive and Non-statutory Stock Option Plan ("the Plan"). Under the Plan,
employees of the Company are granted incentive stock options to purchase common
stock at not less than the fair value on the date of grant. In the case of
grants of non-statutory stock options, options will be granted at a per share
price of no less than 85% of the fair market value on the date of grant.
Generally, the term of the options is 10 years from the initial grant date with
the options vesting over a four-year period. The Plan is administered by the
Compensation Committee of the Board of Directors. The total number of shares of
common stock that may be issued pursuant to options granted under the Plan is
4,000,000 (Note 14).
Deferred compensation was recorded during the nine-month period ended
September 30, 1999 in connection with the granting of stock options at exercise
prices that were less than the deemed fair value. Deferred compensation of
$978,975 is reflected as a separate component of stockholders' deficit and is
being amortized over a four-year time period using an accelerated methodology.
Compensation expense of $386,713 was recognized for the nine-month period ended
September 30, 1999.
Additionally, to the extent that the fair market value of common stock is
deemed to exceed the exercise price for options granted in the fourth quarter,
it is expected that a charge will be recorded for non-cash compensation
expense.
The following information relates to stock options outstanding as of
September 30, 1999:
[Download Table]
Nine Months Ended
September 30, 1999
-------------------
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at beginning of period.................... -- --
Granted............................................... 3,973,500 $0.82
Exercised............................................. -- --
Forfeited/expired..................................... (153,000) 0.51
---------
Outstanding at end of period.......................... 3,820,500 $0.84
=========
The weighted average fair value of options granted during the period was
$0.56.
The following table summarizes information about stock options outstanding
at September 30, 1999:
[Download Table]
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Outstanding Price
-------- ----------- ------------ -------- ----------- --------
$0.50 1,807,500 8.80 $0.50 439,125 $0.50
0.75 1,090,000 9.96 0.75 -- 0.75
1.50 316,940 9.29 1.50 78,788 1.50
1.65 606,060 5.06 1.65 121,212 1.65
--------- -------
3,820,500 639,125
========= =======
F-14
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation," upon establishing the Plan. As permitted by SFAS 123, the
Company continues to apply the accounting provisions of APB Opinion Number 25,
"Accounting for Stock Issued to Employees" with regard to the measurement of
compensation cost for options granted. The Company recognized $386,713 of
compensation expense for the period ended September 30, 1999 in conjunction
with grants made under its fixed stock option plans. Had expense been
recognized using the fair value method described in SFAS 123, the Company would
have reported the following results of operations using the Black-Scholes
option pricing model:
[Download Table]
Nine Months
Ended
September 30,
1999
-------------
Pro forma net loss......................................... $(8,269,567)
Pro forma net loss per diluted share....................... $ (0.56)
These costs may not be representative of the total effects on pro forma
reported income for future years. Factors that may also impact disclosures in
future years include the attribution of the awards to the service period, the
vesting period of stock options, timing of additional grants of stock option
awards and number of shares granted for future awards.
The assumptions utilized for calculating the estimated fair value of
options granted in accordance with SFAS 123 are as follows:
[Download Table]
Nine Months
Ended
September 30,
1999
-------------
Annualized dividend yield................................... 0.0%
Risk free rate of return.................................... 5.5%
Expected option term (in years)............................. 7
Expected volatility......................................... 0.0%
In connection with the lease agreement entered into in June 1999 (Note 3),
the Company granted the lessor warrants to purchase 91,429 shares of the
Company's Series A Preferred Stock at a price of $1.05 per share. These
warrants can be exercised at any time between the earlier of a period of seven
years from date of issuance or three years from the effective date of the
Company's initial public offering and expire at the earlier of seven years from
the date of issue or three years from the effective date of the Company's
initial public offering. The relative fair value of these warrants has been
recorded in the financial statements as stipulated by Accounting Principal's
Board Opinion No. 14 and equaled $59,806, which was recorded as debt discount
and is being amortized to interest expense over the term of the lease.
In connection with the note payable to a third party in August 1999 (Note
5), the Company granted the lender warrants to purchase 21,429 shares of the
Company's Series A preferred stock at a price of $1.05 per share. These
warrants can be exercised at any time before the earlier of a period of seven
years from date of issuance or three years from the effective date of the
Company's initial public offering and expire at the earlier of seven years from
the date of issue or three years from the effective date of the Company's
initial public offering. The relative fair value of these warrants has been
recorded in the financial statements as stipulated by Accounting Principal's
Board Opinion No. 14 and equaled $14,017, which was recorded as debt discount
and is being amortized to interest expense over the term of the note.
F-15
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
In connection with debt financing agreements entered into with related
parties in September 1999 (Note 4), the Company issued warrants to purchase
shares of Series B preferred stock. The total amount of Series B preferred
stock to be issued is equal to 15% of the principal amount of each lendor's
promissory note (24,790 shares). The warrants have an exercise price of $12.43
per share. The conversion price will be determined based upon the completion of
the December round of financing. The relative fair value of these warrants has
been recorded in the financial statements as stipulated by Accounting
Principles Board Opinion No. 14 and equaled $186,125 as of September 30, 1999
and has been recorded as debt discount. The discount is being amortized to
interest expense over the term of the note.
The term of the warrant agreement begins upon the closing of the private
placement of the Company's Series B preferred stock and ends on September 28,
2004. Additionally, upon the closing of the Company's initial public offering,
all outstanding warrants for the purchase of Series B preferred stock become
null and void. However, these warrants require that upon the closing of the
Company's initial public offering, the Company must issue replacement warrants
to purchase common stock to holders of these warrants on equitable terms.
8. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the carrying amounts of assets and
liabilities and their respective tax bases using enacted tax rates in effect
for the year in which the differences are expected to reverse.
The components of the deferred tax asset are as follows:
[Download Table]
December 31, September 30,
1998 1999
------------ -------------
Deferred tax assets:
Accrued expenses............................. $ 209,267 $ 1,047,970
Deferred revenue............................. 68,745 135,022
Deferred compensation........................ -- 146,951
Net operating loss........................... -- 2,262,032
--------- -----------
Total deferred tax assets.................. 278,012 3,591,975
Less: valuation allowance.................... (251,364) (3,398,540)
--------- -----------
26,648 193,435
Deferred tax liabilities:
Accounts receivable.......................... 7,648 174,515
Book over tax basis depreciation............. 19,000 18,920
--------- -----------
Net deferred tax asset (liability)......... $ -- $ --
========= ===========
The valuation allowance relates principally to deferred tax assets that the
Company estimates may not be realizable based upon available evidence. The
Company has generated a net operating loss carryforward of $6.0 million as of
September 30, 1999 that will expire beginning in 2019 for federal tax purposes.
Based on Internal Revenue Code regulations relating to changes in ownership of
the Company, utilization of the net operating loss carryforward may be subject
to annual limitations.
F-16
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Income tax benefit differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to losses before income tax expense as a result
of the following:
[Download Table]
Year Ended
December 27, Nine Months
1998 to Ended
December 31, September 30,
1998 1999
------------ -------------
Computed expected income tax benefit.......... $(740,514) $(2,747,225)
Increase (decrease) in tax benefit resulting
from:
Change in valuation allowance............... 325,462 3,073,078
State and local income taxes, net of federal
benefit.................................... (87,119) (323,203)
Loss allocated to S corporation income tax
year and other............................. 740,860 (2,650)
Effect of conversion from S corporation to C
corporation................................ (238,689) --
--------- -----------
Income tax benefit........................ $ -- $ --
========= ===========
9. Commitments and Contingencies
During 1998, the Company leased space in Chicago, Illinois under an
operating lease. The lease called for minimum rent with an annual escalation.
The lease expired in October 1998.
The Company entered into a new operating lease, which commenced in January
1999 and expires on December 31, 2008. The lease calls for minimum rents with
an annual escalation.
Additionally, the Company entered into an operating lease for Internet data
services that commenced on June 30, 1999. The lease calls for monthly payments
of $7,150. The lease expires on November 3, 2000.
Total rental expense was $54,215, $57,696 and $88,747 during 1996, 1997 and
1998 and $44,229 and $185,156 for the nine-month periods ended September 30,
1998 and 1999.
The following is a schedule of future minimum rentals required for
operating leases that have remaining noncancelable lease terms in excess of one
year, as of December 31, 1998:
[Download Table]
1999........................................................... $ 235,895
2000........................................................... 240,312
2001........................................................... 244,730
2002........................................................... 249,147
2003........................................................... 253,565
Thereafter..................................................... 1,334,085
----------
Total........................................................ $2,557,734
==========
F-17
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Future payments under noncancelable capital lease agreements as of
September 30, 1999 are as follows:
[Download Table]
1999.......................................................... $ 60,327
2000.......................................................... 438,163
2001.......................................................... 419,047
2002.......................................................... 335,411
2003 and thereafter........................................... 87,753
----------
1,340,701
Less amounts representing interest............................ (206,266)
----------
Net present value of minimum lease payments................... 1,134,435
Less current portion.......................................... (321,176)
----------
$ 813,259
==========
On September 30, 1999, the Company signed an agreement with a third party
for the purchase of a software license to be used to support the business
activity of the Company. Subject to the terms of the agreement, the Company is
obligated to pay $25,000 of license fees by October 31, 1999 and $225,000 by
March 31, 2000.
10. Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted EPS computations. The calculation below provides net
loss, weighted average common shares outstanding and the resultant net loss per
share for both basic and diluted EPS for the years ended December 31, 1996 and
1997 and 1998 and for the nine-month periods ended September 30, 1998 and 1999.
[Enlarge/Download Table]
Year Ended Nine Months Ended
December 31, September 30,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
(unaudited)
Numerator:
Net (loss) income..... $ (952,161) $ (893,873) $(2,177,983) $(1,233,698) $(8,080,075)
========== ========== =========== =========== ===========
Denominator:
Weighted average
common shares........ 16,950,000 16,950,000 16,897,835 16,950,000 7,430,000
(Denominator for basic
calculation)
Weighted average
effect of dilutive
securities:
Convertible preferred
stock................ -- -- -- -- --
Stock options and
warrants............. -- -- -- -- --
---------- ---------- ----------- ----------- -----------
Denominator for
diluted calculation.. 16,950,000 16,950,000 16,897,835 16,950,000 7,430,000
========== ========== =========== =========== ===========
Earnings per share:
Basic................. $ (0.06) (0.05) $ (0.13) $ (0.07) $ (1.09)
========== ========== =========== =========== ===========
Diluted............... $ (0.06) (0.05) $ (0.13) $ (0.07) $ (1.09)
========== ========== =========== =========== ===========
F-18
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
11. Related Party Transactions
The Company and Fast Heat, Inc. ("Fast Heat") are related parties through a
common group of shareholders which hold a substantial ownership interest in
both companies. Fast Heat is owned by the Stojka family, including Tim and Nick
Stojka, Chairman and Chief Executive Officer of the Company and Executive Vice-
President and Director of the Company, respectively. In 1998, Fast Heat
provided funding to the Company for operations. Additionally, Fast Heat and
Fast Heat International (an affiliate of Fast Heat) have guaranteed the
Company's obligations under the current office lease. At December 31, 1997 and
1998 amounts due to Fast Heat were $217,309 and $92,713, respectively. At
September 30, 1998 and 1999 amounts due to Fast Heat were $951,632 and $98,776.
The amount is due on demand and accrued interest at 8.0% in 1997 and at 8.5% in
1998 and 1999. The Company paid this obligation in full in November 1999.
In 1997 and 1998, the Company provided Internet related services to Fast
Heat. The amount of revenue earned for these services was $79,600 and $2,025
for the years ended December 31, 1997 and 1998 and $2,025 for the nine month
period ended September 30, 1998. No such services were performed in the nine-
month period ending September 30, 1999.
In 1996, 1997, 1998 and 1999 the Company provided bartered services for
print advertising and trade show benefits to an affiliated entity in exchange
for print advertising and certain trade show benefits. The Company has not
reflected these barter transactions in the financial statements.
12. Defined Contribution Savings Plan
The Company maintains a defined contribution 401(k) profit sharing plan
covering substantially all eligible employees meeting certain minimum age and
months of service requirements, as defined. Participants may make elective
contributions up to established limits. All amounts contributed by participants
and earnings on these contributions are fully vested at all times. The Plan
provides for matching and discretionary contributions by the Company. The
Company's expense for the defined contribution plan totaled $8,680 for the year
ended December 31, 1998, and $6,235 and $8,085 for the periods ended September
30, 1998 and 1999, respectively. The Company's expenses for 1996 and 1997 were
de minimis.
13. Financial Results and Liquidity
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing, or other sources of capital. During
December 1998 (as described in Note 6), the Company sold $5 million of
preferred stock and obtained a commitment for the purchase of an additional $2
million of preferred stock. In March 1999, the Company's Board of Directors
approved a resolution initiating the sale of preferred stock under this
commitment and the shares were issued in June 1999. In addition, in November
and December 1999, the Company sold $38.6 million of preferred stock to fund
planned expenditures for fiscal years 1999 and 2000. Management believes that
its current funds will be sufficient to enable the Company to meet its planned
expenditures for fiscal 2000.
14. Subsequent Events
In November 1999, the Company entered into a three-year supplier agreement
with a third party. According to the terms of the agreement, the Company will
serve as the supplier's exclusive third party e-commerce solution for the first
two years and the Company will market and sell specified
F-19
COMMERX, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
products purchased from the supplier over the Internet using the Company's Web
site, PlasticsNet.Com.
In December 1999, the Company entered into a supplier agreement with a
third party. According to the terms of the agreement, the Company will serve as
the supplier's non-exclusive third party e-commerce solution and will market
and sell specified products purchased from the supplier over the Internet using
the Company's Web site, PlasticsNet.Com. The term of the agreement ends in one
year, but automatically renews each year unless either party terminates the
agreement.
Additionally, in December 1999, the Board of Directors of the Company
approved an increase in the total number of shares of common stock that may be
issued pursuant to options granted under the Combined Incentive and
Nonstatutory Stock Option Plan from 4,000,000 to 5,500,000.
In December 1999, the Company issued 1,192,738 shares of Series B preferred
stock in exchange for gross cash proceeds of $14,700,000.
F-20
[INSIDE BACK COVER OF PROSPECTUS]
The following text is included in a vertical timeline that will print the years
in bold, with corresponding copy adjacent.
1994 "Involved in the plastics industry from an early age, brothers Tim and
Nick Stojka realize that significant inefficiencies exist in the market and
develop an idea to change the way purchasing is done in the plastics industry"
1995 "The Stojka brothers launch Commerx (Latin for "commerce") and their
flagship marketplace, PlasticsNet.Com"
1996 "PlasticsNet.Com focuses on forming industry relationships and community
development"
1997 "Site evolves to include catalog aggregation, lead generation
opportunities; site visits increase continuously"
1998 "E-commerce architecture developed, investment received from Internet
Capital Group (ICG)"
1999 "E-commerce function launched, site becomes a leading neutral industry
marketplace for the plastics industry"
1999 "PlasticsNet.Com recognized as the #4 B2B Web site by Business Marketing,
an Advertising Age magazine"
2000 "Commerx continues to develop its marketplace solution, with future plans
to enter other verticals and expand internationally"
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
[Download Table]
Page
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Special Note Regarding Forward- Looking Statements........................ 19
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 32
Management................................................................ 46
Related Party and Other Transactions...................................... 53
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 59
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 61
Underwriting.............................................................. 62
Index to Financial Statements............................................. 64
----------------
Through and including , 2000 (the 25th day after the date of
this prospectus) all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
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Shares
Commerx, Inc.
Common Stock
----------------
[LOGO]
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Goldman, Sachs & Co.
Merrill Lynch & Co.
Chase H&Q
Robertson Stephens
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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 the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD fee and the Nasdaq National Market
listing fee.
[Download Table]
SEC registration fee.......................................... $ 26,400
NASD filing fee............................................... $ 10,500
Nasdaq National Market listing fee............................ $ 94,000
Printing...................................................... $ 200,000
Legal fees and expenses....................................... $ 300,000
Accounting fees and expenses.................................. $ 200,000
Blue sky fees and expenses.................................... $ 2,000
Transfer agent and registrar fees............................. $ 20,000
Miscellaneous................................................. $ 347,100
----------
Total..................................................... $1,200,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases) or (iv) for any transaction from which
the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Bylaws of the
Registrant provide that (i) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (ii) the
Registrant may indemnify its other employees and agents as set forth in the
Delaware General Corporation Law, (iii) the Registrant is required to advance
expenses, as incurred, to its directors and executive officers in connection
with a legal proceeding to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions and (iv) the rights
conferred in the Bylaws are not exclusive.
The Registrant intends to enter into Indemnification Agreements with each
of its directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Registrant's Certificate of Incorporation and to provide
additional procedural protections. At present, there is no pending litigation
or proceeding involving a director, officer or employee of the Registrant
regarding which indemnification is sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification.
II-1
Reference is also made to Section of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnification
Agreements entered into between the Registrant and each of its directors and
executive officers may be sufficiently broad to permit indemnification of the
Registrant's directors and executive officers for liabilities arising under the
Securities Act.
The Registrant, with approval by the Registrant's Board of Directors,
expects to obtain additional directors' and officers' liability insurance.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
[Download Table]
Exhibit
Document Number
-------- -------
Form of Underwriting Agreement.................................. 1.1
Amended and Restated Articles of Incorporation of Commerx....... 3.1(b)
Bylaws of Commerx............................................... 3.2(b)
Form of Officer and Director Indemnity Agreement................ 10.5
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the period from January 1, 1997 through December 31, 1999, the
registrant has sold and issued the following securities:
1. In December 1998 and June 1999, the registrant issued 8,570,000 shares
of Series A preferred stock to five investors for consideration of a
cash payment of $6,750,000, the extinguishment of a note payable in
the amount of $250,000 and the exchange of 9,520,000 shares of common
stock.
2. In June 1999, the registrant issued a warrant to purchase 91,429
shares of Series A preferred stock at an exercise price of $1.05 per
share.
3. In August 1999, the registrant issued a warrant to purchase 21,429
shares of Series A preferred stock at an exercise price of $1.05 per
share.
4. In November and December 1999, the registrant issued 3,128,732 shares
of Series B preferred stock to 23 investors for an aggregate
consideration of $38,631,309.
5. In November 1999, the registrant issued a warrant to purchase 24,790
shares of Series B preferred stock at an exercise price of $12.43 per
share.
6. Since inception, the registrant has granted options to purchase an
aggregate of 4,634,000 shares of common stock to a number of its
employees, directors, officers and consultants. No consideration was
received by the registrant upon grant of any such option. As of
December 31, 1999, 240,500 options have been exercised.
The issuances of the above securities were intended to be exempt from
registration under the Securities Act in reliance on Section 4(2) thereof as
transactions by an issuer not involving any public offering. In addition,
certain issuances described in Item 6 were intended to be exempt from
registration under the Securities Act in reliance upon Rule 701 and/or Rule
4(2) promulgated under the Securities Act. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the share
certificates, warrants and options issued in such transactions. The registrant
believes that all recipients had adequate access, through their relationships
with the registrant, to information about the registrant.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
[Download Table]
Exhibit
No. Description
------- -----------
1.1 Form of Underwriting Agreement*
3.1(a) Amended and Restated Certificate of Incorporation (to be
replaced by 3.1(b) upon the closing of the offering)
3.1(b) Form of Amended and Restated Certificate of Incorporation (to
be effective upon the closing of the offering)*
3.2(a) By-laws (to be replaced by 3.2(b) upon the closing of the
offering)
3.2(b) Form of Amended and Restated Bylaws (to be effective upon the
closing of the offering)*
4.1 Specimen Stock Certificate*
4.2 Investor Rights Agreement dated December 28, 1998 between
registrant and the investors listed on Exhibit A thereto
4.3 Investor Rights Agreement dated November 19, 1999 between
registrant and the investors listed on Exhibit A thereto
4.4 Investor Rights Agreement dated December 30, 1999 between
registrant and the investors listed on Exhibit A thereto
4.5 Warrant Agreement to purchase Series A preferred stock of
registrant issued to Comdisco, Inc. dated June 8, 1999
4.6 Warrant Agreement to purchase Series A preferred stock of
registrant issued to Comdisco, Inc. dated July 23, 1999
4.7 Warrant to purchase Series B preferred stock of registrant
issued to David Dill dated September 28, 1999
4.8 Warrant to purchase Series B preferred stock of registrant
issued to Jeffrey Garwood dated September 28, 1999
4.9 Warrant to purchase Series B preferred stock of registrant
issued to James Morelli dated September 28, 1999
4.10 Warrant to purchase Series B preferred stock of registrant
issued to David Franco dated September 28, 1999
5.1 Opinion of Wildman, Harrold, Allen & Dixon regarding legality
of the securities being registered*
10.1 Amended and Restated 1999 Combined Incentive and Non-statutory
Stock Option Plan*
10.2 2000 Employee Stock Purchase Plan*
10.3 2000 Section 423 Stock Purchase Plan*
10.4 Office Lease dated as of November 1, 1998 between registrant
and WDI Realty Co.
10.5 Form of Officer and Director Indemnity Agreement
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wildman, Harrold, Allen & Dixon (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
--------
* To be filed by amendment
II-3
(b) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule is included as part of this registration statement:
Schedule II--Valuation and Qualifying Accounts.
Other financial statement schedules have been omitted because they are
inapplicable or are not required under applicable provisions of Regulation S-X,
or because the information that would otherwise be included in such schedules
is contained in the registrant's financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 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, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on the 26th day of January, 2000.
COMMERX, INC.
/s/ Tim Stojka
By :_________________________________
Tim Stojka
Chairman and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears immediately below constitutes and appoints Tim Stojka or David Dill or
any of them, his or her true and lawful attorney-in-fact and agent, with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and any and all
additional registration statements pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, in connection with or related to the offering
contemplated by this Registration Statement and its amendments, if any, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his or her substitute or 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 indicated on January 26, 2000.
[Download Table]
Signature Title
--------- -----
/s/ Tim Stojka Chairman and Chief Executive Officer
___________________________________________
Tim Stojka
/s/ Nick Stojka Executive Vice President, Director
___________________________________________
Nick Stojka
/s/ Jeffrey Garwood Chief Operating Officer
___________________________________________
Jeffrey Garwood
/s/ David Dill Chief Financial Officer
___________________________________________
David Dill
/s/ Kenneth Fox Director
___________________________________________
Kenneth Fox
/s/ Robert Pollan Director
___________________________________________
Robert Pollan
/s/ Timothy Ozark Director
___________________________________________
Timothy Ozark
/s/ Charles Fritz Director
___________________________________________
Charles Fritz
II-5
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Commerx, Inc.
Our audits of the financial statements referred to in our report dated
December 28, 1999 appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule. In our opinion, such
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 28, 1999
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1997, and 1998
and for the nine months ended September 30, 1998 and 1999
ALLOWANCE FOR DOUBTFUL ACCOUNTS
[Download Table]
Nine Months Ended
Years Ended December 31, September 30,
------------------------ -------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -------
(unaudited)
Beginning Balance................ $ -- $ -- $ 12,800 $ 12,800 $ --
Provisions for allowance......... -- 12,800 -- -- 26,363
Write-offs against the allowance. -- -- (12,800) (12,800) --
Ending Balance................... $ -- $12,800 $ -- $ -- $26,363
EXHIBIT INDEX
[Download Table]
Exhibit
No. Description
------- -----------
1.1 Form of Underwriting Agreement*
3.1(a) Amended and Restated Certificate of Incorporation (to be
replaced by 3.1(b) upon the closing of the offering)
3.1(b) Form of Amended and Restated Certificate of Incorporation (to
be effective upon the closing of the offering)*
3.2(a) By-laws (to be replaced by 3.2(b) upon the closing of the
offering)
3.2(b) Form of Amended and Restated Bylaws (to be effective upon the
closing of the offering)*
4.1 Specimen Stock Certificate*
4.2 Investor Rights Agreement dated December 28, 1998 between
registrant and the investors listed on Exhibit A thereto
4.3 Investor Rights Agreement dated November 19, 1999 between
registrant and the investors listed on Exhibit A thereto
4.4 Investor Rights Agreement dated December 30, 1999 between
registrant and the investors listed on Exhibit A thereto
4.5 Warrant Agreement to purchase Series A preferred stock of
registrant issued to Comdisco, Inc. dated June 8, 1999
4.6 Warrant Agreement to purchase Series A preferred stock of
registrant issued to Comdisco, Inc. dated July 23, 1999
4.7 Warrant to purchase Series B preferred stock of registrant
issued to David Dill dated September 28, 1999
4.8 Warrant to purchase Series B preferred stock of registrant
issued to Jeffrey Garwood dated September 28, 1999
4.9 Warrant to purchase Series B preferred stock of registrant
issued to James Morelli dated September 28, 1999
4.10 Warrant to purchase Series B preferred stock of registrant
issued to David Franco dated September 28, 1999
5.1 Opinion of Wildman, Harrold, Allen & Dixon regarding legality
of the securities being registered*
10.1 Amended and Restated 1999 Combined Incentive and Non-statutory
Stock Option Plan*
10.2 2000 Employee Stock Purchase Plan*
10.3 2000 Section 423 Stock Purchase Plan*
10.4 Office Lease dated as of November 1, 1998 between registrant
and WDI Realty Co.
10.5 Form of Officer and Director Indemnity Agreement
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wildman, Harrold, Allen & Dixon (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
--------
* To be filed by amendment
Dates Referenced Herein
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