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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Telaxis Communications Corporation We develop and supply high-speed, or broadband, wireless access equipment used by network service providers to deliver integrated voice, video and data services to business and residential subscribers. Our products provide a high performance alternative to other access technologies, such as traditional copper wires, digital subscriber lines and cable modems, that connect the network service provider and the subscriber. Our products enable high-speed Internet access, electronic commerce, remote access, telecommuting and extensions of corporate networks to branch offices. Our product line consists of wireless transmitter and receiver equipment that is installed outdoors in a circular geographic service area, or cell. Each cell has equipment at its center called a hub that transmits and receives data to and from customer premises equipment installed at multiple subscriber locations. This cell-based arrangement is commonly referred to as point-to- multipoint architecture. Using our point-to-multipoint products, network service providers can enter markets quickly and economically, and then expand their networks by adding customer premises equipment as the number of subscribers grows. We have developed two families of broadband point-to-multipoint wireless access products. Our modular hubs and customer premises equipment can be rapidly tailored for competitive site demonstrations and initial commercial deployments. These modular products address a network service provider's need to offer new services and enter new markets quickly. Our planar hubs and customer equipment can be mass-produced using low-cost, highly automated manufacturing techniques. We use the word planar to describe this family of products because these products combine the functions of multiple stand-alone modules onto a flat printed circuit board. These planar products address a network service provider's need for cost-effective deployment to many subscribers. We sell our products primarily to network system integrators, such as Newbridge Networks and Motorola, which include our products in broadband wireless systems sold to network service providers. Our products have been successfully demonstrated at more than 40 sites worldwide over the last four years. We believe this experience is unmatched by any other supplier of broadband point-to-multipoint wireless access equipment. As a result of these demonstrations, our products have been selected, either directly or by network system integrators, for commercial deployment by network service providers, including: . American Wireless . Korea Telecom . BellSouth Movicom . Maxlink Communications . Telenordia . Formus Our objective is to be the leading developer and supplier of broadband point-to-multipoint wireless access equipment for use by network service providers worldwide. Our strategy to accomplish this objective is to: . Penetrate the global market with our two product families . Capitalize upon our early customer acceptance . Expand strategic relationships with network system integrators . Reduce product costs while increasing performance and adding functionality . Leverage technology partnerships . Establish brand identity Our principal executive offices and manufacturing facilities are located at 20 Industrial Drive East, South Deerfield, Massachusetts 01373-0109. Our telephone number is (413) 665-8551. Our web site is located at www.telaxiscomm.com. Information contained in our web site is not incorporated by reference into this prospectus, and you should not consider information contained in our web site as part of this prospectus. Our company was incorporated in Massachusetts in 1982. The Offering Common stock offered.............. 4,000,000 shares Common stock outstanding after this offering.................... 15,332,312 shares Use of proceeds................... For general corporate purposes and for potential acquisitions. Proposed Nasdaq National Market symbol........................... TLXS The number of shares to be outstanding after the offering is based on the number of shares of common stock outstanding as of December 31, 1999 and gives effect to the conversion of all outstanding shares of our preferred stock into 10,488,440 shares of common stock upon the closing of this offering. This number excludes: . 1,881,763 shares that we may issue upon the exercise of options outstanding as of December 31, 1999 at a weighted average exercise price of $2.66 per share . 2,116,711 shares available for issuance upon the exercise of options which have been or may be granted after December 31, 1999 under our active stock plans . 1,221,370 shares that we may issue upon the exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of $1.19 per share Recent Financial Results We expect that our revenues for the quarter ended December 31, 1999 will be approximately $4.2 million. We expect both our operating loss and our loss from continuing operations for the quarter ended December 31, 1999 to be between $2.3 million and $2.6 million. Summary Financial Data (in thousands, except per share data) The following tables summarize our financial data. The statement of operations data reflect only our continuing operations. You should read our financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma balance sheet data reflect the conversion of our currently outstanding redeemable preferred stock into common stock upon the closing of this offering. The pro forma as adjusted balance sheet data reflect our sale of 4,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> Nine Months Ended Year Ended December 31, September 30, -------------------------- ----------------------- 1996 1997 1998 1998 1999 ------- ------- -------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Sales...................... $ 201 $ 1,733 $ 2,386 $ 1,447 $ 5,504 Gross margin (loss)........ (306) (1,022) (5,131) (1,873) 401 Operating loss............. (1,829) (6,726) (13,172) (7,932) (5,441) Loss from continuing operations................ $(2,239) $(6,712) $(11,253) $(7,076) $(5,947) Basic and diluted loss per share from continuing operations..... $ (4.15) $(14.16) $ (22.87) $(14.38) $(11.14) Shares used in computing basic and diluted loss per share............ 540 474 492 492 534 Pro forma basic and diluted loss per share from continuing operations(1).. $ (1.78) $ (0.76) Shares used in computing pro forma basic and diluted loss per share(1).................. 6,319 7,833 </TABLE> - -------------------- (1) For an explanation of these computations, see Note 1 to our financial statements. <TABLE> <CAPTION> September 30, 1999 ----------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents................. $ 12,158 $12,158 $66,958 Working capital........................... 12,372 12,372 67,172 Total assets.............................. 25,958 25,958 80,758 Long-term debt and capital lease obligations, net of current portion...... 1,602 1,602 1,602 Redeemable preferred stock................ 47,793 -- -- Total stockholders' (deficit) equity...... (31,399) 16,394 71,194 </TABLE> Except where we state otherwise, the information we present in this prospectus: . reflects the discontinuation of our millimeter-wave products business segment . reflects the amendment of our charter to increase the authorized number of shares of common stock to 100,000,000 shares and change our name to "Telaxis Communications Corporation" from "Millitech Corporation" . reflects a one for two reverse stock split of our common stock effective December 16, 1999 . assumes that the underwriters do not exercise their option to purchase 600,000 additional shares after the closing of this offering

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Predictive Systems, Inc. Our Business We are a network consulting company focused on the design, performance, management and security of complex computing networks. We utilize our proprietary consulting methodology, BusinessFirst, to translate our clients' strategic business objectives into sound technology solutions. Using our BusinessFirst methodology, we demonstrate the business value of technology solutions in specific and measurable terms, thereby enabling our clients to incorporate objective and quantifiable analysis into their technology investment decisions. As a result, our clients can gain a clear understanding of the benefits that they will derive from their network technology investments and a measure of certainty regarding how their technology investments will be translated into quantifiable improvements to their business processes. Our Services As an independent service provider, we provide our clients with unbiased expertise that enables the design, implementation and management of optimal technology solutions. We provide our services on either a project outsource or collaborative consulting basis. Our project outsource services are primarily based and measured against mutually agreed upon service offerings and provide our clients with certainty of costs, delivery time and project scope. Our collaborative consulting services enable our clients to utilize our extensive expertise in order to extend their internal capabilities and to access our methodologies. In addition to these services, we have developed an innovative service model through which we deliver our clients productized services, which are pre-packaged service products. Our service products are characterized by pre-defined service offerings that have a pre-defined set of service deliverables, a pre-defined pricing model and are implemented using a pre-defined methodology. In contrast to our project outsource and collaborative consulting services which provide our clients with services that are customized for, and therefore unique to, each engagement, our service products are typically provided with little or no modification. We believe that this unique approach to network services further differentiates us from our competitors. Our consultants are organized into the following practice areas, which cover the four cornerstones of network computing: network and systems management; internetwork design and engineering; performance management; and information security. This structure enables our consultants to gain in-depth expertise and become intimately familiar with the best practices and methodologies identified within each of those disciplines. Our Market We believe we are well-positioned to capitalize on global trends impacting communications technology, primarily the acceptance and growth of the Internet and private intranets. As a result of these trends, the demand for network consulting services has grown dramatically. International Data Corporation, a market research organization, estimates that the worldwide market for these services will grow from $12.1 billion in 1998 to $25.5 billion by 2003. Although there are many third-party service providers attempting to address this growing market, including network equipment vendors, systems integrators, value-added resellers and network consulting companies, we believe that few have the requisite focus and expertise to address the multi-faceted issues surrounding today's complex networking environments. Our Strategy Our goal is to become the leading provider of services for the design, performance, management and security of complex networks. To achieve this goal, we intend to pursue the following strategies: o continue to evolve our BusinessFirst methodology; o expand and enhance our service product offerings; o continue to attract and retain highly qualified consultants; o further increase our industry expertise; o expand in existing and new geographic markets; and o establish additional and broaden existing strategic relationships. Our Clients We provide our services to a broad range of clients in many industries, including communications services, financial services, network technology and professional services. Our clients include Bear Stearns; Cisco Systems; UUNET, an MCI WorldCom company; Pfizer and Qwest. These clients, in the aggregate, accounted for approximately 45.8% of our revenues for the year ended December 31, 1999. Our History We were organized as Predictive Holdings, Inc. in Delaware in February 1995. In March 1999, in order to simplify our corporate organizational structure, Predictive Holdings was merged into its wholly-owned subsidiary, Predictive Systems, Inc., the surviving corporation. Since our inception, we have expanded our service offerings, evolved our technology expertise and developed the scope of our business to address the most critical network technology needs of the broad client base we serve. We have continued to grow our client base by expanding geographically, and we have supported this client base by attracting and retaining talented professionals at all levels. As of December 31, 1999, our employee base had grown to 416 full-time employees. Our principal executive offices are located at 417 Fifth Avenue, 11th Floor, New York, NY 10016. Our telephone number is (212) 659-3400. In addition, we maintain offices in California, Georgia, Massachusetts, New Jersey, North Carolina, Texas, Virginia, England and The Netherlands. We maintain a web site at www.predictive.com. Information contained on our web site does not constitute part of this prospectus. --------------------- "PREDICTIVE SYSTEMS," "BUSINESSFIRST" and the Predictive logo are trademarks of Predictive. All other trademarks and service marks used in this prospectus are the property of their respective owners. The Offering <TABLE> <S> <C> Common stock offered by Predictive .............. 1,000,000 shares Common stock offered by the selling stockholders 2,800,000 shares Common stock to be outstanding after the offering 24,429,200 shares Use of proceeds ................................. For general corporate purposes, including work- ing capital. We may also use a portion of the proceeds for acquisitions of complementary businesses or technologies. Please see "Use of Proceeds." Nasdaq National Market symbol ................... PRDS </TABLE> Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to 570,000 shares of our common stock by some of the selling stockholders which the underwriters have the option to purchase solely to cover over-allotments. The number of shares to be outstanding after this offering is based upon shares outstanding as of December 31, 1999, and does not include: o 10,756,910 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $3.11 per share; o 769,220 additional shares issued to various selling stockholders as a result of the exercise of options, which shares will be sold by such selling stockholders in this offering; o 1,903,870 additional shares reserved for issuance under our stock option plan; and o 750,000 additional shares available for issuance under our employee stock purchase plan. Summary Consolidated Financial Data (in thousands, except per share data) The following tables summarize the financial data for our business. You should read this information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> Year Ended December 31, -------------------------------------- 1997 1998 1999 ------------ ---------- ---------- <S> <C> <C> <C> Statement of Operations Data: Revenues ............................. $ 18,087 $25,923 $ 52,745 Cost of revenues ..................... 10,407 14,560 27,465 Gross profit ......................... 7,680 11,363 25,280 Noncash compensation expense ......... -- -- 48 Operating profit (loss) .............. 1,887 (822) (1,138) Net income (loss) .................... $ 1,011 $ (627) $ (957) ======== ======= ======== Net Income (Loss) Per Share: Basic ................................ $ 0.22 $ (0.11) $ (0.08) ======== ======= ======== Diluted .............................. $ 0.08 $ (0.11) $ (0.08) ======== ======= ======== Weighted Average Shares Outstanding: Basic ................................ 4,382 6,015 12,138 ======== ======= ======== Diluted .............................. 12,765 6,015 12,138 ======== ======= ======== </TABLE> The following table is a summary of our balance sheet at December 31, 1999. The as adjusted data give effect to the sale of 1,000,000 shares of common stock by us at an assumed offering price of $60.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. December 31, 1999 ------------------------- Actual As Adjusted ---------- ------------ Balance Sheet Data: Cash and cash equivalents .......... $89,634 $145,669 Marketable securities .............. 2,018 2,018 Working capital .................... 102,092 158,127 Total assets ....................... 117,423 173,458 Total stockholders' equity ......... 108,502 164,537 The as adjusted data does not give effect to the receipt by us of proceeds of approximately $616 in connection with the exercise of options to acquire 769,220 shares of common stock by various selling stockholders, which shares will be sold by such selling stockholders in this offering. Giving effect to such proceeds, our cash and cash equivalents, marketable securities, working capital, total assets and total stockholders' equity would have been $146,285, $2,018, $158,743, $174,074 and $165,153, respectively.

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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that is important to you. We encourage you to read this prospectus in its entirety. ABOUT GOLDEN BOOKS We are the largest publisher of children's books in the North American retail market and we have published our flagship product line, "Little Golden Books," for over 50 years. We have two business segments, which we operate primarily through our principal operating subsidiary, Golden Books Publishing: - Consumer Products, which operates as our Children's Publishing division, and - Entertainment, which operates as the Golden Books Entertainment Group division. Our Children's Publishing division produces: - storybooks; - coloring/activity books; - puzzles; - educational workbooks; - reference books; - novelty books; and - chapter books. The products of the Children's Publishing division use both partially and wholly owned characters, including Pat the Bunny, The Poky Little Puppy and Lassie, and characters licensed by us from third parties, including: - Pokemon, from Nintendo; - Scooby-Doo and Powerpuff Girls, from Warner Brothers; - Between the Lions, from Sirius Thinking, Ltd. and WGBH Education Foundation; - Barbie, from Mattel; - Little Critters, from Mercer Mayer; and - Tarzan and Toy Story 2, from Disney. We also publish under the Road to Reading trademark, a level reading series, education and reference books, which consist of workbooks, flashcards and other reference books. We first began publishing our Road to Reading series in 1998 using our existing characters and titles, as well as licensed characters -- Barbie, for example. Our Children's Publishing division's products have traditionally been designed primarily for children up to age eight and have been distributed primarily through mass-market channels, which include national discount store chains, including Wal-Mart, K-Mart, Target and Toys "R" Us. We also sell children's products through bookstores, children's educational specialty retailers, toy stores, supermarkets, drugstores and warehouse clubs and special markets, including school book clubs, school book fairs, paperback jobbers, catalogues and educational institutions. In addition, we sell through international channels. Our Entertainment division sells our video products, licenses properties from our film library to third parties, both domestically and internationally, for use on television, home video and other media, and licenses properties from our library to third parties for character-based merchandise. Our film library is made up of: - copyrights; - distribution rights; - trademarks and licenses relating to characters; - television programs; and - animated and live action motion pictures. Among the film library characters are: - Rudolph the Red-Nosed Reindeer; - Frosty the Snowman; - Santa Claus; - Lassie; - Underdog; - The Lone Ranger; - Tennessee Tuxedo; - Shari Lewis' Lambchop; and - Hush Puppy. The film library has, among other properties, over 3,000 half-hour individual and multiple episode television programs, including 26 episodes of Felix the Cat and 52 episodes of Abbott and Costello. We are continuing to pursue a strategy that we began in 1998. We are changing our mix of products to emphasize our most profitable products, while phasing out unprofitable products. Our strategy has enabled us to pursue the broader strategy of building a leading family entertainment company that creates, publishes and licenses children's books and family related entertainment products. We intend to build on our position as a leader in the children's publishing market, using the strength of our brand to provide family-oriented content through many media. While we are confident that our strategy will be successful, we cannot assure you that it will be. Our corporate offices, publishing and principal sales offices are located at 888 Seventh Avenue, New York, New York 10106 and our telephone number is (212) 547-6700. Our principal administrative offices are located in Sturtevant, Wisconsin and our principal warehousing and distribution facilities are located in Crawfordsville, Indiana. THE AMENDED JOINT PLAN OF REORGANIZATION In February 1999, we reached an agreement with our major creditors under which our then existing long-term debt would be significantly reduced and our existing trade obligations would be paid in full. Under that agreement, Golden Books, Golden Books Publishing and Golden Books Home Video, Inc. filed a petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York on February 26, 1999. Under an order dated September 24, 1999, the Bankruptcy Court confirmed our amended joint plan of reorganization. Significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999. On January 27, 2000, we completed the amended joint plan of reorganization and emerged from bankruptcy. The following is a summary of the amended joint plan of reorganization: - The senior notes of $150.0 million existing prior to our bankruptcy were converted into: (1) new senior secured notes in the principal amount of $87.0 million due 2004, with interest at the rate of 10.75%, if paid in cash, or, at our option for the first two years, 14.25% payable in additional senior secured notes, and (2) 4,250,000 shares of Golden Books' new common stock. The senior secured notes are secured by the collateral which had already been granted to the holders of the senior notes existing prior to bankruptcy and additional collateral. - The Trust Originated Preferred Securities indebtedness of $109.8 million was converted into 5,000,000 shares of Golden Books' new common stock. - The Golden Press Holdings, L.L.C. loan facility in the amount of $10.0 million was converted into 500,000 shares of Golden Books' new common stock. - The old employment agreement with Richard E. Snyder, Golden Books' Chairman of the Board and Chief Executive Officer before and after the reorganization, was terminated and Mr. Snyder received for his executing a new employment agreement and surrendering claims and rights under his old employment agreement, 250,000 shares of Golden Books' new common stock in the form of restricted stock, among other things. - Shares of preferred and common stock of Golden Books existing prior to our bankruptcy proceeding and outstanding at January 27, 2000 were cancelled. Holders of those preferred and common stock received warrants to purchase 525,000 shares of the Golden Books' new common stock at an exercise price of $23.03 per share, allocated two-thirds to the preferred and one-third to the common shareholders. Upon the completion of our amended joint plan of reorganization, we entered into a revolving credit and term loan agreement consisting of a $50.0 million revolving credit facility and a $10.0 million term loan facility. We used part of the proceeds from the revolving credit and term loan agreement to repay all of the outstanding amounts under a debtor-in-possession loan. The remaining proceeds are available for our working capital and general corporate purposes. We are in the process of paying all our pre-petition trade creditors with undisputed claims the amounts due to them with accrued interest at 4.25%. We also are working to resolve all disputed claims of pre-petition trade creditors in the Bankruptcy Court. As significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999 and in accordance with the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Law" ("SOP 90-7"), we have applied reorganization and fresh-start accounting adjustments to our consolidated balance sheet as of December 25, 1999. Under fresh-start accounting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date fresh-start accounting is applied. To avoid confusion, we may refer in this prospectus to Golden Books and its subsidiaries after applying the fresh-start accounting as the Successor Company and we may refer to Golden Books and its subsidiaries prior to applying the fresh-start accounting as the Predecessor Company. ----------------------- SUMMARY OF THE OFFERING The selling security holders are offering to sell up to $34,011,200 principal amount of the notes and 3,477,832 shares of common stock. We will not receive any proceeds from the sale of the notes or the common stock. You should read the discussions under the headings "Description of the Notes" and "Description of the Capital Stock" for further information regarding the notes and the common stock. Summary of the Notes <TABLE> <S> <C> Securities offered ....................................... 10.75% Senior Secured Notes due 2004 Issuer ................................................... Golden Books Publishing Maturity Date............................................. December 31, 2004 Interest Rate and Payment Dates........................... Annual rate: 10.75%. Payment frequency: every six months on June 30 and December 31. Interest payments in lieu of cash: at the option of Golden Books Publishing, semiannual interest payments due on or prior to December 31, 2002 may be paid in the form of additional notes at the annual rate of 14.25%. Guarantees................................................ Payment on each note is guaranteed on a senior secured basis, jointly and severally, by Golden Books and certain subsidiaries of Golden Books. Ranking................................................... The notes and the guarantees constitute senior debts. They rank equally with all of Golden Books Publishing's and each guarantor's current and future indebtedness. Collateral................................................ The notes are secured by a first priority lien or a second priority lien on all assets and property owned by Golden Books Publishing and each guarantor. Optional Redemption....................................... Golden Books Publishing may redeem some or all of the notes at any time at the redemption prices listed in the section "Description of the Notes" under the heading "Redemption." </TABLE> <TABLE> <S> <C> Mandatory Redemption...................................... Golden Books Publishing must redeem the notes, in part in a principal amount equal to $8,333,000, on each of June 30, 2003, December 31, 2003 and June 30, 2004, at a redemption price equal to 100% of the principal amount plus accrued interest. Mandatory Offer to Repurchase............................. If Golden Books Publishing sells certain assets or experiences specific kinds of changes of control, Golden Books Publishing must offer to repurchase the notes, subject to certain limitations in the case of assets sales, at the price listed in the section "Description of the Notes." Basic Covenants of the Indenture.......................... Golden Books Publishing issued the notes under an indenture with HSBC Bank USA. The indenture, among other things, requires Golden Books to comply with certain financial covenants, restricts Golden Books Publishing's ability and the ability of Golden Books and Golden Books Publishing's and Golden Books' subsidiaries to: - borrow money; - pay dividends on stock or purchase stock; - sell assets or merge with or into other companies; - - make investments; - transact business with affiliates; - sell stock in subsidiaries; - engage in any new line of business; and - use assets as security in other transactions. For more details, see the "Description of the Notes" section under the heading "Certain Covenants." </TABLE> The Common Stock Golden Books is authorized to issue a total of 30,000,000 shares of common stock, par value $.01 per share. As of May 4, 2000, there were 10,233,889 shares of Golden Books common stock outstanding. SUMMARY CONSOLIDATED FINANCIAL DATA We are providing the following information to aid in your analysis of the financial aspects of our company. We derived the financial information presented below from the audited consolidated financial statements of the Predecessor Company, except for the December 25, 1999 consolidated balance sheet information which represents the Successor Company. This information is only a summary and should be read in conjunction with the Selected Financial Data, our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In 1996, we changed our fiscal year end so as to end on the last Saturday of December in each year. As a result, the fiscal 1996 results from operations are not necessarily comparable to other periods as presented. <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ 11 Months Year Ended Ended Year Ended --------------------------------------------- ---------------------------- Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- INCOME STATEMENT DATA: (In thousands, except per share data) <S> <C> <C> <C> <C> <C> Revenue Net sales ...................................... $ 165,259 $ 193,573 $ 242,481 $ 254,046 $ 369,572 Royalties and other income ..................... 512 653 1,080 959 1,722 --------- --------- --------- --------- ---------- Total revenue ............................... 165,771 194,226 243,561 255,005 371,294 --------- --------- --------- --------- ---------- Costs and expenses: Cost of sales .................................. 111,421 181,141 176,238 231,792 281,392 Selling, general and administrative ............ 79,041 98,293 111,307 142,721 129,020 Restructuring, (gains) losses on sales of assets, write-off of assets and gain on streamlining plan .......................... (7,300) 17,071 (10,786) 65,741 6,701 --------- --------- --------- --------- ---------- Total costs and expenses .................... 183,162 296,505 276,759 440,254 417,113 --------- --------- --------- --------- ---------- Loss before reorganization items, fresh-start valuation, distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures, interest expense, net, (benefit) provision for income taxes and extraordinary item ......................................... (17,391) (102,279) (33,198) (185,249) (45,819) Reorganization items .............................. (21,329) -- -- -- -- Fresh-start valuation ............................. 77,007 -- -- -- -- Distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures (Contractual distributions of $9,667 for the year ended December 25, 1999) ................ 1,628 10,282 10,282 3,597 -- Interest expense, net of interest income (Contractual interest expense of $14,646 for the year ended December 25, 1999) .................................... 3,366 16,704 6,163 6,764 9,896 --------- --------- --------- --------- ---------- Income (loss) before (benefit) provision for income taxes and extraordinary item .......... 33,293 (129,265) (49,643) (195,610) (55,715) (Benefit) provision for income taxes .............. (590) (666) 37 1,893 11,332 --------- --------- --------- --------- ---------- Income (loss) before extraordinary item ........... 33,883 (128,599) (49,680) (197,503) $ (67,047) Extraordinary item-early extinguishment of debt ... 151,956 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) ................................. $ 185,839 $(128,599) $ (49,680) $(197,503) $ (67,047) ========= ========= ========= ========= ========== Net income (loss) per basic and diluted common share before extraordinary item ............. $ 1.15 $ (4.89) $ (2.18) $ (8.73) $ (3.23) Net income per basic and diluted common share- extraordinary item .......................... 5.38 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) per basic and diluted common share ....................................... $ 6.53 $ (4.89) $ (2.18) $ (8.73) $ (3.23) ========= ========= ========= ========= ========== Weighted average basic and diluted common shares outstanding .......................... 28,266 27,433 26,357 23,317 21,047 ========= ========= ========= ========= ========== </TABLE> <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ Year Ended 11 Months --------------------------------------------- Ended Year Ended Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> OTHER OPERATING DATA: EBITDA (1) ........................................ $ (3,491) $ (77,479) $ (10,598) $(171,249) $ (29,824) Cash flow provided by (used in): Operating activities ........................ $ (23,177) $ (64,217) $ (79,218) $ (19,420) $ 855 Investing activities ........................ 13,734 (10,612) (7,519) (73,564) (8,753) Financing activities ........................ 497 32,365 4,556 187,354 (32,251) Ratio of earnings to combined fixed charges and preferred stock dividends (deficiency in the coverage of combined fixed charges and preferred stock dividends to earnings before combined fixed charges and preferred stock dividends) (2) ...... 4.81x (134,756) (57,492) (201,746) (56,563) </TABLE> The consolidated balance sheet information at December 25, 1999 reflects our amended joint plan of reorganization and the application of the principles of fresh-start accounting. Accordingly, the financial information at December 25, 1999 is not comparable to our historical financial information prior to December 25, 1999. <TABLE> <CAPTION> Successor | Predecessor Company Company | --------------------------------------------------------------- Dec. 25, | Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 | 1998 1997 1996 1996 --------- | --------- --------- --------- --------- <S> <C> | <C> <C> <C> <C> BALANCE SHEET DATA (at period end): | Working capital (deficiency) ............... $ (4,641) | $(267,997) $ 95,780 $ 168,210 $ 165,309 Total assets ............................... 289,998 | 254,951 323,164 367,235 321,965 Long-term debt (including amount shown as | current for Predecessor Company) ..... 93,750 | 150,000 149,897 149,862 149,845 Guaranteed preferred beneficial interests in | Golden Books' and Golden Books | Publishing's Convertible Debentures .. -- | 115,000 110,707 110,488 -- Convertible Preferred Stock - Series A ..... -- | -- -- -- 9,985 Common stockholders' equity (deficit) ...... 49,750 | (189,081) (61,309) (19,637) 74,368 </TABLE> - ----------------------- (1) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization, transition costs, reorganization items, fresh-start valuation and extraordinary item. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, we believe that the industry accepts EBITDA as a generally recognized measure of performance and that analysts who report publicly use EBITDA as a measure of performance. Nevertheless, you should not consider this measure in isolation or as a substitute for operating income (loss), net income (loss), net cash provided by (used in) operating activities or any other measure for determining the operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. EBITDA, as we calculate it, may not be comparable to calculations of similarly titled measures presented by other companies. (2) For purposes of the ratio of earnings to combined fixed charges and preferred stock dividends, earnings were calculated by adding pretax income before extraordinary item, interest expense, the portion of rnts representative of an interest factor and distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures. Combined fixed charges and preferred stock dividends consist of interest expense, the portion of rents representative of an interest factor, distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures and preferred stock dividend requirements of Golden Books and its subsidiaries. For the period in which earnings were insufficient to cover combined fixed charges and preferred stock dividends, the dollar amount of the coverage deficiency, instead of the ratio, is disclosed. FORWARD-LOOKING STATEMENTS This document includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend for the words "believes," "anticipates," "expects," "intends," "interested in," "plans," "continues," "projects" and similar expressions to identify forward-looking statements. The forward-looking statements contained in this prospectus are generally discussed under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management's reasonable estimates of future results or trends. Consequently, actual results could differ materially from these forward-looking statements. The factors that may affect our expectations of our operations include, among others, the following: - our success at maintaining lower operating costs; - our success in returning to profitability and generating sufficient cash flow to meet our operational and financing requirements including servicing our reduced indebtedness; - loss of key licenses; - adverse changes in relationships with key customers; - demographics and general economic and business conditions; - the degree of acceptance of new product introduction; - changes in consumer preferences, such as the growth of computer-based products and consumer spending habits, competition from existing and potential competitors; pricing pressures, costs of labor and other costs and expenses; and - level of product returns.

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our company. You should read the entire prospectus carefully, including risk factors, and our financial statements, before making an investment decision. OVERVIEW GreyStone is a software development and systems integration company. Specifically, we develop real-time, interactive, and networked three-dimensional (3-D) visual and aural software, simulated "virtual" environments, and "Info-Space" applications that we market to customers in government and commercial markets. We also provide our customers with supporting engineering services in order to add value to the software applications that we sell to our customers. We commenced business in San Diego, California in 1989 in order to provide the United States military and its contractors with software and engineering services for applications in highly advanced military hardware (fighting aircraft, missiles, ships, and vehicles) and training simulators. Our defense customers have included the U.S. Navy, Army and Air Force, Lockheed Martin, Logicon, Hughes Aircraft, and the Defense Advanced Research Projects Agency (DARPA), and others. These customers use GreyStone's products and services in aerial, mechanized, and naval combat, electronic warfare, mission planning and support, training, battlefield command, control, communications, computers, and intelligence ("C4I"), and unmanned aerial vehicles ("UAVs"). In 1994, we initiated a long-term program to develop multi-player (collaborative) real-time, interactive, and networked 3-D entertainment content ("Titles") to run on high-end 3-D multimedia home-based personal computers ("PCs") and new PC-based open architecture arcade amusement machines ("OA3Ms"). During 1998 we developed our first PC-based entertainment Title, XS-G(TM), to sell to the OA3M entertainment market. In December 1999 we transitioned from operating as a privately-held company to a publicly-traded company with the completion of a merger with a company with no previous operations which was traded on the Over-the-Counter Bulletin Board. GreyStone Technology, Inc.'s operations continue today as a wholly-owned subsidiary of GreyStone Digital Technology, Inc. (formerly Express Capital Concepts, Inc.). All references to "GreyStone's" operations in the description of the company's business in this prospectus are those of the wholly-owned subsidiary, under which all of GreyStone Digital Technology, Inc.'s operations are currently conducted. On August 22, 2000 the Company was listed on the Nasdaq SmallCap Market and trades under the symbol GSTN. Our principal office is located at 4950 Murphy Canyon Road, San Diego, California 92123. Our telephone number at this office is (858) 874-7000; fax number is (858) 874-7019, and our website is www.gstone.com. Information contained at our website is not part of this prospectus. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] 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: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] The Offering <TABLE> <S> <C> Common stock offered by preferred stockholders upon conversion, by preferred stockholders upon exercise of warrants and by other warrant- holders upon exercise............... 5,843,550 Shares of common stock Of the 5,843,550 shares of common stock being offered, up to 1,875,000 shares are to be issued from time to time upon conversion of preferred stock; up to 1,875,000 shares are to be issued from time to time upon exercise of warrants held by series A preferred stockholders; and 2,093,550 shares are to be issued from time to time upon exercise of other warrants which provide for registration rights. Common stock outstanding prior to this offering ................ 16,278,179 shares Common stock to be outstanding after the offering .............. 22,121,729 shares assuming the conversion of 5,000 shares of preferred stock into 1,875,000 shares of common stock at the current conversion rate of $4.00 per share (including a 50% reserve for additional shares), and assuming the exercise of 1,875,000 warrants held by series A convertible preferred stockholders at $5.38 per share (also including a 50% reserve), 861,800 warrants at $4.95 per share, 250,000 warrants at $6.00 per share, 6,500 warrants at $8.00 per share, and 975,250 warrants at $10.00 per share. The common stock issued upon conversion of all preferred stock and the exercise of all warrants being registered by this prospectus would represent 26% of our outstanding common shares. Anti dilution provisions ........... The conversion rate of the series A convertible preferred stock and the exercise price per share and number of shares of common stock issuable upon exercise of the warrants held by the series A preferred stockholders are subject to adjustment in the event of a common stock dividend, a subdivision or combination of outstanding shares of common stock or in the event of any recapitalization, reclassification, consolidation, merger or similar event. Use of proceeds..................... This offering is being made by selling security holders and we will not receive any of the proceeds of these sales. We may receive cash proceeds to extent any of the warrants are exercised. </TABLE> <TABLE> <CAPTION> CALCULATION OF REGISTRATION FEE ---------------------------------------------------------------------------------------------------------------- Proposed Maximum Title of Each Class Amount of Aggregate Offering Proposed Maximum Of securities Shares to be Price Per Aggregate Offering Amount of Registered Registered Share Price Registration Fee ----------------------- ------------ ------------------ ------------------ ---------------- <S> <C> <C> <C> <C> Common Stock Issuable upon Conversion of Series A Convertible Preferred Stock 1,875,000(1) $ 5.00(2) $ 9,375,000 $ 2,475 ------------------------------------------------------------------------------------------------------------------------ Common Stock Issuable upon Exercise of Warrants Issued to Series A Preferred Stockholders 1,875,000(1) $ 5.38(3) $ 10,087,500 $ 2,663 ------------------------------------------------------------------------------------------------------------------------ Common Stock Issuable upon Exercise of Warrants 2,093,550(4) $4.95 - $10.00(5) $ 15,570,410 $ 4,111 ------------------------------------------------------------------------------------------------------------------------ Total $ 9,249 ----- -------- </TABLE> ---------- (1) Represents the maximum number of securities that could be issued in the transaction described in the registration statement increased by 50% reserve to allow for possible adjustments provided in the Series A Convertible Preferred Stock transaction agreement. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended; based on the average of the last bid and asked prices of GreyStone common stock on the over-the-counter market on July 17, 2000. (3) Exercise price of the Warrants. (4) The number of shares of Common Stock issuable upon exercise of warrants pursuant to registration rights provisions of certain warrants. (5) Range of exercise prices of warrants with registration rights. The registrant hereby amends the registration statement on this 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 become effective in accordance with Section 8(a) of the Securities Act of 1993 or until the registration statement shall become effective on this date as the Commission, acting pursuant to said Section 8(a), may determine. NASD SmallCap Market Symbol .............. GSTN The number of shares of common stock to be outstanding after this offering is based upon the number of shares outstanding as of June 30, 2000 and does not include the following: - 550,000 shares of common stock subject to options issued at an exercise price of $6.00 per share under our 1991 stock option plan and 1,775,762 shares of common stock subject to options issued at an exercise price ranging from $3.80 to $6.80 per share under our 1994 stock option plan, - 450,000 shares of common stock reserved for issuance under our 1991 stock option plan, and 233,238 shares of common stock reserved for issuance under our 1994 stock option plan, - 1,790,000 shares of common stock subject to options issued at an exercise price ranging from $.275 to $4.95 outside of either stock option plan, - Subject to approval by the company's shareholders at the September, 2000 annual meeting of shareholders, 2,000,000 additional shares of common stock reserved for issuance under our 1994 stock option plan and 4,000,000 shares of common stock reserved for issuance under our 2000 stock option plan. - Other warrants to purchase 5,415,546 shares at exercise prices ranging from $4.95 to $12.00 per share. Please see capitalization, shares eligible for future sales, and description of securities for a more complete discussion regarding the outstanding shares of common stock, preferred stock, warrants, and options to purchase common stock and related matters. Summary financial data The following selected historical financial data with respect to GreyStone's statements of operations for the three months ended June 30, 2000 and 1999, and with respect to its balance sheet at June 30, 2000, is derived from unaudited financial statements of GreyStone which are included elsewhere in this registration statement. In the opinion of GreyStone's management, the unaudited financial statements include all adjustments, consisting of normal recurring accruals, that GreyStone considers necessary for a fair presentation of the results of operations and financial position for each of the periods presented. Operating results for GreyStone for the three months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending March 31, 2001. The selected historical financial data set forth below with respect to GreyStone's statements of operations for the years ended March 31, 2000, 1999, and 1998, and with respect to GreyStone's balance sheet data at March 31, 2000 and 1999, are derived from the financial statements of GreyStone, which have been audited by J.H. Cohn LLP, independent public accountants, included elsewhere in this registration statement. The selected historical financial data that follows, with respect to GreyStone's statement of operations for the years ended March 31, 1997 and 1996 and with respect to GreyStone's balance sheet data at March 31, 1998, 1997 and 1996 has been derived from the financial statements of GreyStone, which have been audited by J.H. Cohn LLP, the full text of which is not included in this registration statement. The selected historical financial data set forth should be read in conjunction with, and is qualified in its entirety, by reference to, the financial statements and notes related thereto included elsewhere in this registration statement in the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where an offer or sale is not permitted. SUBJECT TO COMPLETION, DATED September 19, 2000 PROSPECTUS GREYSTONE DIGITAL TECHNOLOGY, INC. 5,843,550 Shares of Common Stock All of the shares of common stock being sold in this offering are for the accounts of selling security holders. We will not receive any of the proceeds from the sale of shares of common stock, by the selling security holders. We will receive the exercise prices with respect to the exercise of any warrants. If all of the warrants were exercised we could receive net proceeds of approximately $22,295,410. See "Selling Security Holders". The selling security holders may sell the shares of common stock, preferred stock and warrants to or through underwriters, and also may sell them directly to other purchasers or through agents from time to time in the over-the-counter market. Sales may be made at fixed prices, which may be changed, negotiated prices, or at market prices prevailing at the time of sale. Our common stock is quoted on the National Association of Securities Dealers SmallCap Market under the symbol GSTN. At present, GreyStone has not registered, nor intends to register, preferred stock or any warrants themselves. The market for GreyStone securities is limited to the company's common stock. On September 18, 2000 the average of the last bid and asked prices of our common stock in Nasdaq's SmallCap Market as reported by the NASD was $4.6875. ----------- Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 6" ----------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. September 19, 2000 <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, YEARS ENDED MARCH 31, --------------------------- ------------------------------------------------------------------- 2000 1999 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................... $ 540,044 $ 459,570 $ 1,908,182 $ 2,105,517 $ 2,112,566 $ 2,336,371 $ 2,065,260 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Expenses: Cost of revenues.......... 423,502 226,844 1,206,647 1,274,177 1,181,728 1,621,166 1,404,976 Marketing and sales....... 258,732 166,511 781,203 853,190 662,503 720,213 663,373 Research and development............ 340,358 237,302 1,009,923 1,093,145 1,254,297 1,978,505 3,146,960 General and administrative......... 1,189,188 515,968 3,482,042 2,044,392 3,420,898 2,087,877 3,040,119 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total expenses.... 2,211,780 1,146,625 6,479,815 5,264,904 6,519,426 6,407,761 8,255,428 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Loss from operations........ (1,671,736) (687,055) (4,571,633) (3,159,387) (4,406,860) (4,071,390) (6,190,168) Net interest expense (income).................. (27,407) 7,182 (84,407) 99,944 201,941 615,240 507,518 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss.................... $(1,644,329) $ (694,237) $(4,487,226) $(3,259,331) $(4,608,801) $(4,686,630) $(6,697,686) =========== =========== =========== =========== =========== =========== =========== Basic net loss per share.... $ (0.10) $ (0.05) $ (.29) $ (0.23) $ (0.34) $ (0.41) $ (0.63) Basic weighted average number of shares outstanding............... 16,284,406 14,880,743 15,398,789 14,131,416 13,435,377 11,408,158 10,617,417 </TABLE> <TABLE> <CAPTION> AS OF AS OF MARCH 31, JUNE 30, ----------------------------------------------------------------- 2000 2000 1999 1998 1997 1996 ----------- ---------- ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> (unaudited) BALANCE SHEET DATA: Cash and cash equivalents..... $2,858,050 $ 167,299 $ 795,480 $ 5,083 $ 14,224 $ 6,276 Working capital (deficiency)................ 2,570,115 (395,577) (805,406) (1,826,674) (7,151,324) (7,151,834) Total assets.................. 4,646,152 1,647,482 1,276,922 915,156 1,336,505 1,791,115 Long-term debt, net of current portion..................... -0- -0- -0- -0- -0- 1,207,965 Total stockholders' equity (deficiency)................ 4,117,856 657,390 (524,441) (1,314,457) (6,199,575) (7,109,133) </TABLE>

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+ PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes appearing elsewhere in this prospectus. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option. Tularik Tularik engages in the discovery and development of a broad range of novel and superior orally available drugs based on gene regulation. Building on our scientific strengths, we intend to become a world-class pharmaceutical company. Our research programs, all of which address attractive commercial markets, include cancer, cytomegalovirus, diabetes, obesity, inflammation, allergy/asthma, high blood cholesterol levels, known as hypercholesterolemia, bacterial diseases and a class of drug targets called orphan nuclear receptors because their exact function is unknown and they are located within the nucleus of the cell. We have diversified our drug discovery and development efforts not only across a large number of diseases, but also across multiple promising targets and drug candidates for these diseases. Gene regulation is the selective activation and deactivation of genes within a cell and is fundamental to the development or progression of most diseases. Our drug discovery approach, which is based on gene regulation, is amenable to the discovery of orally available drugs. These drugs are well suited for the treatment of chronic diseases that require the daily administration of medications over many years. We also selectively pursue drug candidates with mechanisms of action other than gene regulation. Our drug discovery and development expertise includes molecular biology, biochemistry, structural biology, chemistry, pharmacology and human testing. To complement our internal capabilities, we collaborate with world-renowned scientists and clinicians and with leading pharmaceutical companies. We believe that our integration of biology, chemistry and pharmacology enhances our ability to find novel gene regulating drugs and that our drug discovery and development efforts are highly efficient and productive. To date, we have: . identified numerous novel proteins that regulate the expression of disease-causing genes; . established more than 80 automated drug testing systems, known as high throughput screening assays, that mimic the diseases addressed by our programs; . conducted more than 15 million drug screens using a library of more than 500,000 distinct compounds and natural products; . identified 18 drug leads, ten of which are being optimized by chemists; . identified drug candidates in two of our programs that are undergoing pre-clinical testing consisting of animal studies designed to determine the feasibility of human testing; . identified two cancer drug candidates that are undergoing human testing designed to determine safety, known as phase 1 clinical trials; and . obtained a license for a cancer drug candidate that has completed phase 1 clinical trials and that we expect to enter human testing designed to determine efficacy, known as phase 2 clinical trials, during 2000. We have commenced, or are preparing for, human testing of three cancer drug candidates: T138067, which we refer to as T67; T900607, which we refer to as T607; and T904064, formerly known as lometrexol and which we refer to as T64. T67 acts on the same protein targeted by the cancer drugs Taxol and vincristine. In contrast to these drugs, T67 retains its activity against tumor cells that are multiple drug resistant and is able to enter the brain. To date, we have enrolled 42 patients in phase 1 clinical trials of T67. Pending successful completion of these trials, we will initiate phase 2 clinical trials of T67 in several tumor types. T607 is an analog of T67, has the same target and is similarly active against multiple drug resistant tumors. Animal studies indicate that T607 is distinct from T67 because T607 has a reduced ability to enter the brain, which may make it suitable for the treatment of different tumor types than T67. We recently commenced phase 1 clinical trials of T607. The utility of cancer drugs like T64 has been proven by methotrexate, a drug used extensively in the treatment of several tumor types. We expect to commence phase 2 clinical trials of T64 in 2000. We intend to commercialize drugs independently and through collaborations with pharmaceutical partners. To assist in the commercialization of some of our products, and to fund research and development activities, we have established and will continue to pursue collaborations with selected pharmaceutical and biotechnology companies. We currently have corporate collaborations in four of our research programs: with Knoll relating to obesity; with Japan Tobacco relating to orphan nuclear receptors; with Roche Bioscience relating to inflammation; and with Japan Tobacco relating to obesity/diabetes. We have retained significant rights to independently market products resulting from most of our programs, including worldwide commercialization rights to our cancer, bacterial diseases and cytomegalovirus programs and North American commercialization rights in three of our externally funded programs. As of December 31, 1999, we had received a total of $124.0 million from our current and former corporate collaborators, including $111.0 million in research funding and $13.0 million from equity purchases. To date, we have funded our operations primarily through the sale of equity securities, non-equity payments from collaborators and interest income. We expect our sources of revenue, if any, for the next several years to consist primarily of payments under corporate collaborations and interest income. To date, 49 U.S. patents based on our discoveries had been issued or allowed. In addition, we have 53 patent applications pending in the United States and have filed several corresponding foreign patent applications. Tularik was incorporated in California in 1991 and reincorporated in Delaware in 1997. Our principal office is located at Two Corporate Drive, South San Francisco, California 94080, and our telephone number is (650) 825-7000. The Offering <TABLE> <CAPTION> <C> <S> Common stock offered by Tularik.................... 1,875,000 shares Common stock offered by the selling stockholders... 625,000 shares Common stock to be outstanding after the offering.. 47,302,190 shares Use of proceeds.................................... Research and development and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol...................... "TLRK" </TABLE> The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of February 29, 2000 and excludes: . 4,243,185 shares of common stock underlying options outstanding as of February 29, 2000 at a weighted average exercise price of $3.90 per share; . 359,321 shares of common stock underlying warrants outstanding as of February 29, 2000 at a weighted average exercise price of $11.94 per share; . 2,167,678 shares available for issuance or future grant under our stock option plans; . 487,017 shares available for issuance under our employee stock purchase plan; and . 199,414 shares available for issuance under our matching plan. Summary Consolidated Financial Data The following tables summarize our consolidated financial data. The as adjusted column of the consolidated balance sheet data reflects the sale by us of 1,875,000 shares of our common stock at an assumed public offering price of $35.125 per share, after deducting the estimated underwriting discount and offering expenses payable by us. <TABLE> <CAPTION> Year Ended December 31, ---------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- -------- -------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Collaborative research and development revenue........... $11,124 $15,297 $ 20,009 $ 21,362 $ 23,806 Total operating expenses(1).... 15,980 22,252 49,468 38,297 54,565 Net loss(1).................... (3,607) (5,480) (25,374) (10,539) (25,538) Basic and diluted net loss per share......................... $ (0.91) $ (1.09) $ (4.19) $ (1.55) $ (2.70) Weighted-average shares used in computing basic and diluted net loss per share............ 3,957 5,034 6,063 6,791 9,451 Pro forma basic and diluted net loss per share(2)............. $ (0.31) $ (0.73) Weighted-average shares used in computing pro forma basic and diluted net loss per share.... 33,687 34,829 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 --------------------------- Actual As Adjusted ----------- -------------- (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments.. $ 203,029 $ 264,917 Working capital.................................... 184,553 246,441 Total assets....................................... 230,438 292,326 Long-term obligations, less current portion........ 10,097 10,097 Deferred compensation.............................. (4,586) (4,586) Accumulated deficit................................ (87,395) (87,395) Total stockholders' equity......................... 197,569 259,457 </TABLE> - -------- (1) Total operating expenses in 1997 include a non-cash charge of $18.9 million for acquired in-process research and development in connection with our acquisition of Amplicon Corp. You should read Note 6 of notes to consolidated financial statements for information about this acquisition. (2) Assumes that our outstanding preferred stock was converted into common stock at the beginning of each of the periods presented.

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+ PROSPECTUS SUMMARY This summary is not complete and does not contain all of the information that may be important to you. You should read the entire prospectus carefully, including the financial statements and related notes, before making an investment decision. Our Business We are developing a novel class of small molecule pharmaceutical compounds for the treatment of diseases that result from the interruption and subsequent restoration of blood supply, known as ischemia and reperfusion, and inflammation. We believe that these disease processes create stress agents, and that these agents activate a cascade of events in and around cells, which can lead to cell damage and death. We believe that our compounds, which we refer to as (TM)NRTs, can modify the cellular response to these stress agents and significantly reduce the resulting cellular damage and death. Our most advanced programs target diseases affecting the brain such as acute cerebral stroke, Parkinson's disease, AIDS dementia complex and Alzheimer's disease. In collaboration with AstraZeneca PLC, a multinational pharmaceutical company based in Europe, a Phase IIa clinical study of an NRT for the intravenous treatment of acute stroke has been completed in Europe. We believe that AstraZeneca will initiate Phase IIb/III trials of this compound by mid- 2000. We are also independently conducting Phase IIa clinical studies in the United States of an orally administered NRT for the treatment of Parkinson's disease and AIDS dementia. We are working with AstraZeneca to develop an orally active lead compound for the treatment of Alzheimer's disease. Additionally, we are conducting pre-clinical programs to develop therapeutics for the treatment of arthritis and inflammatory bowel disease, and a research program to evaluate the potential of NRTs to treat heart attacks. Our approach to the development of therapeutics grew out of the work of our scientific founders in investigating the role of oxidative stress agents in disease. These and other stress agents, such as inflammatory mediators, are produced by the body in higher than normal quantities after an injury, or after interruption of blood supply. They are also produced at higher rates as individuals age. Our research has demonstrated that stress agents activate a cascade of biochemical and molecular events than can cause cell damage and death. Based on this knowledge, we have designed and developed a library of proprietary NRTs that we believe may slow or reverse the damaging effects of these toxic cascades. We have developed candidate NRTs for both oral and intravenous administration. No treatment-limiting side effects have been observed in clinical testing of these compounds. Stroke involves the interruption of blood supply to part of the brain. Our NRT for the treatment of stroke, NXY-059, protected brain cells against death in recognized preclinical stroke models. Preclinical studies suggest that the compound may be effective in humans when administered up to six or more hours after the stroke has occurred. This long window of activity is important because stroke patients often experience delays of several hours before receiving treatment. Phase I clinical testing of NXY-059 to test safety and obtain a drug distribution and elimination profile in healthy volunteers was completed by our partner, AstraZeneca, in Sweden in 1998. No treatment-limiting side effects were observed. A 150 patient Phase IIa clinical trial of NXY-059 for the purpose of testing safety and tolerability and to collect pilot data on stroke recovery in acute stroke patients was completed by AstraZeneca in Europe in May 1999. No adverse side effects were observed in this trial, for any category of stroke. No significant trends in stroke recovery were observed. We believe, based on discussions with AstraZeneca, that AstraZeneca will initiate Phase IIb/III trials of NXY-059 by mid-2000 to obtain information about the efficacy of NXY-059, and to gather further information on safety. We expect the trials to consist of two parallel trials totaling over 3,000 patients in North America and Europe. Parkinson's disease is a degenerative neurological disorder caused by a shortage of the chemical messenger dopamine, which is essential for movement control. A growing body of evidence suggests that inflammation contributes to Parkinson's disease progression. In certain preclinical models, CPI-1189, our NRT for the treatment of Parkinson's disease, provided significant protection to dopamine-producing and other cells in the brain. These results suggested that CPI-1189 may be effective against the progressive loss of motor and mental function characteristic of Parkinson's disease. Phase I clinical testing of CPI-1189 to test safety and obtain a drug absorption and distribution profile in healthy volunteers was completed in 1998, and no treatment-limiting side effects were observed. We are currently completing a Phase IIa clinical study of CPI-1189 for the purpose of testing safety and evaluating preliminary efficacy information in Parkinson's disease patients. AIDS dementia refers to the debilitating neurological and cognitive impairments associated with acquired immune deficiency syndrome, or AIDS. We believe that AIDS dementia is caused by inflammation and toxins produced as a result of HIV infection. In addition, we believe that CPI-1189, the same NRT under development to treat Parkinson's disease, may be effective as a treatment for AIDS dementia. In laboratory tests using human brain cells, CPI-1189 provided significant protection to these cells from inflammation and toxins associated with AIDS dementia. We are currently conducting a Phase IIa clinical trial of this NRT for the purpose of testing safety and evaluating preliminary efficacy information in AIDS dementia patients. The Neuro AIDS Research Consortium, a group of eight university medical centers that receives funding from the U.S. National Institute of Mental Health, provides a substantial portion of the funding for this trial, and plays a major role in the design and management of the trial. Our Alzheimer's disease program is part of the AstraZeneca partnership and focuses on preventing brain cell damage associated with inflammation related to a type of protein deposit, known as -amyloid plaque, and tangles, in the brain. These deposits and tangles have been associated with the memory loss and behavioral disorders characteristic of Alzheimer's disease. Our research findings from both cell culture and animal models suggest that NRTs may prevent the brain cell damage and death induced by these inflammatory agents. In related studies, the administration of other NRTs has diminished the cognitive decline in older animals. We are currently undergoing final evaluation of a number of compounds as candidates for clinical testing in Alzheimer's disease patients. We have also established a number of programs to evaluate NRTs for the treatment of diseases outside of the brain that involve damage caused by stress agents. One of the most promising of these programs is the evaluation of NRTs for the treatment of arthritis. Given the important role that inflammation plays in arthritis, we believe that NRTs could prove to be effective therapeutics for this disease. We have identified candidate compounds for this purpose, and research to select a clinical lead compound is underway. We are also investigating the use of NRTs to treat inflammatory bowel disease, a disorder of the gastro-intestinal tract in which inflammation plays a major role, and heart attacks, where the interruption and subsequent restoration of blood supply to the heart can result in major damage to that organ. In June 1995, we entered into a collaborative agreement with AstraZeneca to develop new drugs for the treatment of stroke, Alzheimer's disease, traumatic brain injury and multi-infarct dementia. Under this agreement, AstraZeneca: . pays us up to $6.0 million per year for 5 years, primarily to fund our research for these conditions, . conducts most of the development of NRTs for these conditions, . makes payments to us based upon the achievement of specified development milestones, and . pays royalties to us on any sales of licensed products, in exchange for exclusive worldwide marketing and other rights. We retain worldwide manufacturing rights for the active ingredient of the products and have an option to obtain certain co-promotion rights in the United States. We have received approximately $37.1 million through December 31, 1999 under the AstraZeneca agreement. We have a strong proprietary position protecting our NRT technology which includes ownership of, or license rights to, 35 United States patents, 35 United States patent applications, 57 foreign patents and 201 foreign patent applications related to NRTs and their use as pharmaceuticals. We employ 95 persons, including 26 with Ph.D. and/or M.D. degrees. We occupy a modern 31,000 square foot laboratory and office facility in Sunnyvale, California and a 77,000 square foot manufacturing and office/laboratory facility in Santa Clara, California. The manufacturing area of the Santa Clara facility, which is approximately 30,000 square feet, is designed and operated to comply with the U.S. Food and Drug Administration, or FDA, regulations on Good Manufacturing Practices. A portion of the manufacturing facility is designed to manufacture compounds for clinical trials, has been licensed by the California Department of Health Services and is in production, while the remainder of the manufacturing facility is designed to manufacture compounds for commercial sale, and is currently undergoing the California licensing process. Our executive offices are located at 484 Oakmead Parkway, Sunnyvale, California 94086. Our telephone number is (408) 822-1600. The Offering <TABLE> <C> <S> Common Stock offered by Centaur.. 1,904,169 shares Outstanding after the offering... 17,500,000 shares Use of proceeds.................. Funding of research and development, capital expenditures and general corporate purposes, including working capital. Swiss security ID number......... 917088 ISIN Code........................ CH0009170884 Settlement system................ SegaIntersettle ("SIS") Risk Factors..................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Expected Closing................. March 10, 2000 </TABLE> We are selling most of the common stock offered in this offering outside of the United States to a limited number of institutional and private investors. While the shares of common stock offered may be traded from time to time in the Swiss over-the-counter market, the common stock will not be listed or quoted on any exchange or automated quotation system in connection with this offering. Accordingly, we do not anticipate that there will be an active trading market for our common stock as a result of this offering. Persons purchasing shares of the common stock offered pursuant to this prospectus will be required to enter into a market lock-up agreement in the form attached as Appendix A to this prospectus. The market lock-up agreement prohibits the sale of shares of the common stock issued in this offering for up to 180 days after our initial public offering in which shares of our common stock are listed on an internationally recognized securities exchange or quotation system. The share certificates issued in connection with this offering will bear a legend reflecting this market lock-up agreement. See "Shares Eligible for Future Sale". The number of shares that will be outstanding after this offering is based on the actual number of shares outstanding as of December 31, 1999, but excludes: . 1,776,055 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999 under our 1993 Equity Incentive Plan, 1998 Equity Incentive Plan and 1998 Directors Stock Option Plan, at a weighted average per share exercise price of $3.61; . 45,000 shares of common stock reserved as of December 31, 1999 for issuance upon the exercise of warrants at a weighted average per share exercise price of $5.11; and . 1,135,824 shares of common stock reserved as of December 31, 1999 for future grant or issuance under our 1998 Equity Incentive Plan, 1998 Directors Stock Option Plan and 1998 Employee Stock Purchase Plan. For more information regarding our equity benefit plans, see "Management-- Directors Compensation" and "--Employee Benefit Plans" and note 9 of notes to financial statements. Summary Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------ 1995 1996 1997 1998 1999 ------ ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenue....................... $7,875 $12,743 $ 9,573 $ 6,663 $ 7,429 Operating expenses: Research and development........ 5,490 7,854 15,646 13,629 16,176 General and administrative...... 1,385 2,306 2,266 3,494 4,089 ------ ------- ------- -------- -------- Total operating expenses.......... 6,875 10,160 17,912 17,123 20,265 ------ ------- ------- -------- -------- Income (loss) from operations..... 1,000 2,583 (8,339) (10,460) (12,836) Share of losses in affiliate...... -- -- -- (305) (319) Interest and other income, net.... 491 362 1,107 80 (130) ------ ------- ------- -------- -------- Net income (loss)................. $1,491 $ 2,945 $(7,232) $(10,685) $(13,285) ====== ======= ======= ======== ======== Net income (loss) per share: Basic........................... $ 0.62 $ 1.15 $ (2.64) $ (1.90) $ (0.85) ====== ======= ======= ======== ======== Diluted......................... $ 0.13 $ 0.24 $ (2.64) $ (1.90) $ (0.85) ====== ======= ======= ======== ======== Shares used in computing net income (loss) per share: Basic........................... 2,403 2,551 2,742 5,614 15,549 ====== ======= ======= ======== ======== Diluted......................... 11,602 12,514 2,742 5,614 15,549 ====== ======= ======= ======== ======== </TABLE> The following table summarizes our financial data. The "Actual" column presents actual summary balance sheet data as of December 31, 1999. The "As Adjusted" column presents balance sheet data as of December 31, 1999, as adjusted, which reflects our sale of the 1,904,169 shares of common stock offered by us in this offering at an offering price per share of $11.50 and after deducting the underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> December 31, 1999 ------------------ As Actual Adjusted -------- -------- <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and short term investments........... $ 12,576 $ 32,632 Working capital............................................. 8,877 28,933 Total assets................................................ 23,395 43,451 Long-term obligations, net of current portion............... 3,470 3,470 Accumulated deficit......................................... (31,521) (31,521) Total stockholders' equity.................................. 13,750 33,806 </TABLE> For an explanation of the determination of shares used in computing basic and diluted net income (loss) per share, see note 1 of notes to financial statements.

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+ PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Industrial Ecosystems, Inc. (hereinafter referred to as "IEI" or "Company") was incorporated in the state of Utah in July 1993. In March 1994, the Company acquired 100% of the equity securities of Environmental Protection Company, a New Mexico corporation ("EPC") in exchange for shares of IEI's Common Stock. EPC is in the excavation and bioremediation business and operates principally in the Farmington, New Mexico area. Environmental Protection Company -------------------------------- As indicated above, the Company operates a wholly owned subsidiary, EPC, which, among other things, utilizes a unique bioremediation process to reclaim contaminated soil. A majority of the Company's excavating and soil remediation jobs are done on sites owned and operated by BP-Amoco Production Company ("BP-Amoco"), in and around the Farmington, New Mexico area. EPC engages in soil remediation of hydrocarbon spills using proprietary biotechnology knowhow. ROP North America, Inc. ----------------------- The Company, through a wholly owned Canadian subsidiary, IEI Canada, Inc., owns a 50% membership interest in ROP North America, LLC (the "JV"). The JV, through its wholly owned subsidiary, ROP North America, Inc.("ROP"), has a small pig-farming operation, as well as the equipment to operate a blending/processing plant in Amherstburg, Ontario, Canada to convert organic by-products from commercial food processors, such as potato and corn by- products, and certain organic material from other commercial, industrial and institutional sources, such as the syrup from ethanol production, into a livestock feed ingredient. The Company's principal offices are located at 2040 West Broadway, Bloomfield, NM 87413. The Company's telephone number is (505) 632-1796. See RISK FACTORS and BUSINESS. THE OFFERING Selling Shareholders................ 9,600,000 shares of Common Stock 12,300,000 Warrant Shares Shares Outstanding as of Prospectus Date.................... Common Stock: 45,900,683 Preferred Stock: -0- Shares Outstanding after Offering... Common Stock: 67,800,683 (1) Preferred Stock: -0- ------------------------ (1) Assuming the outstanding Warrants to purchase up to 12,300,000 Warrant Shares are exercised and no other shares of Common Stock have been issued by the Company. Use of Proceeds..................... The Company will not receive any proceeds from the sale of the Common Stock by the Selling Shareholders. In the event the Selling Shareholders exercise warrants to purchase up to 12,300,000 Warrant Shares, the Company could receive up to $4,306,400 in proceeds, which funds will be used by the Company for general working capital. See USE OF PROCEEDS and DESCRIPTION OF SECURITIES. Risk Factors........................ There are certain substantial risks associated with an investment in the Common Stock, including among others, risks associated with the absence of operating revenues or profitable operations. See RISK FACTORS. OTC Bulletin Board Symbol........... Common Stock: IECS Summary Financial Information ----------------------------- The following table sets forth selected summarized financial data for the Company at the dates and for the periods indicated. The data should be read in conjunction with the financial statements and notes thereto set forth elsewhere in this Prospectus. <TABLE> <CAPTION> For the Three For the Months Ended Years Ended March 31, December 31, ------------------ ----------------- 2000 1999 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: ----------------------------- Net Sales...................... $ 127,968 $ 130,833 $ 472,865 $ 626,545 Operating Expenses............. $ 254,488 $ 260,729 $ 1,186,833 $ 1,714,528 Other Income (Expenses)........ $ (5,855) $ 17,957 $ (46,487) $ (400,979) Net (Loss)..................... $ (238,342) $ (198,656) $(1,165,555) $(1,894,749) Extraordinary Gain............. $ - $ 325,957 $ 350,957 $ - Foreign Currency Adjustments....$ (9,262) $ 3,348 $ (11,659) $ 14,664 Net Gain (Loss) per Share.......$ (0.01) $ (0.00) $ (0.02) $ (0.06) Weighted Average Number of Shares Outstanding.......... 45,600,683 33,000,905 40,241,683 35,500,905 Actual as of ------------ March 31, December 31, ------------- ------------ 2000 1999 ------------- ------------ <S> <C> <C> BALANCE SHEET DATA: ------------------ Total Current Assets............. $ 346,006 $ 104,985 Total Assets..................... $ 525,122 $ 296,869 Total Current Liabilities $ 1,201,861 $ 1,211,484 Working Capital (Deficit)........ $ (855,855) $ (914,615) Long Term Debt................... $ 108,266 $ 108,266 Commitments and Contingencies.... $ 582,336 $ 582,336 Shareholders' (Deficit).......... $ (1,367,341) $ (1,605,217) </TABLE>

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+ PROSPECTUS SUMMARY The following is a summary of the pertinent information regarding this Offering. This summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. The Prospectus should be read in its entirety, as this summary does not constitute a complete recitation of facts necessary to make an investment decision. The Offering - ------------ Securities Offered 4,000,000 shares of Common Stock, plus an additional 810,000 shares issuable upon exercise of Warrants held by Swartz. Offering Price The shares being registered hereunder are being offered by Swartz from time to time at the then current market price. Common Stock to be 18,310,675 shares; does not include 810,000 Outstanding after the shares issuable upon exercise of Warrants Offering held by Swartz. Dividend Policy We do not anticipate paying dividends on our Common Stock in the foreseeable future. Use of Proceeds The shares offered herein are being sold by Swartz and as such, we will not receive any of the proceeds of the Offering. (See "Use of Proceeds"). Material Risk Factors This Offering involves a high degree of risk, elements of which include possible lack of profitability, competition, breach of leasing agreements, death or incapacity of management and inadequate insurance coverage. There is a risk to investors due to the speculative nature of this investment, historical losses from operations, a shortage of capital, lack of dividends, dilution factors, control by present shareholders and economic conditions in general. There is a material risk that we may have insufficient funding to engage in any or all of the proposed activities (See "Risk Factors" and "Dilution"). THE COMPANY eCom eCom.com, inc. provides an e-commerce infrastructure that enables the small business enterprise to carve its niche in the retail and business to business Internet economy. eCom eCom B2BPlus provides an affordable, user- friendly technological platform and professional resources to facilitate web business development. The eCom eCom SuperHUB gives the web entrepreneur a comprehensive package of on-line tools to generate, execute and fulfill e-commerce transactions. eCom is the parent of US Amateur Sports Company, which is the parent of USA Performance Products, Inc. USA Performance Products manufactures and distributes paintball guns and accessories, and has served as a test model for our e-commerce business concepts. We were incorporated on June 14, 1994 in the State of Florida under the name US Amateur Sports, Inc., but we changed our name in January 1999 to better reflect our business operations. Our principal offices are located at 3801 PGA Boulevard, Suite 1001, Palm Beach Gardens, Florida 33410, and our phone number is (561) 622-4395.

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock sold in this offering. NET.GENESIS CORP. We provide software and professional services that help our customers understand, analyze and improve their online businesses. Our net.Analysis software enables companies to collect, store, organize and analyze detailed information about the online behavior of customers and other visitors on their web sites. Through net.Analysis, our customers can also import and analyze information about these e-customers that is available from other online and offline software systems and databases. Our professional services organization provides strategic analytic consulting and product integration and installation services. This combined software and services solution enables companies to: - better tailor and target their marketing initiatives - restructure their web sites to facilitate electronic commerce, or e-commerce - provide more relevant and cost-effective content - improve web site design - better allocate advertising and partnership resources - better plan their investments in web site hardware and software As use of the Internet has grown, companies have invested in a variety of software applications and services to develop and support their web sites and improve the online experience of their e-customers. In the face of increasing competition, online businesses are seeking to improve their ability to attract, serve and retain customers and more effectively communicate and conduct e-commerce with them. To achieve these objectives, companies must understand the needs and web site behavior of their e-customers. Companies must also understand the costs and benefits of each of their web initiatives, such as online marketing campaigns, e-commerce efforts, web site content, advertising and other promotional sponsorships, and their investments in web site hardware and software. Complicating matters, companies often desire to understand the behavior of their e-customers in the context of their traditional offline businesses. Our net.Analysis software helps companies achieve these objectives by collecting information about the online behavior of e-customers on their web sites, such as the web pages they viewed most often, the banner advertisements they clicked on, how they navigated through the site, how they purchased products and services, and why they may have abandoned the site. With net.Analysis' reporting capabilities, companies can select the data they wish to analyze, segment that data according to criteria they establish, and use it to analyze the online behavior of selected categories of e-customers. net.Analysis enables companies to organize this information, which we call e-customer intelligence, in ways that help them understand and improve their online businesses. For example, a company can use our software to identify the characteristics of its best e-customers and to analyze trends in their online activity. This can help the company evaluate the cost-effectiveness of its e-commerce efforts, promotional campaigns or investments in content. With net.Analysis, a company can also import customer information from its other online and offline software systems and databases and correlate this information with information about customers' online behavior to learn, for example, whether e-customers buy from the company's offline retail establishments or respond to the company's direct mail or other offline marketing initiatives. This ability to form a <PAGE> 8 unified view of e-customer behavior in the context of the company's entire business is a valuable asset for many companies. We have designed net.Analysis to perform reliably in complex web site environments and to manage tens of millions to over 100 million hits per day. We have also designed net.Analysis to be compatible with Microsoft Windows NT and Unix, two widely used operating systems, and third-party software applications and to simplify the development of add-on analytic applications. Our professional services organization has extensive experience using net.Analysis to analyze and understand e-customer behavior, and uses this expertise to help companies develop web-based performance measurements that are relevant to their online businesses. We also help companies design web site modifications and develop customized analyses and reports to meet their online business goals. We have licensed net.Analysis to over 200 customers. We target Fortune 1000 companies as well as new businesses using the Internet as their primary business channel. We sell our products through our direct sales force and to a lesser extent indirectly through arrangements with systems integrators, original equipment manufacturers and other technology providers. Our executive offices are located at 150 CambridgePark Drive, Cambridge, Massachusetts 02140, and our telephone number at that location is (617) 665-9200. Our web site is located at www.netgen.com. Information contained on our web site is not part of this prospectus. <PAGE> 9 THE OFFERING <TABLE> <S> <C> Common stock offered by net.Genesis................. 4,250,000 shares Common stock to be outstanding after this offering.......................................... 20,459,832 shares Use of proceeds..................................... To fund working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. NTGX </TABLE> The number of shares of common stock to be outstanding after the offering is based on shares outstanding as of January 26, 2000. This number includes 12,867,683 shares that we will issue upon conversion of our outstanding preferred stock upon completion of this offering and 85,843 shares that we expect to issue upon the exercise of a warrant before the completion of this offering. It excludes: - 209,804 shares issuable upon exercise of other warrants that will remain outstanding after this offering, which have an exercise price of $2.45 per share - 2,060,680 shares issuable upon exercise of options outstanding as of January 26, 2000, which have a weighted average exercise price of $2.79 per share - 2,371,500 additional shares reserved as of January 26, 2000 for future issuance under our stock-based compensation plans ------------------------------ Except where we state otherwise, the information we present in this prospectus reflects - a three-for-four reverse split of our common stock effected on February 2, 2000 - the automatic conversion of our outstanding preferred stock into common stock upon completion of this offering - amendments to our certificate of incorporation and by-laws to be effective upon completion of this offering - no exercise of the underwriters' option to purchase additional shares in this offering <PAGE> 10 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize the financial data of our business. We have computed the pro forma share information included in the statement of operations data as we describe in note 2 of the notes to our financial statements. The pro forma as adjusted column in the balance sheet data reflects: - the conversion of all of our outstanding preferred stock into common stock upon completion of this offering - our issuance of shares of common stock upon exercise of a warrant, which we expect will occur before the completion of this offering - our sale of 4,250,000 shares of common stock at an assumed initial public offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses that we will pay <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 ------- ------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Product revenue.......................................... $ 845 $ 937 $ 3,788 Service revenue.......................................... 164 631 2,747 ------- ------- -------- Total revenue.............................................. 1,009 1,568 6,535 Gross profit............................................... 369 575 3,199 Total operating expenses................................... 3,419 6,459 19,213 Loss from operations....................................... (3,050) (5,884) (16,014) Net loss................................................... (3,110) (5,773) (16,012) Dividends and accretion of redeemable preferred stock...... (337) (660) (1,912) Net loss available to common stockholders.................. (3,447) (6,433) (17,924) Basic and diluted net loss available to common stockholders per share................................................ $ (8.11) $(10.82) $ (13.72) Shares used in computing basic and diluted net loss available to common stockholders per share............... 425 595 1,307 Unaudited pro forma basic and diluted net loss per common share.................................................... $ (1.33) Shares used in computing unaudited pro forma basic and diluted net loss per common share........................ 11,996 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 9,643 $68,311 Working capital............................................. 7,353 66,021 Total assets................................................ 17,792 76,460 Long-term portion of capital lease obligations and long-term debt...................................................... 1,892 1,892 Redeemable convertible preferred stock...................... 36,575 -- Total stockholders' equity (deficit)........................ (27,147) 68,096 </TABLE> ------------------------ We own or have rights to trademarks or trade names that we use in conjunction with the sale of our products and services. net.Genesis and net.Analysis are registered trademarks that we own. CartSmarts, Design for Analysis, DFA, net.Dashboard, net.Instrument, net.Stream and ReportSite are trademarks that we own. This prospectus also contains trademarks and trade names of other companies. 6 <PAGE> 11

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+ PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO A ONE-FOR-TWO REVERSE STOCK SPLIT WITH RESPECT TO OUR COMMON STOCK THAT WILL BE EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING. NOGATECH We provide computer chips that compress digital video images and establish connections, or video connectivity, between video devices and computers, as well as between video devices across a variety of networks. Our products enable real-time transmission of video, audio and data signals into personal computers and hand-held personal computing devices known as personal digital assistants. Our chips are small, power efficient and work together with our related decompression software for use in processing video images on all major operating systems. Our products are based on our proprietary mathematical procedures, known as algorithms, and enable communication of video and other data from a variety of video sources through standard interfaces into PCs. Our chips and software provide high quality video while efficiently using the resources of the PC's central processing unit. We principally sell our chips on a stand-alone basis to original equipment manufacturers, who design them into products such as PC digital video cameras, video capture devices and PC-TVs. In addition, we sell to original equipment manufacturers our own video devices that incorporate our chips. In 1999, purchasers of our products included AME Group, Camtel Technology, Fujitsu General, Hauppauge Computer Works, Interex, IO Data, Pinnacle Systems, Sharp Electronics and X-10.com. Our chips are manufactured and tested by subcontractors. The convergence of TV and PC applications, the growth of the Internet and the establishment of high speed broadband communication networks have created an increased demand for high quality video connections. We believe that the marketplace will demand additional digital video compression chips that are compatible with the new industry standard for video compression, known as MPEG-4. We are developing chips based on the MPEG-4 standard that will enable a variety of applications, including processing and storing digital video data across the Internet and mobile and broadcast networks. Our objective is to be a leading provider of video connection chips for computer products using advanced video compression technology and standard computer connections between PCs and video accessories, known as plug-and-play interfaces. Key elements of our strategy are to: - maintain our expertise in video compression technology; - focus on high volume applications; - create and strengthen relationships with key customers; and - build upon existing technologies to penetrate new markets. Our sales were $3.2 million in 1998, $8.9 million in 1999 and $2.9 million in the three months ended March 31, 2000, with net losses of $1.8 million in 1998 and $1.1 million in 1999, and net income of $93,000 in the three months ended March 31, 2000. We were initially incorporated in California in 1993 and reincorporated in Delaware in 1999. Our principal executive offices are located at 5201 Great America Parkway, Santa Clara, California, 95054, and our telephone number is (408) 562-6200. The address of our office in Israel is 3 Gavish Street, Kfar Saba 44641. Our world wide web address is www.nogatech.com. The information on our website does not constitute part of this prospectus.

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus, including the "Risk Factors" section. SOUTHERN ENERGY, INC. We are a competitive provider of electricity and energy-related products and services. We have regionally based businesses in the Americas, Europe and the Asia-Pacific region. We have built and acquired a portfolio of power plants in which we have net ownership interests totaling 12,652 megawatts (MW) of generation capacity. In addition, we have projects under development or pending acquisition totaling 11,212 MW. We also market energy and energy-linked commodities and manage the risk associated with market price fluctuations of these commodities. By linking our electricity generation capabilities and our access to natural gas supplies with our energy marketing and risk management expertise, our strategy is to meet a wide range of customer requirements as well as optimize the value of our electricity generating and gas assets. In North America, we own and operate power plants with a total generation capacity of 7,389 MW. We control an additional 1,738 MW of generation capacity through management contracts. We also have projects under development or pending acquisition totaling 11,101 MW, including 5,154 MW of generation capacity that we have recently agreed to acquire from Potomac Electric Power Company. Through Southern Company Energy Marketing, L.P. (SCEM), our wholly owned indirect subsidiary, we market and trade energy and energy-linked commodities, including electricity, gas, oil, coal and emission allowances. In Europe, we own a 26% interest in Bewag AG, an electric utility serving 2.1 million customers in Berlin, Germany. We also have a 49% economic interest in, and operating control of, Western Power Distribution, which distributes electricity to approximately 1.4 million end-users in southwest England. Our European marketing and risk management business began trading power in the Nordic energy market in 1999. We expect to begin marketing power in the Dutch, German, Swiss and Italian energy markets in 2000. In the Asia-Pacific region, we have interests in 3,159 MW of generation capacity in the Philippines and China. Most of our revenues in the Asia-Pacific region are derived from contracts with government entities or regional power boards and are predominantly linked to the U.S. dollar to mitigate foreign currency exchange risks. In the Caribbean and South America, we have ownership interests in electric utilities, power plants and transmission facilities. These assets are located in the Bahamas, Trinidad and Tobago, Brazil and Chile. We are pursuing the sale of our Chilean subsidiary, and we recently sold our Argentine subsidiary. RECENT DEVELOPMENTS WPD Limited, a company indirectly owned by us and PPL Global, has offered to acquire all of the outstanding shares of Hyder plc for L565 million (approximately $847 million) plus the assumption of L2.1 billion (approximately $3.2 billion) of debt. Hyder owns and operates the electricity network in South Wales and the water distribution and waste water treatment business for all of Wales. On September 15, 2000, WPD Limited committed unconditionally to purchase any THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2000 PROSPECTUS 58,000,000 Shares SOUTHERN ENERGY, INC. Common Stock ------------------------- This is an initial public offering of shares of common stock of Southern Energy, Inc. All of the 58,000,000 shares of common stock are being sold by Southern Energy. At the request of Southern Energy, the underwriters have reserved at the initial public offering price up to 2,900,000 shares of common stock for sale to employees and other business associates of Southern Energy. Prior to this offering, there has been no public market for the common stock. We estimate that the initial public offering price will be between $18.00 and $20.00 per share. Our common stock has been approved for listing on the New York Stock Exchange under the trading symbol "SOE," subject to official notice of issuance. OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 11. Concurrently with this offering, a Delaware business trust that we own is offering up to 6,000,000 % Convertible Trust Preferred Securities, Series A by means of a separate prospectus. The underwriters of the preferred securities offering have an option to purchase up to 900,000 additional preferred securities to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to us.............................................. $ $ </TABLE> The underwriters may also purchase up to an additional 8,700,000 shares of common stock, at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments. The underwriters expect to deliver the shares in New York, New York on , 2000. ------------------------- GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER ------------------------- BANC OF AMERICA SECURITIES LLC CREDIT SUISSE FIRST BOSTON J.P. MORGAN & CO. LEHMAN BROTHERS SALOMON SMITH BARNEY Prospectus dated , 2000 shares of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD Limited had acquired approximately 68% of the shares of Hyder. In addition, WPD Limited has replaced Hyder's board of directors with our employees and employees of Western Power Distribution and PPL Global. On September 11, 2000, we closed the acquisition of an additional 40% interest in SCEM from Vastar Resources, Inc. for $250 million. The acquisition was effective as of August 10, 2000. As a result of this transaction, SCEM became our wholly owned indirect subsidiary. THE POWER INDUSTRY In the United States, the power industry had an estimated end-user market of over $215 billion of electricity sales in 1999 produced by an aggregate base of power generation facilities with a capacity of approximately 734,000 MW. Historically, the power generation industry has been characterized by electric utility monopolies selling to a franchise customer base. In response to increasing customer demand for access to low-cost electricity and enhanced services, new regulatory initiatives have been and are continuing to be adopted to increase competition in the power industry. We believe that increasing demand for electricity and the need to replace older power plants will create a need for additional power generating capacity throughout the United States. We believe that these market trends will create opportunities for efficient, low-cost power producers that are able to produce and sell energy to customers at competitive rates. Outside of the United States, we expect many governments in developed economies to privatize their utilities, having realized that their energy assets can be sold to raise capital without impairing system reliability. We expect these countries to develop regulatory structures to encourage competition in the electricity sector. In developing countries, the demand for electricity is expected to grow rapidly. In order to satisfy this anticipated increase in demand, some developing countries have adopted government programs designed to encourage private investment in power plants. We believe that these market trends will continue to create opportunities to acquire and develop power generation plants outside the United States. Industry trends and regulatory initiatives are transforming existing franchise customer markets, which are characterized by vertically integrated, price-regulated utilities, into markets in which generators compete with each other for their principal customers (wholesale power suppliers and major end-users) on the basis of price, service quality and other factors. This transformation requires that generators and their principal customers manage the risks associated with producing and delivering energy commodities, thereby creating opportunities to profitably market energy commodities and provide services to manage the risks associated with market price fluctuations of these commodities. STRATEGY Our strategy is to be a leading competitive provider of electricity and energy-related products and services in our target markets of North America, Europe and the Asia-Pacific region. We intend to acquire, develop and operate power plants and gas transportation and storage assets primarily in our target markets. We also intend to integrate power plants and gas assets with the marketing of energy commodities and the management of market risk associated with those commodities. We plan to implement our growth strategy by: - Maximizing the financial and operational performance of our current investments, - Capitalizing on opportunities generated by our regional presence, - Developing new power plants and expanding our existing plants, - Acquiring power plants and gas assets in our target markets, INSIDE FRONT COVER PAGE -- DESCRIPTION OF ARTWORK "Southern Energy" appears at the top center of the page. Underneath the words "Southern Energy", there is a picture of the Potrero plant (California), Plant Mitte (Germany), and the Sual plant (Philippines). Underneath these pictures, text in the center of the page reads: "One of the world's largest competitive providers of electricity and energy-related products and services with businesses in the Americas, Europe and the Asia-Pacific region" Underneath these words are three bar charts, collectively entitled "Generation Capacity by Region," showing generation capacity in the Americas, Europe and the Asia-Pacific regions, respectively. The first bar in each chart shows capacity today and capacity under development/pending acquisitions. The second bar in each chart shows generation capacity described by the following legend: "Our Strategic Goal is to achieve this capacity by 2004, but there can be no assurance that we will do so." INSIDE COVER GATEFOLD -- DESCRIPTION OF ARTWORK Around the border the phrase "SEE THE OPPORTUNITY(SM) ......" appears. Across the top of the gatefold are the following phrases: "Power Provider," "Energy Marketing and Risk Management" and "Global Reach." Underneath these phrases, on the far left side of the gatefold are the following photographs of varying size: the Stateline plant (Indiana), the Shajiao C plant (China) and a service truck and two workers from Western Power Distribution (United Kingdom). To the right of these photographs are the following pictures: the Birchwood plant under construction (Virginia), the trading floor of Southern Company Energy Marketing, L.P. and a close-up of a trading screen. On the right side of the gatefold are the following five lines of text: "Key Statistics*," "#3 Independent Power Producer in the World," "#5 Power Marketer in the United States," "#10 Gas Marketer in the United States" and "*Sources for the rankings include the McGraw-Hill publication 205 Independent Power Companies, Power Markets Week (August 21, 2000), and Gas Daily (August 4, 2000)." Underneath these words is a graphic of the globe, showing North America and the northern half of South America. - Entering into contractual arrangements for the management and control of generation capacity and gas transportation and storage assets, - Integrating energy marketing and risk management with ownership and control of energy assets, and - Exploring energy information and e-commerce applications. We may suffer from some competitive disadvantages which impede our ability to implement this strategy. The need to develop the management infrastructure required for an independent company may affect our ability to compete against companies with longer histories as independent companies. We also expect that, at least initially, we will not be able to raise equity capital to fund our growth on terms as attractive as those available to our competitors. OUR RELATIONSHIP WITH SOUTHERN COMPANY We are currently a wholly owned subsidiary of Southern Company. Upon the completion of this offering, Southern Company will own over 80% of the outstanding shares of our common stock. Southern Company has announced that it currently plans to complete a spin-off of us within 12 months after the completion of this offering by distributing the remaining shares of our common stock to the holders of Southern Company's common stock. We have entered into agreements with Southern Company related to the separation of our business from Southern Company. These separation agreements govern our interim and ongoing relationships with Southern Company. In particular, we have entered into an agreement under which Southern Company will continue to provide various interim services to us, including financial, accounting, engineering and other services. In addition, after this offering but prior to the distribution of our stock by Southern Company, we will transfer the operations and obligations of our leasing and capital funding subsidiaries to Southern Company. All of the separation agreements were negotiated in the overall context of our separation from Southern Company and the requirements of federal and state regulations. We believe that we will realize certain benefits from our complete separation from Southern Company, including the following: reduced governmental regulation, increased capital financing flexibility, a more targeted investment for stockholders, increased strategic focus, access to additional markets, increased speed and responsiveness and targeted incentives for management and employees. We were incorporated in Delaware on April 20, 1993 as a wholly owned subsidiary of Southern Company. Our executive offices are located at 900 Ashwood Parkway, Suite 500, Atlanta, Georgia 30338-4780, and our telephone number is (770) 821-7000. CONCURRENT OFFERING OF CONVERTIBLE TRUST PREFERRED SECURITIES Concurrently with this offering of common stock, SEI Trust I, a Delaware business trust that we own, will sell up to 6,000,000 (6,900,000 if the underwriters exercise their over-allotment option) % Convertible Trust Preferred Securities, Series A at a purchase price of $50 per preferred security by means of a separate prospectus. The net proceeds from the offering of preferred securities are expected to be $290,000,000 ($334,000,000 if the underwriters exercise their over-allotment option). The trust will issue all of its common securities to us. The trust will use the proceeds from the sale of preferred securities and the common securities to purchase from us % Junior Convertible Subordinated Debentures, Series A due 2030. The debentures will have the same financial terms as the preferred securities, including conversion rights. Our obligations to pay the debentures are junior to our payment obligations under our senior debt. Holders of preferred securities will be entitled to receive cash distributions at an annual rate of % of the $50 liquidation preference per preferred security. Holders of preferred securities generally will not have any voting rights. Holders of preferred securities will have the right to convert their preferred securities into shares of our common stock at any time after , 2001 and prior to , 2030, subject to our option to make cash settlements from 2001 until the next business day following the date of the distribution of our common stock held by Southern Company. The preferred securities will convert into our common stock at an initial conversion rate of shares of common stock for each preferred security. This conversion rate is equivalent to a conversion price of $ per share of our common stock. The conversion rate may be subject to adjustment. The trust will redeem all of its outstanding preferred securities and common securities when the debentures are paid at maturity on , 2030. In addition, we can make the trust redeem all or some of the preferred securities at any time on or after , 2003 by redeeming the debentures at the applicable redemption price, plus any accrued and unpaid distributions; provided that we may only redeem the debentures if the closing price of our common stock exceeds % of the conversion price for a specified period of time before the notice of redemption is given. We will guarantee the trust's payment obligations, but only to the extent that the trust has sufficient funds to make payments on the preferred securities. Generally, our obligations under the guarantee are junior to our obligations to make payments on all of our other liabilities. We intend to complete the offering of our common stock regardless of whether the offering of our preferred securities is completed. THE OFFERING COMMON STOCK OFFERED: Common stock offered................ 58,000,000 shares(1) Common stock to be outstanding immediately after the offering.... 330,000,000 shares(1) Common stock to be held by Southern Company immediately after the offering.......................... 272,000,000 shares Use of Proceeds..................... We intend to use a portion of the net proceeds of this offering and the concurrent offering of Convertible Trust Preferred Securities, Series A to repay short-term debt of approximately $839 million. The remaining proceeds from these offerings will be used for general corporate purposes. Proposed NYSE symbol................ "SOE" Rights.............................. One right will be issued and attached to each outstanding share of our capital stock. Under circumstances described under "Description of Capital Stock -- Stockholder Rights Plan" in this prospectus, each right will entitle the holder to purchase one one-thousandth of a share of our Series A preferred stock. These rights would cause substantial dilution to any person or group that attempts to acquire a significant interest in us without approval of our board of directors, and thus could make acquisition of control of us difficult. ------------------------- (1) Assumes the underwriters' over-allotment option to purchase 8,700,000 shares is not exercised. SUMMARY HISTORICAL FINANCIAL DATA You should read the following summary historical financial data together with our consolidated financial statements and the related notes and with "Selected Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In addition, you should read the following summary historical financial data in light of the following: - Our operating revenues declined in 1998 due to our contribution on January 1, 1998 of our power marketing and risk management activities to Southern Company Energy Marketing, L.P. (SCEM), our marketing and risk management joint venture with Vastar formed in September 1997. When the joint venture was formed in September 1997, we contributed only our gas marketing and risk management assets to the venture. Prior to the formation of the joint venture, our marketing and risk management activities were wholly-owned and consolidated. From January 1, 1998 until August 9, 2000, the day prior to the effective date of our acquisition of Vastar's 40% interest in SCEM, we accounted for this joint venture under the equity method of accounting. For 1997, operating revenues would have been $1,768 million if we had not consolidated our marketing and risk management operations. Effective August 10, 2000, we acquired Vastar's 40% interest in SCEM for $250 million. Upon the closing of the transaction, Vastar transferred its interest in SCEM to us and SCEM became our wholly owned indirect subsidiary and will be consolidated in our financial statements on a prospective basis. - The write-down of assets for 1998 includes write-downs of our investments in our Argentine subsidiary, Hidroelectrica Alicura S.A. (Alicura), and our Chilean subsidiary, Empresa Electrica del Norte Grande S.A. (EDELNOR), to adjust for the difference between the carrying value of the assets and their fair market value. The write-down for 1999 and the six months ended June 30, 2000 includes further write-downs of our investments in Alicura and EDELNOR to maintain the carrying value at the fair market value as well as our interest in a $31 million write-down at Western Power Distribution relating to impaired metering assets. Pro forma balance sheet amounts and pro forma income statement amounts for 1999 and the six months ended June 30, 2000 give effect to the probable acquisition of Hyder by WPD Limited, a UK-based company in which we expect to own a 40% interest. As part of this acquisition, Western Power Distribution would no longer be a consolidated subsidiary but, instead, our investment would be accounted for under the equity method. The pro forma information below should be read in conjunction with the Southern Energy pro forma financial statements and Southern Energy's and Hyder's historical consolidated financial statements included elsewhere in this prospectus. Pro forma balance sheet amounts, as adjusted, give effect to the following actions as though these actions had taken place as of June 30, 2000: - the transfer of the operations of our capital funding subsidiary, Southern Company Capital Funding, Inc. (Capital Funding), to Southern Company; - the transfer of our leasing subsidiary, SE Finance Capital Corporation (SE Finance), to Southern Company. As a result of our decision on April 17, 2000 to transfer SE Finance to Southern Company, we have included the historical results of operations of the related subsidiaries as a discontinued operation; and - the payment by us on July 7, 2000 of cash dividends to Southern Company in the aggregate amount of $53 million, and short-term borrowings to fund those dividends. Pro forma balance sheet amounts, as further adjusted, give effect to our sale of 58,000,000 shares of common stock in this offering at an assumed initial public offering price of $19.00 per share and the application of the proceeds from this offering. Pro forma balance sheet amounts, as finally adjusted, give effect to our sale of 6,000,000 preferred securities at an assumed public offering price of $50 per preferred security in a public offering concurrent with this offering and the application of the proceeds from both offerings. <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- --------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1998 1999 1999 1999 2000 2000 ---- ------ ------ ------ ------ --------- ------ ------ --------- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Operating revenues........................... $584 $1,600 $3,750 $1,819 $2,268 $1,292 $1,025 $1,194 $1,004 Write down of assets......................... -- -- -- 308 60 29 5 14 14 Operating income (loss)...................... 66 150 272 (5) 444 213 174 311 215 Other income (expense): Interest income............................ 13 16 138 146 172 166 80 81 80 Interest expense........................... (64) (133) (345) (430) (502) (410) (231) (300) (259) Gain on sales of assets.................... 11 66 24 41 313 27 9 -- -- Equity in income of affiliates............. 10 13 58 135 111 268 147 63 102 Receivables recovery....................... -- -- -- 29 64 64 12 -- -- Other, net................................. (1) 28 33 29 72 47 21 40 30 ---- ------ ------ ------ ------ ------ ------ ------ ------ Total other (expense) income............. (31) (10) (92) (50) 230 162 38 (116) (47) ---- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from continuing operations before income taxes and minority interest................................... 35 140 180 (55) 674 375 212 195 168 Provision (benefit) for income taxes: Continuing operations...................... 8 54 27 (123) 129 (5) 34 (29) (31) Windfall profits tax(1).................... -- -- 148 -- -- -- -- -- -- Minority interest............................ 13 13 29 80 183 19 36 43 10 ---- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from continuing operations..... 14 73 (24) (12) 362 $ 361 142 181 $ 189 ====== ====== Income from discontinued operations, net of income tax benefit of $10 in 1997, $22 in 1998, $15 in 1999, and $7 and $9 for the six months ended June 30, 1999 and 2000, respectively............................... -- -- 8 12 10 7 13 ---- ------ ------ ------ ------ ------ ------ Income (loss) before extraordinary item...... 14 73 (16) -- 372 149 194 Extraordinary gain on early extinguishment of debt, net of income tax of $2 in 1995 and $5 in 1996................................. 4 8 -- -- -- -- -- ---- ------ ------ ------ ------ ------ ------ Net income (loss)........................ $ 18 $ 81 $ (16) $ -- $ 372 $ 149 $ 194 ==== ====== ====== ====== ====== ====== ====== </TABLE> <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------- ---------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1998 1999 1999 1999 2000 2000 ------- ------ ------- ------- ------- --------- ------- ------ --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> EARNINGS PER SHARE INFORMATION: BASIC: From continuing operations...... $ 0.05 $ 0.27 $ (0.09) $ (0.04) $ 1.33 -- $ 0. 52 $ 0.67 -- From discontinued operations.... -- -- 0.03 0.04 0.04 -- 0.03 0.04 -- From extraordinary gain......... 0.02 0.03 -- -- -- -- -- -- -- ------- ------ ------- ------- ------- ------- ------ Net income.................... $ 0.07 $ 0.30 $ (0.06) $ -- $ 1.37 -- $ 0.55 $ 0.71 -- ======= ====== ======= ======= ======= ======= ====== </TABLE> <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------- ---------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1998 1999 1999 1999 2000 2000 ------- ------ ------- ------- ------- --------- ------- ------ --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> PRO FORMA BASIC(2): From continuing operations...... $ 1.21 $1.21 $ 0.61 $ 0.64 ===== ====== From discontinued operations.... 0.04 0.04 ------- ------ Net income.................... $ 1.25 $ 0.65 ======= ====== PRO FORMA DILUTED(2): From continuing operations...... $ 1.21 $1.21 $ 0.61 $ 0.64 ===== ====== From discontinued operations.... 0.04 0.04 ------- ------ Net income.................... $ 1.25 $ 0.65 ======= ====== STATEMENT OF CASH FLOWS DATA: Cash flow from operating activities...................... $ 158 $ (226) $ 264 $ 402 $ 515 -- $ 153 $ 217 -- Cash flow from investing activities...................... (1,244) (136) (4,203) (1,741) (2,263) -- (1,668) (261) -- Cash flow from financing activities...................... 1,653 (193) 4,177 1,502 1,516 -- 1,329 418 -- OTHER OPERATING DATA: EBITDA(3)......................... $ 122 $ 258 $ 512 $ 351 $ 825 $ 661 $ 432 $ 529 $ 432 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ----------------------------------------------------------- PRO PRO FORMA, FORMA, PRO FORMA, AS FURTHER AS FINALLY ACTUAL PRO FORMA AS ADJUSTED ADJUSTED ADJUSTED ------- --------- ----------- ---------- ---------- (DOLLARS IN MILLIONS) (UNAUDITED) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 691 607 $ 542 $ 700 $ 990 Property, plant and equipment, net.......................... 5,912 3,985 3,985 3,985 3,985 Investments................................................. 1,550 1,813 1,745 1,745 1,745 Investment in leveraged leases.............................. 566 566 -- -- -- Total assets.............................................. 14,308 11,980 10,188 10,346 10,636 Non-recourse debt(4)........................................ 6,063 5,157 4,731 4,731 4,731 Total debt................................................ 7,834 6,928 6,555 5,663 5,663 Subsidiary obligated mandatorily redeemable preferred securities(5)............................................. 1,026 950 -- -- -- Minority Interest Company obligated mandatorily redeemable securities of a subsidiary holding solely parent company debentures..... -- -- -- -- 300 Stockholder's equity........................................ 2,775 2,775 2,549 3,599 3,599 </TABLE> (1) In 1997, the United Kingdom imposed a windfall profits tax on the United Kingdom's privatized utilities. (2) Pro forma basic earnings per share information gives effect to the dividends we paid to Southern Company in 2000 as though they had been paid during the periods presented, in accordance with SEC Staff Accounting Bulletin Topic 1:B:3. Pro forma diluted earnings per share information gives effect to the conversion of the Southern Energy value creation plan standard units outstanding at December 31, 1999 and June 30, 2000, respectively, into options to purchase our common stock. (3) EBITDA represents our operating income (loss) plus depreciation and amortization and our equity in income of affiliates. EBITDA excludes the impact of minority interests. EBITDA, as defined, is presented because it is a widely accepted financial indicator used by some investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA, as defined, is not intended to represent cash flows for the period, nor is it presented as an alternative to operating income or as an indicator of operating performance. It should not be considered in isolation or as a substitute for a measure of performance prepared in accordance with generally accepted accounting principles (GAAP) in the United States and is not indicative of operating income or cash flow from operations as determined under GAAP. Our method of computation may or may not be comparable to other similarly titled measures by other companies. (4) This debt is non-recourse to us but is recourse to the applicable subsidiaries and their assets. (5) As of June 30, 2000, this total included $950 million of preferred securities and capital securities issued by special purpose financing subsidiaries held by Capital Funding, the proceeds of which were loaned to Southern Company. Southern Company pays interest on subordinated notes issued in favor of the financing subsidiaries, which payments are used to pay dividends on those preferred or capital securities. In addition, Southern Company has guaranteed payments due under the terms of those securities. These securities are non-recourse to us. In connection with our separation from Southern Company, Capital Funding will be transferred to Southern Company. The remaining $76 million of these securities were issued by a special purpose finance subsidiary of Southern Investments UK plc. They are also non-recourse to us but they are not guaranteed by Southern Company and they will remain outstanding after the offerings but have been eliminated in this pro forma presentation because Southern Investments UK would no longer be consolidated by us after the acquisition of Hyder (assuming successful completion of this acquisition).

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the information under "Risk Factors" beginning on page 6 and the financial statements beginning on page F-1, before making an investment decision. Our Company Etinuum provides an integrated set of strategic, technological, operational and analytical solutions that takes our clients from concept to launch and operation of their e-commerce and other direct-to-customer sales and marketing initiatives. Our clients are typically Fortune 1000 and emerging Web- based companies that sell complex products or employ complicated sales processes. Our ability to design, build, and operate e-commerce and other associated direct-to-customer initiatives enables our clients to more effectively market and sell to their customers. We provide clients access to our strategic consultants, developers, Web-based processing technology, high- level customer support personnel, communications services, and database marketing and analysis services. Our major clients in 1999 included American Express, Safeway, Sega and Sony. In addition, we have recently established relationships with emerging Web-based companies. Our Market Opportunity Our market is driven by the continued acceptance and rapid growth of the Internet, which has dramatically changed the way businesses and consumers communicate and conduct business. International Data Corporation, or IDC, estimates that the actual number of Web buyers worldwide will increase from nearly 31 million in 1998 to more than 182 million in 2003, and that the amount of worldwide commerce conducted over the Internet will increase from approximately $50 billion in 1998 to about $1.3 trillion in 2003. This dramatic increase in the use of the Internet for commerce is creating significant new opportunities and challenges for a broad spectrum of businesses. In response to growing competitive pressures and the escalating rate of technological innovation, many companies are outsourcing business functions to access expertise, resources and technology. As a growing number of companies offer more complex products and services online, demand has increased for sophisticated outsourced service providers that use an integrated approach in delivering technology solutions and specialized services. Additionally, the delivery of these multiple services must be flexible and easy for the customer to use and must enable the client to maintain brand recognition and customer loyalty. Our Services Etinuum offers a comprehensive range of solutions for designing, building and operating our clients' e-commerce and other direct-to-customer initiatives. Our clients' direct-to-customer initiatives use a combination of Web sites, e- mail and other Internet-based communications, telephone communications, fax and mail. Our four service offerings are: Strategic Consulting. We help our clients plan their e-commerce and other direct-to-customer initiatives by determining their needs and objectives, working with them to establish an overall program structure. We design an integrated solution consisting of the required technology, customer communications processes, data requirements and personnel skills. Technology Solutions. We develop, customize and operate Web-based technology platforms, composed of Web-based software and hardware systems, that enable us to rapidly deploy our clients' e-commerce and other direct-to- customer initiatives. Our primary technology platform, the EtinuumWebDirect System, incorporates the Web site interface for customers and our customer representatives, the product specifications and other reference materials, the software applications to electronically process transactions, and the customer and client information databases and hardware systems, all of which can be tailored to meet a client's specific needs. We integrate this technology platform with our clients' and their vendors' existing systems to provide the sharing of information. e-Operations. We provide communications services that handle our clients' transactions with their customers via voice, e-mail, fax and real-time online communications, as well as database management and hosting. These transactions include the sale of complex products such as financial instruments for direct brokerage and online trading firms and computer and electronic equipment for technology manufacturers. Our infrastructure, including our computer systems, networking equipment and communications centers, permits efficient and reliable operations of our clients' complex direct-to-customer-initiatives. Customer Knowledge. We offer sophisticated database marketing and analysis services to help our clients improve their marketing efforts and customer relationships through a better understanding of their customers' buying processes and behaviors. Our Strategy Etinuum's strategy is to be a leading provider of integrated solutions to companies developing e-commerce and other direct-to-customer initiatives that involve the sale of complex products or the use of complicated sales processes. We support our clients in both business-to-consumer and business-to-business transactions. Key elements of our strategy are to: . target clients that provide substantial growth opportunities; . pursue clients in specialized markets that require sophisticated services; . promote our brand through expanded sales and marketing efforts; . broaden and continue to strengthen our service offerings; and . continue to hire, train and retain talented people. In order to execute our strategy, we must, among other things, continue to incur significant expenses to increase our marketing efforts, expand our service offerings, and hire and train new employees. If we are not successful in these efforts, we may be unable to attract new clients or provide the level of services required to meet clients' needs. See "Risk Factors" for a more complete discussion of these and other risks. Our History We incorporated in Colorado in March 1996 under the name Intek Information, Inc. and reincorporated in Delaware in August 1996. In February 2000, we changed our name from Intek Information, Inc. to Etinuum, Inc. Effective October 1, 1999, we acquired all of the outstanding capital stock of Acorn Information Services, Inc., a Delaware corporation based in Connecticut that provides database marketing and analysis services. Also effective October 1, 1999, we transferred software that we had developed to Spider Technologies, Inc., a newly-formed wholly-owned subsidiary, and we then distributed all of the stock of Spider to our stockholders. We have three wholly-owned subsidiaries that are used to hold licenses to conduct operations in various regulated industries. See "Business-Regulatory Matters." Our principal executive offices are located at 5619 DTC Parkway, 12th Floor, Englewood, CO 80111, and our telephone number is (303) 357-3000. We maintain a Web site at www.etinuum.com and our subsidiary, Acorn, maintains a Web site at www.acornis.com. Information contained on these Web sites does not constitute part of this prospectus and is not incorporated by reference in this prospectus. The Offering <TABLE> <S> <C> Common stock offered by Etinuum............... 4,500,000 shares Common stock to be outstanding after this 18,136,384 shares offering..................................... Use of proceeds............................... For general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ "ETIN" </TABLE> Unless otherwise noted, the information in this prospectus assumes that all outstanding shares of preferred stock are converted into common stock upon the closing of this offering and that the underwriters do not exercise their option to purchase an additional 675,000 shares of common stock from us to cover over-allotments, if any. The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, plus 1,473,628 shares issuable to holders of our preferred stock as payment-in-kind dividends through February 29, 2000, and 721,124 shares issuable to holders of our Series F preferred stock assuming the sale of shares in this offering at an initial offering price of $11.00 per share. See "Related Party Transactions - Securities Issuances and Loans." It does not include the following: . options to purchase 2,330,563 shares of common stock granted under our 1997 and 1998 Stock Option Plans at a weighted average exercise price of $6.28 per share; . 6,437,611 shares of common stock available for future issuance under our 1997 and 1998 Stock Option Plans, 2000 Stock Incentive Plan and 2000 Employee Stock Purchase Plan; and . a warrant to purchase 181,250 shares of common stock issued to Sony Electronics Inc. at an exercise price of $8.52 per share. During the first quarter of 2000 through March 20, we have granted options to purchase 1,730,970 shares of common stock at a weighted average exercise price of $9.66 per share. These option grants will result in compensation expense of approximately $125,000 in the first quarter of 2000 assuming a fair market value of our common stock of $10.00 per share on the date of grant. These options were granted to new and existing officers and other employees and in the restructuring of our acquisition of Acorn. See Note 14 of Notes to Consolidated Financial Statements for information about this restructuring. Please see "Capitalization" for a more complete discussion regarding the outstanding shares of our common stock, the options and warrant to purchase our common stock and related matters. Summary Financial Information The following table presents summary financial data. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Historical and Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Unaudited Pro Forma Condensed Financial Infomation." The unaudited pro forma condensed statements of operations information for the year ended December 31, 1999, gives effect to our acquisition of Acorn and the spin-off of Spider as if those transactions had occurred on January 1, 1999. The following transactions are assumed to have occurred on January 1, 1999, in the pro forma as adjusted per share data in the pro forma as adjusted statements of operations data, and on December 31, 1999, in the pro forma as adjusted balance sheet data: . the issuance of 4,500,000 shares in this offering and receipt by us of net proceeds of approximately $44.5 million assuming an initial public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses; . the automatic conversion of all shares of preferred stock outstanding as of December 31, 1999, into 9,560,188 shares of common stock; . the issuance of 1,333,433 shares of common stock to the holders of our preferred stock as payment-in-kind dividends accrued through December 31, 1999; and . the issuance of 721,124 additional shares of common stock to the holders of our Series F preferred stock assuming the sale of shares in this offering at an initial offering price of $11.00 per share. See "Related Party Transactions - Securities Issuances and Loans."

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+ SUMMARY This summary highlights information contained elsewhere in this prospectus. We have included this information in the summary because we believe this information is highly important in making a decision to invest in our common stock. You should read this summary together with the more detailed information regarding our company and the common stock being sold in this offering appearing elsewhere in this prospectus, including our financial statements and related notes, for a more complete understanding of our business and the offering. OUR BUSINESS OVERVIEW Signal Pharmaceuticals is a biopharmaceutical company focused on discovering, developing and commercializing new classes of drugs that regulate genes associated with disease. Current initiatives in the field of genomics, which is the large-scale identification and sequencing of the genes that comprise the human genome, are generating a large flow of information regarding the role of genes in health and disease. We believe our approach can convert this enormous amount of valuable information into new classes of superior drugs. We have advanced the application of genomics beyond identifying genes to understanding the role of genes in disease and how these genes are regulated. This allows us to design novel classes of drugs that selectively regulate genes that cause disease. Our technologies enable us to identify and pursue numerous gene regulating drug targets across multiple diseases and to rapidly identify drugs for development. We believe our approach will yield drugs that treat the underlying causes of a disease, unlike many current drugs which only relieve the symptoms of a disease. Our efforts are focused in several major disease areas in which abnormal gene regulation plays an important role in the onset and progression of disease. These disease areas represent large commercial markets, including cancer, inflammatory disease, osteoporosis, cardiovascular disease, neurological disease and viral infections. OUR DRUG DISCOVERY ENGINE We have developed and integrated a large set of advanced target and drug discovery technologies, which we refer to as our "drug discovery engine," to accelerate the application of genomics to the discovery of important new classes of gene regulating drugs. We first map gene regulating pathways, which are networks of proteins inside cells that relay information to activate or suppress genes. We next select specific gene regulating proteins, or gene switches, within these pathways that control one or more genes that result in disease. We then generate novel drugs that regulate these gene switches. We believe our discovery and development capabilities provide us and our collaborators with a highly advanced and competitive technology platform for target and drug discovery. To protect our discoveries, we pursue patent exclusivity for our drug targets, drug leads and related drug candidates. We own or have exclusive licenses to 38 issued United States and foreign patents and 87 pending United States and foreign patents. OUR ACCOMPLISHMENTS Our drug discovery engine has enabled us to build a large and diverse portfolio of gene regulating drug targets, drug leads and drug candidates. To date, together with our collaborators, we have: - advanced drug discovery programs in six major disease areas; - explored and mapped 10 gene regulating pathways to identify the crucial gene switches that control disease; - identified 27 gene switches that we believe to be important targets for treating disease; - assembled a large and diverse screening library of more than 300,000 distinct compounds and natural products and a proprietary library designed to be potentially effective inhibitors of gene switches; - developed 29 drug discovery tests, or "screens," which allow us to search rapidly through our compound library for new drugs; THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 22, 2000 [SIGNAL LOGO] 5,000,000 SHARES COMMON STOCK Signal Pharmaceuticals, Inc. is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "SGNL." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. As part of our collaboration agreement with DuPont Pharmaceuticals Company, DuPont Pharmaceuticals has agreed to purchase $2.0 million of our common stock in a private transaction concurrent with the closing of this offering at the initial public offering price. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL ---------- ---------- <S> <C> <C> Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to Signal Pharmaceuticals, Inc. ................... $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Signal Pharmaceuticals, Inc. has granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS CHASE H&Q CIBC WORLD MARKETS THE DATE OF THIS PROSPECTUS IS , 2000. - identified 24 novel series of potent and selective drug leads that regulate our disease targets; - commenced evaluation of drug leads in 15 animal models that mimic human diseases; and - developed two drug candidates for which we expect to file Investigational New Drug applications, or INDs, in 2000, assuming preclinical studies required to begin human testing are favorably completed without delays. Our first drug candidate, SP8490, is for treating breast cancer and other cancers. In preclinical animal studies, SP8490, when orally administered, was effective in treating breast cancer and demonstrated equal or superior efficacy to tamoxifen, the current leading hormonal therapy for breast cancer. In addition, SP8490 displayed a superior safety profile in animal models that assess harmful side effects. The second drug candidate, NSP6783, is for preventing or treating nerve damage caused by cancer chemotherapy. In animal studies, this orally administered drug candidate provided significant protection of peripheral nerves and their function in an animal model of nerve damage caused by the chemotherapy drug taxol. In addition, we have discovered other gene regulating drug leads that are effective in several animal models, including models of rheumatoid arthritis, asthma, osteoporosis and epilepsy. We are conducting our drug discovery and development programs both independently and with our corporate collaborators: Nippon Kayaku, Ares-Serono, Axys Pharmaceuticals and DuPont Pharmaceuticals. Currently, our corporate collaborators fund significant portions of our research and development expenditures. We have retained United States co-commercialization or profit-sharing rights for the areas of cancer and inflammatory disease in three of our four collaborative programs. OUR STRATEGY There are five important elements of our business and scientific strategy: - We plan to advance our leadership position in the field of gene regulating targets and drugs by continuing to enhance the capabilities and scale of our discovery technologies. - We plan to continue expanding our product portfolio by mapping multiple gene regulating pathways, identifying multiple drug targets within each of these gene regulating pathways and selecting those targets for drug discovery that can be validated in multiple diseases. - We will develop orally administered drugs for large disease markets where current drugs do not adequately address these diseases. - We intend to establish a United States franchise for drugs that treat cancer and inflammatory disease. - We will continue to seek to establish strategic collaborations with leading pharmaceutical and biotechnology companies and will seek to retain substantial United States commercial rights in those collaborations in our franchise areas. OUR HISTORY We were incorporated in California in July 1992, and we intend to reincorporate in Delaware prior to the completion of this offering. As of December 31, 1999, we had 87 full-time employees with experienced scientists and managers skilled in each phase of target and drug discovery. We had an accumulated deficit as of December 31, 1999 of approximately $37.8 million and expect to continue to incur losses for at least the next several years. Our research laboratories and executive offices are located at 5555 Oberlin Drive, San Diego, California 92121, and our telephone number at that address is (858) 558-7500. Our website is located at www.signalpharm.com. Information contained on our website is not part of this prospectus. [INSIDE FRONT COVER ARTWORK] DEVELOPING DRUGS TO REALIZE THE THERAPEUTIC POTENTIAL OF GENOMICS [Graphic depicting the gene regulating target and drug discovery programs of Signal. The graphic is divided into columns indicating the stage of research or development for each of Signal's current drug targets and drug candidates. The right side of the graphic lists the disease areas targeted by Signal: cancer, inflammation, bone metabolism, cardiovascular disease, neurological disease and viral infections.] Genomics is the large-scale identification and sequencing of the genes that comprise the human genome. The ability to convert the thousands of gene targets coming from genomics into drugs requires knowledge of which genes cause diseases and how to design drugs that selectively regulate these disease genes. Our drug discovery engine is an integrated set of advanced target and drug discovery technologies which accelerate the application of genomics to the generation of gene regulating drugs. Using our drug discovery engine, we have generated a pipeline of novel gene regulating targets and drugs at various stages of development for treating major diseases. THE OFFERING Common stock offered by Signal Pharmaceuticals........................... 5,000,000 shares Common stock to be outstanding after this offering.................................. 19,236,756 shares Use of proceeds........................... We intend to use the net proceeds of this offering for research and development, the acquisition of research and development technologies, compound libraries and product rights, capital investments, repayment of debt and working capital and general corporate purposes. Proposed Nasdaq National Market symbol.... SGNL ------------------------------ The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and assumes the completion of the sale of $2.0 million of our common stock to DuPont Pharmaceuticals in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $14.00 per share. The number of shares of common stock to be outstanding after the offering excludes: - 1,493,607 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $0.72 per share. Subsequent to December 31, 1999, we granted options to purchase 589,375 shares of common stock at a weighted average exercise price of $2.50 per share; - 125,000 shares subject to warrants outstanding as of December 31, 1999, at an exercise price of $4.20 per share; - 1,417,018 additional shares that we could issue under our 2000 Equity Incentive Plan; - 250,000 shares that we could issue under our Non-Employee Directors' Stock Option Plan; and - 500,000 shares that we could issue under our Employee Stock Purchase Plan. ------------------------------ Unless otherwise stated, information in this prospectus is based on the following assumptions: - the conversion of all our outstanding shares of preferred stock into shares of common stock upon the closing of this offering; - no exercise of the underwriters' over-allotment option; - our reincorporation in Delaware and the filing of our amended and restated certificate of incorporation prior to the closing of this offering; and - a 1-for-2 stock split to be effected prior to the completion of this offering. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue....................................... $ 299 $ 3,933 $ 7,579 $15,414 $11,748 Expenses: Research and development.................... 5,173 7,724 10,337 15,573 16,748 General and administrative.................. 1,937 2,471 2,791 4,798 3,011 ------- ------- ------- ------- ------- Total expenses........................... 7,110 10,195 13,128 20,371 19,759 ------- ------- ------- ------- ------- Loss from operations.......................... (6,811) (6,262) (5,549) (4,957) (8,011) Interest income (expense), net................ 329 53 (191) 600 155 ------- ------- ------- ------- ------- Net loss...................................... (6,482) (6,209) (5,740) (4,357) (7,856) Imputed dividend on preferred stock........... -- -- -- -- (818) ------- ------- ------- ------- ------- Net loss applicable to common shareholders.... $(6,482) $(6,209) $(5,740) $(4,357) $(8,674) ======= ======= ======= ======= ======= Historical net loss per share applicable to common shareholders, basic and diluted...... $ (9.12) $ (7.29) $ (5.65) $ (3.31) $ (5.29) ======= ======= ======= ======= ======= Weighted average shares....................... 711 852 1,016 1,318 1,641 ======= ======= ======= ======= ======= Pro forma net loss per share applicable to common shareholders, basic and diluted...... $ (0.63) ======= Shares used in computing pro forma net loss per share, basic and diluted................ 13,752 ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 9,420 $ 75,670 Working capital............................................. 3,960 70,210 Total assets................................................ 14,539 80,789 Long-term obligations under capital leases and equipment notes payable............................................. 1,805 1,805 Accumulated deficit......................................... (37,776) (37,776) Total stockholders' equity.................................. 5,983 72,233 </TABLE> Please see note 1 of notes to our financial statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma as adjusted balance sheet data reflect the net proceeds from the sale by us of shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and our estimated offering expenses, and our receipt of $2.0 million from DuPont Pharmaceuticals in exchange for the 142,857 shares of common stock to be issued in a private transaction concurrent with the closing of this offering.

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+ SUMMARY This summary highlights information contained in this prospectus. This summary does not contain all the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. In this prospectus, the terms Chordiant, we, us, and our refer to Chordiant Software, Inc. and its wholly owned subsidiary Chordiant International, Inc.. Except as otherwise indicated, information in this prospectus is based on the following assumptions: . the conversion of all our outstanding shares of preferred stock and convertible debentures into shares of common stock upon the closing of this offering; . no exercise of the underwriters' over-allotment options; and . the filing of our amended and restated certificate of incorporation before the closing of this offering. Chordiant and the Chordiant logo are registered trademarks of Chordiant. WSOP, CCS-Customer Communications Solution and One Click, One Call, One Customer are trademarks of Chordiant. This prospectus also includes trademarks owned by other parties. All other trademarks mentioned are the property of their owners. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus. Chordiant Software, Inc. Chordiant provides e-business infrastructure software that it believes enables companies to offer their customers personalized marketing, sales programs, e-business services and customer support across multiple communication channels. These channels include the internet, e-mail systems, automated telephony self-service systems, and customer service representatives in call centers and retail outlets. We believe that companies that use organization-wide customer information to provide consistent customer support through all channels of customer contact will be able to compete more successfully in the rapidly changing internet economy. Our Customer Communications Solution, or CCS, software product, is comprised of a suite of applications. It includes standard business services, a workflow engine and enterprise integration services supporting network, telephony, and data management connections. It also connects with existing databases and computer systems. Our product is licensed to our customers as a complete e-business infrastructure system. CCS includes a customer service representative application, a web communications application and an e-mail communications application. Our software is designed to enable companies to: . develop a comprehensive single view of the customer; . use automated, sophisticated decision making processes; . offer their customers consistent experiences across multiple communications channels; and . utilize standard and customizable business services. We license our product and provide related services primarily through our direct sales organization, complemented by the selling and support efforts of systems integrators. We license our product to multinational market leaders in business-to-consumer industries. Our customers include Bank One International, Cable & Wireless Communications, Canadian Tire Acceptance Limited, Chase Manhattan Mortgage Corporation, Metropolitan Life Insurance Company, Direct Line Group Services Limited, First USA Bank, General Motors' OnStar division, KLM Royal Dutch Airlines and Thomas Cook Global Services. Our objective is to continue to provide innovative e-business infrastructure software that enables a company to offer its customers personalized interactions across multiple communication channels. Our principal executive offices are located at 20400 Stevens Creek Blvd., Suite 400, Cupertino, CA 95014, and our telephone number is (408) 517-6100. Our internet address is www.chordiant.com. The information on our web site is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered................................ 4,500,000 shares Common stock to be outstanding after this offering.. 34,818,295 shares Use of proceeds..................................... General corporate purposes, including working capital and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. CHRD </TABLE> -------------------- The number of shares of common stock to be outstanding after this offering assumes no exercise of the underwriters' over-allotment options. The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, and excludes: . 7,773,658 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $1.82 per share; . 898,276 additional shares that we could issue under our equity incentive stock option plan; . 700,000 shares that we could issue under our non-employee directors' stock option plan; and . 2,000,000 shares that we could issue under our employee stock purchase plan. Summary Consolidated Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, ---------------------------- 1997 1998 1999 -------- -------- -------- (in thousands, except per share data) <S> <C> <C> <C> Consolidated Statement of Operations Data: Net revenues: License......................................... $ 1,142 $ 4,360 $ 8,007 Service......................................... 1,766 8,105 9,581 -------- -------- -------- Total net revenues.......................... 2,908 12,465 17,588 Cost of net revenues............................. 1,535 9,372 14,749 -------- -------- -------- Gross profit .................................... 1,373 3,093 2,839 Loss from operations............................. (11,923) (17,880) (22,351) Net loss......................................... $(11,593) $(17,440) $(23,137) ======== ======== ======== Net loss per share: Basic and diluted............................... $ (2.31) $ (3.44) $ (4.34) ======== ======== ======== Weighted average shares......................... 5,009 5,075 5,327 ======== ======== ======== Pro forma net loss per share (unaudited): Basic and diluted............................... $ (0.93) ======== Weighted average shares......................... 24,805 ======== </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------------- Actual Pro Forma As Adjusted -------- --------- ----------- (unaudited) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents....................... $ 6,719 $ 6,719 $68,394 Working capital................................. 1,833 1,833 63,508 Total assets.................................... 22,086 22,086 83,761 Borrowings...................................... 13,225 3,225 3,225 Deferred revenues............................... 10,196 10,196 10,196 Mandatorily redeemable preferred stock.......... 51,609 -- -- Stockholders' equity (deficit).................. (57,782) 3,827 65,502 </TABLE> See note 2 of notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma consolidated balance sheet data reflects the conversion of outstanding shares of preferred stock and convertible debt that will be effective upon the closing of this offering. The as adjusted balance sheet data reflects the net proceeds from the sale by us of shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting underwriting discounts and commissions and offering expenses, and our estimated offering expenses.

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding SilverStream and the common stock being sold in this offering and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus. SILVERSTREAM SOFTWARE, INC. SilverStream is a global provider of software and services that enable businesses and other large organizations to create, deploy and manage software programs for intranets, extranets and the Internet. The advantages of Web-based technology are driving the creation of a new generation of business-transforming software programs. These powerful Web-based programs, or Web applications, link a broad universe of customers, vendors, employees and partners with multiple, diverse data sources. We believe our products and services help our customers to rapidly develop Web applications that are reliable, secure and able to handle increasing and variable volumes of user traffic, commonly known as being scalable. Using our products and services, organizations can create and deploy robust Web applications in diverse areas such as e-commerce, business-to-business commerce, enterprise portals, employee self-service, supply chain management and customer service. Organizations are using Web applications to conduct "e-business," which encompasses business-to-business, business-to-employee and business-to-consumer transactions. These organizations recognize that if they are able to offer easy-to-access, compelling, real-time applications as a means of transacting business and interacting with business partners and customers, they can create closer and more enduring business relationships, new efficiencies and significant competitive and strategic advantages. To date, organizations have been required to use many different development tools, programming languages and technologies, often from different vendors, and have had to rely on custom programming and complex integration activities to develop their Web applications. These applications have often been difficult and expensive to create, deploy and manage. In order to compete in this dynamic e-business environment, organizations need expandable, reliable and secure solutions that shorten the development time for powerful new Web applications. SilverStream's products and services are designed to help our customers meet the new challenges posed by Web-based technology and applications. Our products consist of an application server, an integrated set of development tools and enterprise data connectors. Our Application Server is a software product that provides access to various forms of electronic information and communicates, usually in the form of a Web application, with the computers of users accessing the information. Our enterprise data connectors provide access to various kinds of third-party data sources. We believe our products reduce the complexity of developing Web applications and enable customers to extend the reach of these applications, access multiple information sources and simplify administration. We also offer comprehensive consulting, education and technical support services to help ensure the successful development and implementation of Web applications by our customers. We market our products and services globally through our direct sales force and a network of independent software vendors, value-added resellers and consulting partners. To date, we have licensed the SilverStream Application Server to over 500 customers in a wide variety of industries, including communication, financial services, government, manufacturing, oil and gas, pharmaceutical, technology and transportation. We are a Delaware corporation. Our principal executive offices are located at One Burlington Woods, Suite 200, Burlington, Massachusetts 01803 and our telephone number is (781) 238-5400. Our World Wide Web site address is www.silverstream.com. The information in the Web site is not incorporated by reference into this prospectus. SilverStream(R) is our registered trademark and SilverStream Application Server, ObjectEra and the SilverStream logo are our trademarks. This prospectus also contains trademarks and trade names of other companies. RECENT DEVELOPMENTS We have recently announced two important future strategic additions to our product offerings. Through our recent acquisition of GemLogic, we plan to offer an Extensible Markup Language, or XML, integration server in addition to our Application Server to enable customers to more easily develop and deploy business-to-business e-commerce applications. XML is an emerging standard for sharing data over the Internet, enabling data to be exchanged among different software, database packages and legacy systems. We have also announced the formation of an e-Business Solutions group to deliver pre-built application frameworks. These frameworks provide pre-built, reusable software components and tools that provide some of the key functionality common across Web applications without sacrificing the customization necessary to preserve competitive advantage and meet a customer's business needs. Our first planned product from our e-Business Solutions group is a framework for enterprise portals, which are Web applications that provide an integrated, personalized view of all the applications and information that an individual employee, customer or partner needs on a regular basis. Both of these additions to our product and service offerings will be built on top of our Application Server, leveraging its performance and scalability as well as our integrated development tools. THE OFFERING <TABLE> <S> <C> Common stock offered by: SilverStream................................ 1,245,851 shares Selling stockholders...................... 754,149 shares ------------------ Total............................. 2,000,000 shares ------------------ ------------------ Common stock to be outstanding after this offering.................................. 18,934,355 shares Use of proceeds............................. For general corporate purposes, including working capital and capital expenditures. For more detailed information, see "Use of Proceeds" on page 17. Nasdaq National Market symbol............... SSSW </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999. This number does not include 1,793,810 shares issuable upon the exercise of outstanding options. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM MAY 8, 1996 YEARS ENDED NINE MONTHS ENDED (INCEPTION) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, --------------------- ------------------------ 1996 1997 1998 1998 1999 -------------- -------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Software license................. $ -- $ 249 $ 5,983 $ 3,443 $ 9,010 Services......................... -- -- 825 332 5,024 -------- -------- ---------- ---------- ----------- Total revenue...................... -- 249 6,808 3,775 14,034 Cost of revenue: Software license................. -- 90 767 392 1,076 Services......................... -- 282 1,414 880 6,463 -------- -------- ---------- ---------- ----------- Total cost of revenue.............. -- 372 2,181 1,272 7,539 -------- -------- ---------- ---------- ----------- Gross profit (loss)................ -- (123) 4,627 2,503 6,495 Total operating expenses........... 1,005 8,437 17,987 12,328 21,372 -------- -------- ---------- ---------- ----------- Loss from operations............... (1,005) (8,560) (13,360) (9,825) (14,877) -------- -------- ---------- ---------- ----------- Net loss........................... $ (952) $ (8,335) $ (12,885) $ (9,430) $ (14,362) ======== ======== ========== ========== =========== Net loss applicable to common stockholders..................... $ (952) $ (8,335) $ (12,885) $ (9,430) $ (14,625) ======== ======== ========== ========== =========== Basic and diluted net loss per share applicable to common stockholders..................... $ (5.12) $ (10.61) $ (4.89) $ (3.80) $ (2.58) Weighted-average common shares used in computing basic and diluted net loss per share applicable to common stockholders.............. 185,686 785,548 2,632,496 2,484,016 5,678,081 Pro forma basic and diluted net loss per share applicable to common stockholders.............. $ (1.33) $ (1.17) Weighted-average common shares used in computing pro forma basic and diluted net loss per share applicable to common stockholders..................... 9,691,693 12,548,963 </TABLE> Weighted-average common shares shown above exclude unvested shares of common stock subject to repurchase rights, which totalled 2,489,984 and 1,543,653 for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively. Shares used in computing pro forma basic and diluted net loss per share above include 8,659,208 shares of common stock issued upon conversion of our outstanding preferred stock upon the closing of the initial public offering of our common stock on August 20, 1999. The as adjusted column in the consolidated balance sheet data below gives effect to the sale of 1,245,851 shares of common stock in this offering by SilverStream at an assumed public offering price of $106.875 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 ------------------------ ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $51,324 $177,367 Working capital............................................. 55,201 181,244 Total assets................................................ 67,644 193,687 Long-term debt, less current portion........................ 622 622 Total stockholders' equity.................................. 59,095 185,138 </TABLE> Except as set forth in the Consolidated Financial Statements and Notes thereto or as otherwise indicated, all information in this prospectus: - Assumes no exercise of the underwriters' over-allotment option; and - Reflects the conversion upon the closing of our initial public offering on August 20, 1999 of all outstanding shares of our convertible preferred stock into shares of common stock on a one-for-one basis. RECENT OPERATING RESULTS For the three months ended December 31, 1999, our total revenue is estimated to be approximately $9.0 million, consisting of software license revenue of approximately $4.8 million and services revenue of approximately $4.2 million. Our loss per share for the three months ended December 31, 1999 is estimated to be in the range of $0.34 to $0.37, before any potential one-time charges related to our acquisitions during the quarter.

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+ PROSPECTUS SUMMARY DIVERSA CORPORATION You should read the following summary together with the more detailed information regarding our company and our common stock being sold in this offering and our financial statements and the notes to our financial statements appearing elsewhere in this prospectus before making an investment decision. You should also carefully consider the information discussed in "Risk Factors." OUR BUSINESS AND TECHNOLOGIES We believe that we are a global leader in discovering and developing novel enzymes and other biologically active compounds from diverse environmental sources for use in agricultural, chemical processing, industrial and pharmaceutical applications. Enzymes are proteins that catalyze, or facilitate, one or more chemical reactions. Our processes significantly speed the discovery and development of such commercially valuable new enzymes and biologically active small molecules. For example, we launched our first product for an industrial application within two years of project initiation. Our processes are designed to help our strategic partners and customers reduce cost, reduce waste, improve yield and enhance the quality of end products and manufacturing. We believe that the integration of our capabilities differentiates us from our competitors. We accomplish this integration utilizing our proprietary methods in the following manner: . We collect genetic material from organisms that have not previously been cultured in the laboratory found in diverse natural environments; . We isolate, catalog and store genes and gene pathways, or groups of genes that produce enzymes that act together to synthesize a molecule, in vast DNA libraries; . We screen these libraries to analyze more than a billion genes per day to identify potentially useful enzymes and compounds; . We optimize these enzymes and compounds by applying our DirectEvolution(R) genetic modification technologies, including our Gene Site Saturation Mutagenesis(TM) and GeneReassembly(TM) technologies; and . We develop novel host organisms for the manufacture of resulting products. We believe our ability to construct vast libraries from DNA samples collected from organisms in diverse environments is an important factor of our success. Our use of minute DNA samples results in minimal impact to the surrounding environment and has enabled us to enter into numerous formal genetic resource access agreements. We estimate that our environmental gene libraries currently contain the complete genomes of over 1 million unique microorganisms. Our ultra high-throughput screening technologies, such as SingleCell(TM) screening, and our enrichment technologies, such as biopanning, allow for the rapid discovery and identification of genes with desired biological activity or specific DNA sequences. Our DirectEvolution technologies, Gene Site Saturation Mutagenesis and GeneReassembly, enable us to modify the DNA sequences of genes in order to optimize new genes for commercial applications. We use our Gene Site Saturation Mutagenesis technology to create a family of related genes that all differ from a parent gene by a single amino acid change at each defined position. We use our GeneReassembly technologies for the reassembly of related genes from two or more different species to create a large population of new gene variants. The new genes created through these technologies can then be screened for one or more desired characteristics. We intend to commercialize products discovered or developed utilizing our technologies, both independently and in collaboration with strategic partners. We have successfully commercialized our first product and we have 42 other projects with multiple production applications in various stages of development. Our strategic partners are market leaders across multiple industries and include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds International Limited. These partners typically fund research costs and provide various types of payments, which may include exclusivity payments, technology access and development payments, milestone payments, license and commercialization fees and royalties. In addition to $10.7 million received from inception through December 31, 1999, our partners are committed to fund at least $68.0 million under existing agreements over the next five years. Our partners have also invested $9.2 million in our equity securities. OUR TARGET MARKETS AND PRODUCTS We are developing enzymes and other biologically active compounds for a number of industries, including agricultural, chemical processing, industrial and pharmaceutical applications. Our target markets provide both short-term and long-term product revenue opportunities. Within these broad markets we are targeting billion dollar key market segments where we believe our technologies and products will create high value and competitive advantages for our strategic partners and our customers. We are identifying and producing enzymes that exhibit dramatic increases in activity, efficiency and stability. Examples of our product applications include the following: . In agriculture, we are developing a variety of specialty enzymes and engineered genes to improve crop protection, crop yield and nutritional value, as well as to reduce harmful environmental waste. . In chemical processing, we are developing a variety of enzymes to create manufacturing efficiencies, reduce production costs and accelerate generation of new chemical products and processes. . For industrial applications, we successfully commercialized a heat- tolerant enzyme useful for oil and gas recovery and are developing numerous products related to enzymatic processes for detergent, corn processing, textile, pulp and paper processing and fats and oils applications. . In pharmaceuticals, we are working to discover small molecule compounds as candidates for anti-microbials, anti-fungals, anti-virals and other therapeutic drugs. OUR STRATEGY Our goal is to be the leading provider of novel enzymes and biologically active compounds for use in unique, economically attractive applications. The key elements of our strategy are to: . Protect and enhance our technology leadership position; . Expand our existing DNA libraries through access to novel genetic material and utilize our proprietary technologies to discover new genes and gene pathways to provide solutions to market needs; . Deploy our technologies across diverse markets in order to maximize our return on investment; . Pursue additional strategic alliances with market leaders to access funding and industry-specific expertise and to more efficiently develop and commercialize a larger product portfolio; and . Independently develop and commercialize products in selected markets to capture their full economic value. THE OFFERING <TABLE> <S> <C> Common stock offered by Diversa................. 7,000,000 shares Common stock to be outstanding after the offering....................................... 32,811,401 shares Use of proceeds................................. We intend to use the net proceeds from this offering for research and development, capital expenditures, working capital, general corporate purposes and possible future acquisitions. Proposed Nasdaq National Market symbol.......... DVSA </TABLE> The share amounts in this table are based on shares outstanding as of December 31, 1999. This table excludes: . 5,492,798 shares of our common stock reserved for issuance under our stock option plans of which 3,125,000 shares are subject to outstanding options with a weighted average exercise price of $1.73 per share and 13,937 shares of common stock issuable upon exercise of an outstanding option granted outside our stock option plans with an exercise price of $0.03 per share; . 277,719 shares available for issuance under our Non-Employee Directors' Stock Option Plan; . 416,579 shares available for issuance under our 1999 Employee Stock Purchase Plan; and . 364,120 shares of common stock issuable upon exercise of outstanding warrants with a weighted average exercise price of $1.44 per share. Except as otherwise indicated, information in this prospectus is based on the following assumptions: . the conversion of all outstanding shares of our preferred stock into 22,834,011 shares of common stock upon the closing of this offering; . the issuance of an estimated 32,000 shares of common stock to be issued at the closing of this offering to holders of our series A, B and D preferred stock as payment of a dividend that began to accrue on December 21, 1999; . a 1-for-2.8806 reverse-split in our common stock that was effected on February 8, 2000; and . no exercise of the underwriters' over-allotment option to purchase up to 1,050,000 shares. DIVERSA, Gene Site Saturation Mutagenesis, GSSM, Pyrolase, GeneReassembly, DiverseLibraries, PathwayLibraries, DirectEvolution(R), SingleCell and SciLect are trademarks of Diversa Corporation. This prospectus also refers to trade names and trademarks of other organizations. SUMMARY FINANCIAL DATA The following financial information should be read together with the "Selected Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue................. $ 25 $ 706 $ 1,155 $ 1,347 $10,272 Total operating expenses...... 8,857 12,125 13,455 15,201 19,506 Operating loss................ (8,832) (11,419) (12,300) (13,854) (9,234) Net loss...................... (8,904) (11,646) (12,392) (13,510) (9,019) Net loss applicable to common stockholders................. $(8,904) $(11,646) $(12,392) $(13,510) $(9,085) ======= ======== ======== ======== ======= Historical net loss per share, basic and diluted............ $ (7.37) $ (7.68) $ (7.72) $ (7.64) $ (3.86) ======= ======== ======== ======== ======= Historical weighted average shares outstanding........... 1,208 1,517 1,606 1,768 2,353 Pro forma net loss per share.. $ (0.36) ======= Pro forma weighted average shares outstanding........... 25,187 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------ PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- ------- ------------ (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short term investments................................... $ 5,084 $ 5,084 $140,594 Working capital................................ 13,902 13,902 149,412 Total assets................................... 31,072 31,072 167,412 Capital lease obligations, less current portion....................................... 2,677 2,677 2,677 Redeemable convertible preferred stock......... 48,402 -- -- Stockholders' equity (deficit)................. (42,813) 5,589 141,099 </TABLE> Pro forma net loss per share assumes all our preferred stock had been converted into common stock on the date of original issuance. See our financial statements for a more detailed description. Pro forma balance sheet data assumes the conversion of all our outstanding preferred stock into common stock in conjunction with the closing of this offering. The pro forma as adjusted balance sheet data above reflect the sale of 7,000,000 shares of our common stock in this offering at an assumed initial public offering price of $21.00 per share after deducting estimated underwriting discounts and commissions and estimated expenses of this offering, the conversion of all outstanding preferred stock into common stock and the issuance of an estimated 32,000 shares of common stock to be issued at the closing of this offering to holders of our series A, B and D preferred stock as payment of a dividend that began to accrue on December 21, 1999. See "Use of Proceeds" and "Capitalization" for a discussion about how we intend to use the proceeds from this offering and about our capitalization.

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the risk factors and our consolidated financial statements and related notes appearing elsewhere in this prospectus to understand this offering fully. In this prospectus, unless the context indicates otherwise, "Athersys," "we," "us" and "our" refer to Athersys, Inc. and its subsidiaries. OUR COMPANY We are a functional genomics and biopharmaceutical company engaged in the development and application of novel research tools and therapeutic products. Our RAGE (Random Activation of Gene Expression) technology platform is a novel gene expression system that enables us to rapidly survey the entire human genome for proteins with specific biological functions and to quickly and accurately correlate protein function with gene structure. We believe RAGE has powerful applications in functional genomics, generation of validated drug targets, development of protein therapeutics and gene discovery. Our SMC (Synthetic Microchromosome) technology platform enables us to create synthetic human chromosomes, which we are developing as a novel approach to gene therapy. We are establishing a broad portfolio of proprietary technologies that positions us to develop therapeutic products, both internally and with strategic partners, to treat significant and life-threatening diseases. We have collaborations with a number of biotechnology and pharmaceutical companies, including Medarex, Elan, Acorda, Gene-Cell and President Life Sciences. We have also established collaborations with leading academic institutions, including Case Western Reserve University, University of Alabama at Birmingham and the Samuel Lunenfeld Research Institute, an affiliate of the University of Toronto. CHALLENGES Genomics projects are providing a wealth of data on the structure and sequence of human genes. However, the ability to convert gene sequence data into medical products requires the ability to identify the proteins that are encoded by particular genes and determine the biological function of those proteins. In this regard, the sequencing of the human genome represents merely a starting point in understanding the function and medical relevance of human proteins. Therefore, the emphasis in genomics research is shifting from the identification of gene sequence to the determination of protein function. Conventional methods of determining protein function are typically resource-intensive, involve multiple time-consuming steps and generally require the identification and cloning of the gene or knowledge of a gene's sequence in order to produce protein. As a result, the production of protein for subsequent functional analysis is one of the most significant bottlenecks in the development of new gene-based therapeutic and diagnostic products. In addition to the scientific and technical challenges that complicate the study of protein function, legal obstacles, including the restriction on the use of cloned and isolated gene sequences resulting from issued patents, can impede the pace of development of new therapeutics. OUR SOLUTION We have developed a proprietary technology, RAGE (Random Activation of Gene Expression), that we believe provides us with the unique ability to express protein from virtually any gene in the human genome, without requiring either the isolation of individual genes or any prior knowledge of gene sequence, function or normal expression characteristics. RAGE enables us to rapidly survey the entire human genome for proteins with interesting biological functions and to quickly and accurately correlate protein function with gene structure, addressing one of the most significant bottlenecks in functional genomics. We efficiently create comprehensive, genome-wide protein expression libraries that can be used for many different applications, such as functional characterization of expressed proteins, generation of cell lines expressing validated drug targets, manufacturing established therapeutic proteins and gene discovery. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY..................... 3 RISK FACTORS........................... 7 FORWARD-LOOKING STATEMENTS............. 19 TRADEMARKS............................. 19 USE OF PROCEEDS........................ 20 DIVIDEND POLICY........................ 20 CAPITALIZATION......................... 21 DILUTION............................... 23 SELECTED CONSOLIDATED FINANCIAL DATA... 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 26 BUSINESS............................... 30 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> MANAGEMENT............................. 46 RELATED TRANSACTIONS................... 58 PRINCIPAL STOCKHOLDERS................. 62 DESCRIPTION OF CAPITAL STOCK........... 65 SHARES ELIGIBLE FOR FUTURE SALE........ 72 U.S. FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS............ 74 UNDERWRITING........................... 78 NOTICE TO CANADIAN RESIDENTS........... 81 LEGAL MATTERS.......................... 82 EXPERTS................................ 82 WHERE YOU CAN FIND MORE INFORMATION.... 82 INDEX TO FINANCIAL STATEMENTS.......... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. Key advantages of the RAGE technology over conventional gene discovery and protein expression technologies include the following: - rapid creation of unbiased, comprehensive protein expression libraries, which ensures significant coverage of the entire genome, including rarely expressed genes; - protein expression without cloning of genes or use of gene sequence information, which avoids certain intellectual property constraints; - rapid and direct association of protein function with gene structure; - compatibility with a variety of biological model systems and cell types, including human and animal cells; and - scalable levels of gene expression, enabling the production of large quantities of proteins for biochemical studies and commercial applications. OUR STRATEGY Our principal near-term objective is to leverage our unique proprietary technologies to become a leading provider of functional genomics capabilities and drug development tools. Our long-term goal is to establish our own product development and commercialization capabilities, and to use our proprietary technologies and products to become a leading biopharmaceutical company. The key elements of our strategy are to: - capitalize on the multiple applications of RAGE through partnerships; - discover, develop and commercialize novel therapeutics; - develop or access complementary enabling technologies; - establish, expand and protect our intellectual property; and - license non-core applications of RAGE to others. GENE THERAPY WITH SYNTHETIC MICROCHROMOSOMES Our SMCs (Synthetic Microchromosomes) are the first entirely synthetic human chromosomes and, we believe, offer a unique and potentially superior approach to gene therapy. The SMCs contain no viral components, have been shown to be stable in dividing cells and have the capacity to deliver multiple genes along with the natural regulatory elements that govern gene expression. Therefore, we believe that our SMC technology is a powerful platform for the development of effective gene therapy-based treatment for human disease. OUR HISTORY We were incorporated in Delaware in October 1995 and commenced operations in December 1995. Our principal executive offices are located at 3201 Carnegie Avenue, Cleveland, Ohio 44115. Our telephone number is (216) 431-9900. Our web site is www.athersys.com. The information on our web site is not a part of this prospectus. THE OFFERING Common stock offered by Athersys........ shares Common stock to be outstanding after this offering........................... shares Use of proceeds......................... Working capital and general corporate purposes, including potential acquisitions and strategic partnership funding commitments. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. ATHX The number of shares of our common stock to be outstanding after the offering is based on shares outstanding at September 30, 2000. This number also includes (i) 15,941,289 shares that we will issue upon conversion of our outstanding convertible preferred stock upon the completion of this offering, (ii) the issuance of 825,449 shares of common stock in October 2000 to President Life Sciences and (iii) the issuance of shares of common stock upon the completion of this offering as settlement of accrued dividends on Class C and Class E convertible preferred stock assuming an initial public offering price of $ per share. It excludes: - 4,835,622 shares that may be issued upon exercise of options outstanding as of September 30, 2000 at a weighted average exercise price of $1.91 per share; - 313,891 additional shares that may be issued under our stock option plan as of September 30, 2000 and additional shares that may be issued under new stock plans that we intend to adopt prior to the completion of this offering; - 895,849 shares that may be issued upon exercise of warrants outstanding as of September 30, 2000 at a weighted average exercise price of $2.93 per share; and - 509,682 shares that may be issued to Class F stockholders upon exercise of warrants outstanding as of September 30, 2000 at an exercise price of $9.32 per share. If any Class F warrant holder has not exercised its Class F warrants, the Class F warrants will be automatically exercised pursuant to the cashless exercise feature upon completion of this offering. If all of these warrants were exercised pursuant to the cashless exercise feature, an aggregate of shares of common stock would be issued, assuming an initial public offering price of $ per share. Except where we state otherwise, you should assume the following when analyzing information contained in this prospectus: - all of our outstanding convertible preferred stock will convert into common stock upon the completion of this offering; - a 1.2877-for-one stock split of our common stock will be effected prior to the completion of this offering; - an amendment to our certificate of incorporation and bylaws will be effective upon the completion of this offering; and - the underwriters will not exercise their option to purchase additional shares in this offering. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, (UNAUDITED) --------------------------- ----------------- 1997 1998 1999 1999 2000 ------ ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues...................... $ 980 $ -- $ -- $ -- $ -- Operating expenses............ 1,235 2,311 4,944 2,168 4,885 Loss from operations.......... (255) (2,311) (4,944) (2,168) (4,885) Equity in loss of joint venture..................... -- -- (12,015) -- -- Net loss...................... (181) (2,173) (16,598) (1,993) (4,072) Preferred stock dividends..... -- (135) (973) (541) (874) ------ ------- -------- ------- ------- Net loss attributable to common stockholders......... $ (181) $(2,308) $(17,571) $(2,534) $(4,946) ====== ======= ======== ======= ======= Net loss per common share, basic and diluted........... $(0.03) $ (0.38) $ (2.85) $ (0.42) $ (0.75) ====== ======= ======== ======= ======= Weighted-average shares used in computing net loss per common share, basic and diluted..................... 5,585 6,047 6,164 6,064 6,625 ====== ======= ======== ======= ======= Pro forma net loss per common share, basic and diluted (unaudited)................. $ (1.07) $ (0.21) ======== ======= Weighted-average shares used in computing pro forma net loss per common share, basic and diluted (unaudited)..... 15,534 19,378 ======== ======= </TABLE> Please see Note A to our consolidated financial statements for an explanation of the method used to calculate net loss attributable to common stockholders, basic and diluted net loss per common share, pro forma basic and diluted net loss per common share, and the number of shares used in the computation of per share amounts. In the pro forma column below, we have adjusted the actual balance sheet data to give effect to (i) the automatic conversion of our convertible preferred stock into 15,941,289 shares of common stock, (ii) the issuance of 49,244 shares of common stock in August 2000 to certain placement agents in connection with the sale of Class F convertible preferred stock, (iii) the issuance of 412,724 shares of common stock in September 2000 to Medarex, (iv) the issuance of 825,449 shares of common stock in October 2000 to President Life Sciences and (v) the issuance of shares of common stock upon the completion of this offering as settlement of accrued dividends on Class C and Class E convertible preferred stock assuming an initial public offering price of $ per share. In the pro forma as adjusted column below, we have further adjusted the actual balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of shares of common stock at the initial public offering price of $ per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. <TABLE> <CAPTION> JUNE 30, 2000 (UNAUDITED) ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities......... $50,817 $65,817 $ Working capital.......................................... 42,274 57,733 Total assets............................................. 54,628 69,628 Long-term debt, less current portion..................... 1,115 1,115 Accrued dividends........................................ 1,982 1,982 Total stockholders' equity............................... 50,020 65,479 </TABLE>

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+ PROSPECTUS SUMMARY This Summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the discussion regarding the risks of investing in our common stock under "Risk Factors," before investing in our common stock. INTERWORLD We provide Internet commerce software solutions that enable businesses to sell goods and services over the Internet to other businesses and consumers. Our products, which we call enterprise commerce software, enable companies to build their online businesses and integrate them with their existing business practices and enterprise systems. Commerce Exchange is our family of enterprise commerce software, consisting of our Commerce Exchange platform, applications, tools and business adapters. Commerce Exchange enables manufacturing, distribution and retail companies to manage their business-to-business, or B2B, and business-to-consumer, or B2C, selling and support processes, including sales, order management and fulfillment and customer service. Commerce conducted over the Internet has grown dramatically in recent years. According to a report by International Data Corporation, worldwide Internet commerce spending is expected to grow from $50 billion in 1998 to $1.3 trillion in 2003. Businesses are embracing Internet commerce because it enables them both to increase revenues and to reduce operating expenses by: - establishing a new distribution channel for products and services; - enhancing customer relationships; and - automating sales, support and customer service processes. In order to extend their operations to the Internet, businesses must implement reliable information technology solutions to run important online business applications. These solutions must meet rigorous performance requirements and typically operate 24 hours per day, seven days per week. They must be easy to use, while accessing a wide and complex array of databases and computing platforms. Our solution can be expanded to meet the demands of large organizations with complex selling processes and to manage a large number of simultaneous users, high transaction volumes and complex databases. The functionality and ease of implementing, maintaining and upgrading our products address what we believe is a growing desire by businesses to maximize return on investment by more efficiently using their existing information systems. We market our products and services primarily through our direct sales organization and strategic partners. We have established strategic marketing relationships with Active Software, Andersen Consulting, Ariba, Arthur Andersen, Cambridge Technology Partners, Cisco Systems, KPMG Peat Marwick, USWeb/CKS and Whittman-Hart. Set forth below is a representative list of our current customers. Each customer listed below accounted for an aggregate of at least $400,000 of revenues in 1999. <TABLE> <S> <C> boo.com Lids Brooks Brothers MSC Industrial Direct Buena Vista Internet Group (Disney) NIKE GATX Logistics Oki Data America GTE Communications Systems Simon Property Group Guess? Sony Internet Shopping Network U.S.A. Floral Products </TABLE> THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2000 3,750,000 Shares INTERWORLD LOGO INTERWORLD CORPORATION Common Stock ------------------ We are selling 1,250,000 shares of common stock and the selling stockholders are selling 2,500,000 shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. The common stock is listed on The Nasdaq Stock Market's National Market under the symbol "INTW." On February 4, 2000, the last reported sale price for the common stock on The Nasdaq National Market was $74.50 per share. The underwriters have an option to purchase a maximum of 562,500 additional shares from us to cover over-allotments of shares. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS INTERWORLD STOCKHOLDERS ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Per Share............................ $ $ $ $ Total................................ $ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON INVEMED ASSOCIATES BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC. The date of this prospectus is , 2000. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 5 FORWARD-LOOKING STATEMENTS............ 12 USE OF PROCEEDS....................... 13 PRICE RANGE OF COMMON STOCK........... 13 DIVIDEND POLICY....................... 13 CAPITALIZATION........................ 14 DILUTION.............................. 14 SELECTED CONSOLIDATED FINANCIAL DATA................................ 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 17 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> BUSINESS.............................. 25 MANAGEMENT............................ 35 CERTAIN TRANSACTIONS.................. 43 PRINCIPAL AND SELLING STOCKHOLDERS.... 45 DESCRIPTION OF CAPITAL STOCK.......... 47 UNDERWRITING.......................... 49 LEGAL MATTERS......................... 51 EXPERTS............................... 51 CHANGE IN INDEPENDENT ACCOUNTANTS..... 51 ADDITIONAL INFORMATION................ 51 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ANY INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. THE OFFERING Common stock offered by InterWorld.......................... 1,250,000 shares Common stock offered by the selling stockholders........................ 2,500,000 shares Common stock to be outstanding after this offering....................... 28,606,425 shares Use of proceeds..................... We expect to use the net proceeds from the sale of shares offered by us for working capital and general corporate purposes. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Dividend Policy..................... We currently intend to retain all future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying cash dividends. Nasdaq National Market Symbol....... INTW We are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock to be outstanding after this offering. The following is a summary of these additional shares of common stock: - 8,571,026 shares of common stock reserved for issuance under our stock option plans, of which options to purchase 5,846,120 shares of common stock were outstanding as of December 31, 1999 at a weighted average exercise price of $19.34 per share. See Note 15 of Notes to Consolidated Financial Statements; - 1,000,000 shares of common stock reserved for issuance under our employee stock purchase plan; and - 459,070 shares of common stock reserved for issuance at December 31, 1999 under outstanding warrants at a weighted average exercise price of $6.89 per share. The common stock to be outstanding after this offering reflects 27,234,238 shares outstanding on December 31, 1999 and 122,187 shares issued upon exercise of stock options from January 1, 2000 to February 4, 2000. ------------------------ We were incorporated in Delaware in 1995. Our principal executive offices are located at 395 Hudson Street, 6th Floor, New York, New York 10014, (212) 301-2500. Our website is located at www.interworld.com. INFORMATION IN OUR WEBSITE IS NOT A PART OF THIS PROSPECTUS. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option to purchase up to 562,500 shares of common stock granted by us to the underwriters of this offering. InterWorld(R) is our registered service mark and trademark, and Process-Centric(R) is our registered trademark. Trademarks of other companies appearing in this prospectus are the property of their respective holders. SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes our financial data. You should read the following information in conjunction with the financial statements and related notes appearing elsewhere in this prospectus. You should also see the information in this prospectus under the captions "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> NINE MONTHS INCEPTION ENDED (MARCH 28, 1995) YEAR ENDED DECEMBER 31, SEPTEMBER 30, TO DECEMBER 31, ----------------------------- ------------------- 1995 1996 1997 1998 1998 1999 ---------------- ------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues, net: Product licenses..................... $ 25 $ 779 $ 4,883 $ 9,754 $ 5,392 $ 15,691 Services............................. 331 1,241 3,073 4,834 3,177 10,135 Other................................ 3 408 100 2 1 -- ------ ------- -------- -------- -------- -------- Total revenues, net........... 359 2,428 8,056 14,590 8,570 25,826 Gross profit........................... 228 289 927 7,867 4,279 11,807 Loss from continuing operations........ (264) (7,197) (21,675) (22,062) (16,597) (25,200) Basic loss per share and diluted loss per share from continuing operations........................... $(0.02) $ (0.53) $ (1.61) $ (1.60) $ (1.21) $ (1.54) ====== ======= ======== ======== ======== ======== </TABLE> Please note that on March 30, 1998, we completed a spin-off distribution of a subsidiary, UGO Networks, Inc., formerly ActionWorld, Inc., reducing our majority ownership of UGO Networks to a minority interest of approximately 18%. Since March 30, 1998, our minority interest in UGO Networks has decreased to approximately 5.5% due to private equity financings by UGO Networks. UGO Networks is an online entertainment information and game company that commenced operations in 1997. The spin-off was made in order to permit UGO Networks to build a separate management team that would concentrate on creating an online entertainment information and game company and to position UGO Networks to seek private equity financing. UGO Networks has been presented as a discontinued operation in our consolidated statement of operations for the year ended December 31, 1997. A provision of $0.6 million for estimated operating losses through the disposal date was recorded at December 31, 1997. See Note 13 of Notes to Consolidated Financial Statements. The following table is a summary of our balance sheet at September 30, 1999: - on an actual basis; and - on an as adjusted basis to reflect the sale by us of 1,250,000 shares of common stock in this offering, at an assumed public offering price of $74.50 per share and after deducting underwriting discounts and commissions and estimated expenses payable by us. <TABLE> <CAPTION> SEPTEMBER 30, 1999 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $43,461 $130,894 Working capital............................................. 36,338 123,771 Total assets................................................ 57,570 145,003 Total stockholders' equity.................................. 43,059 130,492 </TABLE> Description of graphic material on inside front and back cover pages of the prospectus: Inside front cover (first page of a three page fold-out): The page depicts in three columns the logos of InterWorld customers and partners: Cisco Systems, Brooks Brothers, Disney, GATX Logistics, Nike, Net Perceptions, Ashford.com, Guess?, Lids, Interwoven, Mammoth Golf, Active Software, Ariba, TAKKT, Lucy.com, Internet Shopping Network, OKI, MSC Industrial Direct, boo.com, Belkin Components, Sun Microsystems, Clix n' Mortar (Simon Property), CyberSource and Whittman-Hart. The text in the upper left hand corner is: A sampling of the clients and partners who are members of the InterWorld Enterprise Commerce community. The caption on the top of the page is: Clients and Partners The page also includes InterWorld's logo Inside two pages of fold-out; The page depicts a diagram showing a customer of our client interfacing with our client through the Enterprise Commerce solution surrounded by figures depicting our customer's entire buying cycle from Sales to Order Management to Fulfillment to Customer Service, and arrows pointing to figures depicting our customer's core enterprise systems: Manufacturing Systems, Distribution/Fulfillment Systems, Financial Systems and Customer Systems. The caption at the top of the page is: Commerce Exchange: Designed to increase revenues, reduce operating expenses and enhance customer loyalty. The caption at the bottom of the page is: We provide Internet commerce software solutions that enable businesses to sell goods and services over the Internet to other businesses and consumers. The text down the left hand margin of the page is: The InterWorld Advantage Comprehensive Functionality - Our solution provides a comprehensive set of applications for efficiently managing selling processes online, including sales, order management, fulfillment and customer service. State-of-the-Art Technology Foundation - Our technology supports the deployment of mission-critical online business applications and can accommodate a client's increasing business volumes. Process - Centric(TM) Computing Approach - Our Process-Centric(TM) approach enables a client to create online processes based on existing and evolving business practices. Interoperability - Our products are designed to work with an organization's existing business operational systems and third-party technologies. The text down the right hand margin of the page is: Commerce Exchange: Mission-Critical Enterprise Commerce Effective Enterprise Commerce enables companies to build their online business and integrate them with their existing business practices. Integration of Business Processes: We enable a client's online processes to take into account characteristics of the client's selling environment and its customer's preferences. Integration of Enterprise Systems: Our Business Adapters are designed to facilitate the seamless integration of external business functions, allowing them to be managed within the Commerce Exchange process framework. The page above includes InterWorld's logo. Inside back cover: This page depicts a diagram showing our client interfacing with the Commerce Exchange solution surrounded by figures depicting the programs and services we or our partners provide to our clients throughout implementation and ongoing support. Next to each figure is a box indicating the program and service provided. The text in the boxes next to the figures is: Advice on client online strategy and practices bullet InterWorld one-on-one Workshops Enterprise Commerce project planning bullet InterWorld Professional Services bullet System Integration Partners Commerce site design bullet InterWorld Professional Services bullet Web Design Partners Site implementation and enterprise systems integration bullet InterWorld Professional Services bullet System Integration Partners Review bullet InterWorld Professional Services bullet System Integration Partners Technical, educational and training services bullet InterWorld Client Education Programs Participation in product direction bullet InterWorld Client Input Sessions Client care bullet InterWorld Client Satisfaction Team Client support bullet 24x7 Technical Support The caption on the top of the page is: How We Serve Our Clients RECENT RESULTS Set forth below is unaudited capsule information for 1999 compared to 1998. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------- 1998 1999 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues, net: Product licenses.......................................... $ 9,754 $ 23,855 Services.................................................. 4,834 16,692 Other..................................................... 2 -- -------- -------- Total revenues, net............................... 14,590 40,547 Gross profit................................................ 7,867 20,448 Loss from operations........................................ (22,062) (30,359) Basic loss per share and diluted loss per share from operations................................................ $ (1.60) $ (1.59) </TABLE>

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding us and the common stock being sold in this offering. AREMISSOFT CORPORATION We develop, market, implement and support enterprise-wide software applications primarily for mid-sized organizations in the manufacturing, healthcare, hospitality and construction industries. Our fully integrated suite of Internet-enabled products allows our customers to manage and execute mission-critical functions within their organization, including accounting, purchasing, manufacturing, customer service, and sales and marketing. The modular design of our products enables us to provide customers with a cost- effective scalable solution which can be easily implemented. We focus on mid-sized organizations with annual revenues of less than $200 million to capitalize on a market we believe is receptive to our cost-effective solutions and shorter implementation periods. To date, we have licensed our software applications to more than 6,000 customers in over twenty countries. Our software applications use our internally developed three-tiered, object oriented software architecture, which we call the Aremis architecture. This architecture enables us to develop software solutions rapidly and cost-effectively by taking advantage of the common requirements of customers in our target markets. In addition, we believe that, with 212 developers based in our facilities in India, we have established a cost-effective model for implementing, supporting and enhancing our software applications. In December 1999, we acquired e-nnovations.com, an Internet software solutions provider located in Bangalore, India. We believe this acquisition is a key strategic milestone in our development because it enables us to address the rapidly expanding market opportunities brought about by the Internet. For over two years, we have partnered with e-nnovations.com and have utilized their technological capabilities in several large projects. This acquisition enables us to continue to leverage the diverse technological capabilities of e-nnovations.com to address our customers' current and future e-business needs. We believe the e-nnovations.com acquisition will also assist us to develop an application service provider, or ASP, delivery method to best suit the evolving requirements of our expanding customer base. Our objective is to be a leading provider of enterprise-wide software applications for mid-sized organizations in the manufacturing, healthcare, hospitality and construction industries. Our strategy for achieving this objective includes: - focusing on marketing to mid-sized organizations, - further penetrating our target markets in the manufacturing, healthcare, hospitality and construction industries, - increasing efficiencies by using our software development facilities based in India, - providing Internet-enabled software solutions in response to our customers' needs, - expanding on our technological expertise, and - expanding sales, marketing, support and service. ------------------------ Our principal executive offices are located at Goldsworth House, Denton Way, Woking, Surrey GU21 3LG, United Kingdom, and our telephone number is 011-44-1483-885-000. THE OFFERING Common stock offered by us.... 2,800,000 shares Common stock offered by the selling stockholder........... 200,000 shares Common stock to be outstanding after this offering........... 18,001,595 shares Use of proceeds............... For working capital and other general corporate purposes and to fund potential acquisitions. See "Use of Proceeds." Nasdaq National Market symbol........................ AREM The table above is based on shares outstanding as of March 14, 2000. This table excludes: - 2,963,800 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $14.80 per share, - 86,200 shares of our common stock reserved for future issuances under our 1998 Stock Option Plan, - 330,000 shares of our common stock issuable upon exercise of warrants at an exercise price of $7.50 per share, and - 42,354 shares of our common stock issuable upon exercise of warrants at an exercise price of $8.56 per share. ------------------------ As used in this prospectus, the terms "we," "us," "our," and "AremisSoft" mean AremisSoft Corporation and its subsidiaries, unless otherwise indicated. Except as otherwise indicated, all information in this prospectus: - assumes that the underwriters' over-allotment option is not exercised, and - assumes a public offering price of $37 3/8 per share, the closing price of our common stock on March 14, 2000. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------- PRO FORMA 1995 1996 1997 1998 1999 1999 -------- -------- ------- ------- ------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues........................ $ 21,422 $ 34,432 $42,374 $52,621 $73,386 $ 76,302 Gross profit.......................... 10,609 19,397 29,701 41,566 56,375 58,086 Profit (loss) from operations......... (13,248) (13,448) 310 7,231 17,875 13,657 Income (loss) after taxes before extraordinary item.................. (14,569) (15,304) (1,620) 3,175 12,117 7,899 Net income (loss)..................... $(14,569) $(15,304) $(1,620) $ 3,175 $13,280 $ 9,062 ======== ======== ======= ======= ======= ======== Basic earnings (loss) per share before extraordinary item.................. $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 0.95 $ 0.62 ======== ======== ======= ======= ======= ======== Diluted earnings (loss) per share before extraordinary item........... $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 0.90 $ 0.59 ======== ======== ======= ======= ======= ======== Basic earnings (loss) per share after extraordinary item.................. $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 1.04 $ 0.71 ======== ======== ======= ======= ======= ======== Diluted earnings (loss) per share after extraordinary item............ $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 0.99 $ 0.68 ======== ======== ======= ======= ======= ======== Weighted average number of shares used in computing basic earnings (loss) per share........................... 7,504 7,504 7,518 9,120 12,762 12,762 Weighted average number of shares used in computing diluted earnings (loss) per share........................... 7,504 7,504 7,518 9,135 13,434 13,434 </TABLE> The basis for the determination of shares used in computing per share data is described in note 1 of notes to our consolidated financial statements. The consolidated statement of operations data for the year ended December 31, 1999 includes the operations of e-nnovations.com from December 17, 1999, the date we acquired that business. The unaudited pro forma consolidated statement of operations data reflects the combined results of operations of our company and e-nnovations.com as if we had acquired that business on January 1, 1999. The unaudited pro forma data is not necessarily indicative of what actually would have occurred if the acquisition had occurred on January 1, 1999, nor is it indicative of future operating results. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED ------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $13,386 $110,468 Working capital............................................. 17,840 114,922 Total assets................................................ 60,944 158,026 Long-term debt.............................................. -- -- Total stockholders' equity.................................. 36,246 133,328 </TABLE> The actual and as adjusted consolidated balance sheet data give effect to the e-nnovations.com acquisition which was consummated in December 1999. The as adjusted consolidated balance sheet data also gives effect to our receipt of the estimated net proceeds from the sale of 2,800,000 shares of common stock offered by us in this offering, after deducting the underwriting discounts and estimated offering expenses.

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+ PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. NATIONAL INFORMATION CONSORTIUM, INC. National Information Consortium, Inc. is the leading provider of Internet-based, electronic government services that help governments use the Internet to reduce costs and provide a higher level of service to businesses and citizens. We accomplish this through the following businesses: - OUR PORTAL BUSINESS enters into three to five year contracts with governments and on their behalf designs, builds and operates Internet-based portals which allow businesses and citizens to access government information online and complete transactions, including applying for permits, searching for public information, retrieving driver's license records or filing forms and reports; - OUR EFED BUSINESS provides online infrastructure and software applications that allow government agencies to cost-effectively automate procurement from private businesses; and - OUR NIC CONQUEST BUSINESS develops and delivers to government clients software that enables back-office systems and processes for business-to-government filings over the Internet. In addition, on February 16, 2000, we signed a definitive agreement to acquire SDR Technologies, Inc., the leading developer and provider of online elections and ethics filing systems. Our unique business model allows us to share in the fees governments generate from electronic government services, while reducing the associated financial and technology risks of our government clients. Our clients benefit because they gain a centralized, customer-focused presence on the Internet, while businesses and citizens benefit from a faster, more convenient and more cost-effective means to interact with governments. In the majority of our operations, our revenues are generated from transactions, which generally include the sale of electronic access to public records on behalf of governments, and the collection of subscription and transaction-based fees. In addition, we collect fees for managing electronic government operations, developing government applications, and licensing and maintaining software. Government regulation of commercial and consumer activities entails billions of transactions and exchanges of large volumes of information between government agencies, businesses and citizens. These transactions and exchanges include driver's license records retrieval, motor vehicle registrations, tax returns, permit applications and requests for government-gathered information. Traditionally, government agencies have transacted, and in many cases continue to transact, with businesses and citizens using processes that are expensive, inconvenient, labor-intensive and that require extensive paperwork. Electronic alternatives have often been unavailable, technologically challenging, costly to implement or fragmented among different government agencies. The growing acceptance of the Internet and electronic commerce presents a significant opportunity for the development of electronic government, in which government agencies can quickly and cost-effectively conduct transactions with and distribute information to businesses and citizens over the Internet. Despite the potential benefits of electronic government, government entities face a unique set of challenges in implementing and maintaining Internet-based electronic government services. In addition to the conventional barriers the private sector encounters, including high costs, technological risk, the need for customized and rapid deployment and the scarcity of qualified personnel, governments also confront the intricacies of the political process, a diverse constituent base, limited marketing capabilities and heightened security requirements due to public trust concerns. We have pioneered the development of Internet-based electronic government products and services that address these unique government challenges and meet the needs of businesses and citizens. As part of our solution, we provide: - customer-focused, one-stop government portals and applications that offer a single point of presence on the Internet for government agencies and permit businesses and citizens to conduct transactions and process information requests 24 hours a day, seven days a week; - a cost-efficient financial model that minimizes governments' up-front investments and use of resources and is quickly and easily deployed; and - a contractual relationship with governments that encourages the participation of interested government agencies, businesses and consumer groups. We work with each of our government clients to maximize their use of Internet technology, while addressing issues critical to them, including the privacy and security concerns of businesses and citizens. We plan to strengthen our position as the leading provider of electronic government products and services. Key elements of our strategy include: - continuing to penetrate new markets, including other states, multi-state cooperative organizations and federal agencies; - broadening product and service offerings with new Internet-based businesses and applications to enable government agencies, businesses and citizens to interact more effectively online; - increasing transaction volume and revenues from existing and new customers by generating awareness and educating potential business and consumer users about the availability and benefits of electronic government services; - continuing to diversify our revenues across numerous business lines by making strategic acquisitions and investments in complementary businesses; - intensifying our focus on local government markets by offering both portal solutions and individual application solutions; and - expanding our services into international markets. We were incorporated in Delaware in December 1997 and reincorporated in Colorado in April 1999. In 1998, we completed an exchange offer, through which we consolidated our individual business units that deliver electronic government services into our present company as subsidiaries. Our headquarters are located at 12 Corporate Woods, 10975 Benson Street, Suite 390, Overland Park, Kansas 66210 and our telephone number is 877-234-EGOV. Our Web site is www.nicusa.com. Any reference contained in this prospectus to our Web site, or to any other Web site, shall not be deemed to incorporate information from those sites into this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by us................... 4,000,000 shares Common stock offered by the selling shareholders............................... 4,100,000 shares Common stock to be outstanding after this offering................................... 57,300,632 shares Use of proceeds.............................. We intend to use the net proceeds of this offering primarily to pursue acquisitions, create new products and services, increase market development, further develop infrastructure platforms, increase our marketing efforts and for other general corporate purposes. Nasdaq National Market Symbol................ EGOV </TABLE> ------------------------ The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and does not include the following: - approximately 2,100,000 shares of common stock to be issued in connection with our pending acquisition of SDR Technologies, Inc.; - 3,890,331 shares of common stock subject to options at a weighted average exercise price of $7.65 per share granted under our 1998 stock option plan, assuming the issuance and sale of 84,593 and 50,669 shares of common stock in this offering after the exercise of options by James B. Dodd and Kevin C. Childress, respectively; or - 7,459,895 shares of common stock reserved for future issuance under our 1998 stock option plan and our 1999 employee stock purchase plan. Please see "Capitalization" for a more complete discussion regarding the outstanding shares of our common stock and options to purchase our common stock and other related matters. ------------------------ PRO FORMA INFORMATION GIVES EFFECT TO OUR ACQUISITION OF EFED AND OUR PENDING ACQUISITION OF SDR TECHNOLOGIES, INC. AS IF THESE TRANSACTIONS OCCURRED AT THE BEGINNING OF THE PERIOD PRESENTED. PLEASE SEE OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" FOR MORE DETAILED INFORMATION ABOUT THESE TRANSACTIONS. UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY, AND DOES NOT GIVE EFFECT TO THE PENDING ACQUISITION OF SDR TECHNOLOGIES, INC. SUMMARY CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL INFORMATION The following summary consolidated actual and pro forma financial information should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. The consolidated statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data, at December 31, 1999, labeled "Actual" are derived from, and are qualified by reference to, the audited financial statements included in this prospectus. The consolidated statement of operations data for the year ended December 31, 1999 labeled "Pro Forma" is unaudited and derived from and qualified by reference to the pro forma consolidated statement of operations and related notes included in this prospectus. The as adjusted consolidated balance sheet data summarized below gives effect to the receipt of the estimated net proceeds from the sale by us of 4,000,000 shares of common stock offered by us in this offering at a public offering price of $65.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses, and the receipt of $388,840 by us from the exercise of options to purchase 84,593 and 50,669 shares of common stock by James B. Dodd and Kevin C. Childress, respectively. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1998 1999 1999 ACTUAL ACTUAL ACTUAL PRO FORMA -------- -------- -------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.............................................. $ 996 $28,624 $ 56,966 $ 61,941 Cost of revenues...................................... 5 21,211 42,191 43,598 Gross profit.......................................... 991 7,413 14,775 18,343 Operating loss........................................ (277) (7,205) (14,470) (62,653) Net loss.............................................. $ (277) $(7,896) $(10,730) $(56,100) Net loss per share--basic and diluted................. $ (0.01) $ (0.21) $ (0.23) $ (1.11) Weighted average shares outstanding................... 20,858 37,242 47,278 50,517 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- <S> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 9,527 $ 9,527 Marketable securities....................................... 82,481 331,867 Total assets................................................ 133,661 383,047 Long-term debt (includes current portion of notes payable/ capital lease obligations)................................ 458 458 Total shareholders' equity.................................. 128,089 377,475 </TABLE>

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+ PROSPECTUS SUMMARY The following summary highlights information from this prospectus. Because this is a summary, it does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section, the financial statements and the notes to those financial statements. Careside Careside has developed and is selling a proprietary blood testing system called the Careside system. It is designed to decentralize laboratory operations. The system consists of a testing instrument called the Careside Analyzer and disposable test cartridges, and the Careside Connect, a computer link designed to facilitate data interchange. It also consists of a proprietary hematology testing device called the H-2000, which we recently acquired. The Careside system performs blood tests in the same location as the patient, or what is commonly called point-of-care testing. Blood testing is a significant part of routine and critical patient care. Today, almost all blood testing is done by sending the blood samples to hospital or commercial laboratories. Because of transportation time and several processing steps, these central laboratories generally take between 4 and 24 hours to provide test results to the doctor. We believe that the Careside system provides the platform for solving the limitations of central blood testing laboratories and redefines the market for point-of-care testing. Here are the reasons why: . Cost-Effective Results -- Our system is designed to provide test results that are cost competitive with both hospital and commercial laboratories. . Rapid Test Results -- Our system produces test results within 10 to 15 minutes from the time the blood is drawn from the patient. . Comprehensive Test Menu -- We believe that our planned menu of tests represents over 80% of all blood tests ordered on an out-patient basis, including all of the most commonly ordered blood tests. . Ease of Use -- Our system is designed for use by non-technical personnel, with only simple training. . Industry Standard Technology -- Our system uses the same test methods and technology as large testing devices in hospital and commercial laboratories. . Embedded Quality Assurance/Quality Control -- Our system captures all data required to comply with regulations governing laboratory operations, including those under the Clinical Laboratory Improvement Amendments of 1988. . Ability for Practice Enhancement -- By providing rapid test results for a broad menu of tests, our system will enable doctors to treat patients more quickly, see more patients, improve office productivity and improve patient satisfaction and quality of care. In addition, healthcare providers can increase their revenue by performing and billing for tests themselves. Our goal is to make decentralized testing with the Careside system the standard for routine and critical care blood testing The Careside System Status The FDA has cleared or exempted the Careside Analyzer for 37 blood tests for professional laboratory use and the H-2000 is cleared or exempted for 16 blood tests. Thus, as of early April 2000, the FDA had cleared or exempted the Careside system for 53 different blood tests, which represents most of the routine blood tests ordered by physicians. In addition, the FDA has cleared the Careside Analyzer as a "point-of-care" device. This clearance means that properly trained non-technical personnel can operate the Careside Analyzer, eliminating the need for a lab specialist to oversee each test. We will seek the same designation for the H-2000 in 2000. <PAGE> In December 1999, we initiated the first of a number of product installations in pilot sites. These pilots involve assessing both the economic opportunity provided to the customer from the use of the Careside system and refining an instruction manual which is intended to provide customers with the information they need to operate a lab using the Careside system. By year end 1999, two of four planned pilots were initiated. The first was started at a small group practice that had never run a lab. The second was with a larger group currently operating a lab. We plan additional pilot site marketing studies in 2000. These studies will demonstrate our system's cost-effectiveness and how potential customers will use it. We launched the sale of the Careside system in December 1999 and as of April 2000 have begun installations in California, Kentucky, Arizona, Texas, with other states scheduled to follow. Market Opportunity The lack of timely test results from central laboratories has given rise to a growing market for point-of-care tests. According to 1997 industry data and estimates, the worldwide product market for testing of blood and other bodily fluids and tissues was $18.3 billion in 1997 and was expected to grow to $20 billion in 2000. Based on their prior industry experience, our senior management believes that the Careside system's 53 test menu will address over 38% of this market. The rest of the market includes complex and specialized tests not performed by the Careside system. The U.S. and Canadian market is approximately 40% of the worldwide market. Our marketing efforts are targeted towards converting U.S. and Canadian blood testing to point-of-care testing. We define the potential market for our products as being virtually wherever blood is drawn from patients for standardized blood tests. Based on industry data and estimates, we believe the addressable worldwide market for our blood tests is expected to be $7.6 billion in 2000 and is expected to grow at 16% per year thereafter. The key U.S. markets we have targeted are as follows: . Hospitals: There are over 6,500 acute care and specialty hospitals in the United States that require laboratory-testing services. These services are usually provided by a central hospital laboratory that has to be maintained on a 24-hour basis and staffed by specially trained lab personnel. . Physician Groups: The American Medical Association states that there are 27,100 physician groups in the United States. We estimate that 21,000 of these groups have three or more doctors. We believe that for groups of three or more physicians the Careside system will offer cost-effective improvements in daily office routine, greater convenience, enhanced patient satisfaction and new revenue opportunities. . Nursing Homes: According to the American Healthcare Association, in 1999 there were 15,574 nursing homes in the United States comprised of more than 1.6 million licensed beds. The average occupancy rate was over 92%, with each nursing home averaging nearly 100 patients. Nursing homes currently pay a premium to laboratories to receive timely results. The Careside system would benefit nursing homes by helping them earn revenue from Medicare and other payers, and reduce costs by decreasing the Nursing Home's reliance on central laboratories. . Home Care: The number of home care visits increased from 70 million in 1990 to an estimated 306 million in 1997. On average, 30% of home care patients visited each week require laboratory testing. There are currently over 20,000 home care agencies in the United States, and 9,600 of them are Medicare certified. Currently, all home care agencies rely on commercial labs for blood testing. Home care agencies would benefit from increased revenue opportunities by using the Careside system to conduct blood testing in their base offices. . Other: Field military hospitals, ships, employee health clinics, drop- in clinics, surgi-centers, dialysis units and other alternate sites all represent potential customer opportunities for Careside. Early History SmithKline Beecham Clinical Laboratories, Inc. conducted extensive surveys of the point-of-care market beginning in 1993. As a result, in 1994, SmithKline started our predecessor business to develop the technology we use. We acquired -2- <PAGE> this business in November 1996. Several senior members of SmithKline's management team, including the President of SmithKline Beecham Clinical Laboratories, worked on this point-of-care project at SmithKline. They are now part of the executive management team of Careside. In June 1999, Careside completed its initial public offering. Our publicly-traded common stock is listed on the American Stock Exchange under the ticker symbol "CSA," and our publicly-traded warrants under the symbol "CSA.WS". In December 1999, we acquired Texas International Laboratories, Inc. ("TIL"). TIL owned and marketed a proprietary hematology testing device, renamed the H-2000, which is now part of the Careside system. Careside was incorporated in the State of Delaware in July 1996 under the name Exigent Diagnostics, Inc. In May 1998, we changed our name to Careside, Inc. Our principal executive offices are located at 6100 Bristol Parkway, Culver City, California 90230 and our telephone number is (310) 338-6767. -3- <PAGE> The Offering <TABLE> <S> <C> Shares offered by selling stockholders: . . . . . . . . . . . . . . . . . . . . . . 3,248,510 (1) Use of Proceeds: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders </TABLE> (1) Of these shares, approximately . 1,706,984 are shares of common stock held by the selling stockholders, . 384,615 shares of common stock are issuable upon exercise of warrants exercisable at $5.20 per share, . 340,237 shares of common stock are issuable upon exercise of warrants exercisable at $6.76, . 101,305 shares of common stock issuable upon exercise of warrants exercisable at $8.77 per share, . 154,247 shares of common stock are issuable upon exercise of our contingent warrants, which are exercisable at $.01 per share if the closing price of our common stock falls below $7.50 per share for 15 consecutive days during the period from August 15, 2000 to November 15, 2000 and . 235,294 shares of common stock issuable upon exercise of a warrant in connection with a bridge loan and . 325,828 shares of common stock are issuable upon conversion of shares of our Series A Convertible Preferred Stock and exercise of warrants received on conversion. -4- <PAGE> Summary Financial Data The following table presents summary financial information for Careside and the predecessor business at SmithKline Beecham Chemical Laboratories, Inc. You should read this data together with the financial statements and related notes included in this prospectus (amounts in thousands except share data). The pro forma as adjusted balance sheet data reflects the effect of the sale of 1,184,091 shares of common stock at $8.77 per share in a private placement and the exercise of 1,154 options and the purchase of 2,839 shares under our Employee Stock Purchase Plan. <TABLE> <CAPTION> Predecessor Business Careside, Inc. -------------------- -------------- ------------------------------------------------------------------- Period from Period from Ten months Inception (July Inception (July Year Ended Ended 10, 1996) to Years ended 10, 1996) to December 31, October 31, December 31, December 31 December 31, --------------------------------------------------------------------- 1995 1996 1996 1997 1998 1999 1999 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenue $ - $ - $ - $ 61 $ 61 Cost of Sales - - - 31 31 --------- ---------- ---------- ---------- ---------- Gross Profit - - - 30 30 Operating expenses Research and development $ 2,110 $ 3,055 1,562 5,896 8,298 8,252 24,008 Sales and marketing - 85 249 1,205 1,539 General and administration 585 224 55 555 601 1,448 2,659 ---------- --------- ---------- ---------- ---------- ---------- ---------- Operating loss $ (2,695) $ (3,279) (1,617) (6,536) (9,148) (10,875) (28,176) =========== ========== Goodwill Amortization - - - (37) (37) Net interest income/(expense) (21) 205 212 (679) (283) ---------- ---------- ---------- ---------- ---------- Net loss (1,638) (6,331) (8,936) (11,591) (28,496) Dividend on Series A Preferred - - - (55) (55) ---------- ---------- ---------- ---------- ---------- Net loss to common shareholders $ (1,638) $ (6,331) $ (8,936) $ (11,646) $ (28,551) ========== ========== ========== ========== ========== Net loss per share $ (2.25) $ (2.04) $ (1.93) $ (1.88) ========== ========== ========== ========== Shares used in computing net loss per share 728,465 3,098,980 4,629,916 6,210,496 </TABLE> <TABLE> <CAPTION> Careside, Inc. December 31, 1999 --------------------- Balance Sheet Data: Pro Forma As Adjusted Actual (unaudited) ------ ---------- <S> <C> <C> Cash and cash equivalents............................................................. $4,905 $ 14,471 Total assets.......................................................................... 14,389 23,955 Long-term liabilities................................................................. 1,096 1,096 Deficit accumulated during development stage.......................................... (28,496) (28,496) Total stockholders' equity............................................................ 9,079 18,646 </TABLE> -5- <PAGE>

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about us, the common stock we are selling in this offering and our consolidated financial statements, including the notes to those statements, included elsewhere in this prospectus. OUR BUSINESS We are a business-to-business intermediary that facilitates the buying and selling of capacity on communications networks. We facilitate the process through which users of communications circuits obtain circuits dedicated for their specific use from multiple vendors. We refer to this process as "provisioning a circuit." We also facilitate the installation and servicing of these dedicated circuits. Our clients are communications service providers, such as telecommunications service providers, internet service providers and application service providers, who buy capacity on communications circuits for use by their customers. We obtain the communications capacity from transport suppliers, who are the owners of the communications infrastructure over which information is transmitted. Through our services, we provide our clients with an outsourced, integrated solution to obtaining communications network capacity within a fragmented network services market. The services we provide include: - assembling detailed information about available network capacity from multiple suppliers; - operating facilities where communications networks can be physically interconnected; - providing ongoing access to dedicated circuits; and - providing client support services. We offer our clients the ability to obtain pricing quotes and circuit availability information and to order circuits over the Internet. We intend to expand our Internet service offering to include network management, monitoring and restoration. Through these services, we provide our clients with an outsourced, integrated solution to the challenges they face within a fragmented network services market. As an independent intermediary, we have been able to collect and assemble network information from multiple transport suppliers. Our Universal Information Exchange, or UIX, consists of several proprietary, interconnected databases containing capacity, availability, physical location and pricing information from over 35 transport suppliers and more than 75,000 physical sites. Through our UIX we efficiently and cost-effectively provide our clients with dedicated circuits that connect across the networks of multiple suppliers. In addition, we operate network interconnection facilities called Universal Transport Exchanges, or UTXs, where various transport suppliers can easily connect to the networks of any other transport supplier in that facility. As of March 15, 2000 we had operational UTX facilities in Chicago and Santa Clara. In addition, we had UTX facilities under construction in Dallas, Los Angeles, Miami, San Francisco and Washington, D.C. We also provide a single point of contact for network management services, including network monitoring, maintenance and restoration. As of December 31, 1999, we provided services to over 100 clients, including AboveNet Communications (MFN), BCE Nexxia, Cable & Wireless, Teleglobe Communications and UUNET, each of which represented at least 1% of our monthly recurring revenues as of December 31, 1999. THE OPPORTUNITY The communications network services market is competitive, complex and fragmented. Domestic and international deregulation, combined with growth in Internet usage, has spawned a rapid increase in the number of transport suppliers and service providers as well as the strategies they employ to build networks and reach customers. This diversity of industry participants and business strategies has resulted in the development of multiple networks serving various geographic regions. It is difficult to connect these networks together due to the fact that transport suppliers and service providers do not have access to pricing, capacity, availability and location information for the networks of other suppliers. Because transport suppliers compete with each other, they have little incentive to share this information or to locate their equipment within competitors' facilities. To date, we believe that major transport suppliers have not been able to effectively support dedicated circuits that connect across the networks of multiple suppliers on their own networks, or through efficient interconnection with other suppliers, to fully meet their customers' requirements. Communications service providers and transport suppliers face a number of challenges, as outlined below, due to the number of vendors in the market. <TABLE> <CAPTION> CHALLENGES FOR SERVICE PROVIDERS CHALLENGES FOR TRANSPORT SUPPLIERS -------------------------------- ---------------------------------- <S> <C> - - significant time and expense related to - inability to efficiently fulfill customer pricing, obtaining and installing demand for dedicated circuits due to the circuits; limited coverage of their networks; - - difficulty determining the availability of - costs associated with selling excess capacity in a timely manner, which may network capacity; and result in significant backlog of customer orders and possibly lost revenues; and - inability to provide a consistent level of service over multiple network segments. - - inability to maintain, monitor and restore connections. </TABLE> OUR SOLUTION Our integrated solution addresses these challenges and provides the following key benefits to our clients: - Single Point of Contact for Supplying and Installing Circuits and Providing Network Management Services. As a third-party provider, we allow our clients to outsource the obtaining, installing and providing of their communications infrastructure. Our solution provides significant time, effort and cost savings to our clients who would otherwise be forced to independently analyze the capacity, availability and pricing of circuits from multiple vendors to construct and maintain circuits. In addition, we maintain a network management service organization through which we provide a single point of contact for 24-hour-a-day, seven-day-a-week network monitoring, maintenance and restoration across multiple vendor networks. - Efficient, Cost Effective Provision and Installation of Circuits Across Multiple Vendor Networks. We use the information contained in our UIX databases to efficiently and cost-effectively provide and install circuits across geographically dispersed, multiple vendor networks. - Easily Extended Network Coverage. Our clients are able to easily extend the coverage of their networks by purchasing dedicated circuits from us which access the networks of over 35 network transport suppliers. - Significant Source of Demand for Transport Capacity Suppliers. We represent a significant source of demand for transport suppliers because we purchase a large volume of circuits. We believe our transport suppliers consider us to be a valuable partner because we provide them efficient access to the capacity requirements of our clients. - Ongoing Client Support. We provide ongoing technical and administrative support during the circuit planning, ordering, provisioning and installation processes. OUR STRATEGY Our objective is to facilitate the creation of a seamlessly connected, global communications network by improving the overall efficiency of the market for transport capacity and infrastructure services. To achieve this objective, we intend to: - continue to enhance the Internet functionality of our UIX; - continue to expand and populate our UIX databases with network information; - continue to develop UTX facilities; - optimize circuit configurations to gain efficiencies; - expand UIX, UTX and client support services internationally; and - enhance capabilities through acquisitions and partnerships. CORPORATE INFORMATION Our principal executive offices are located at 100 North Riverside Plaza, Suite 2200, Chicago, Illinois 60606, and our telephone number is (312) 660-5000. We do not intend for information contained on our website, www.universalaccess.net, to constitute part of this prospectus. We were incorporated in Illinois in October 1997. We reincorporated in Delaware in June 1999. TRADEMARKS Universal Access, the Universal Access logo, Universal Transport Exchange, Universal Information Exchange, UTX and UIX are service marks and ProVision and Stuff Software are trademarks of Universal Access. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. THE OFFERING <TABLE> <S> <C> Common stock offered.................................. 11,000,000 shares Common stock which will be outstanding after the offering(1)......................................... 85,809,264 shares Use of proceeds....................................... For general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary products, technologies and businesses. Proposed Nasdaq National Market symbol................ "UAXS" </TABLE> At our request the underwriters have reserved at the initial public offering price up to 2,300,000 shares of our common stock for sale to an existing stockholder of Universal Access. - --------------- (1) Based on the number of shares outstanding as of December 31, 1999. This number excludes: - 13,000,000 shares of common stock reserved for issuance under our Amended 1998 Employee Stock Option Plan, of which 10,465,750 shares were subject to outstanding options with a weighted average exercise price of $0.99 per share, and 934,250 shares were available for future grants; - 1,943,400 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.59 per share; and - 11,000,000 shares available for issuance under our 1999 Stock Plan, 1999 Employee Stock Purchase Plan and 1999 Director Plan. Except where we state otherwise, the information in this prospectus: - gives effect to the conversion of all of our outstanding shares of preferred stock into 42,834,243 shares of common stock upon the closing of this offering, and assumes that each share of Series E preferred stock converts into three shares of common stock. For a description of the conversion terms of the Series E preferred stock, please read "Description of Capital Stock"; - assumes no exercise of the underwriters' option to purchase additional shares in this offering; and - reflects a 500 for 1 forward stock split that our board approved on July 10, 1998, a 2 for 1 forward stock split that our board approved on February 17, 1999, a 3 for 2 forward stock split that our board approved on June 23, 1999 and a 2 for 1 forward stock split that our board approved and effected as a stock dividend on September 15, 1999. SUMMARY FINANCIAL INFORMATION The pro forma statement of operations data give effect to the Pacific Crest Networks, Inc. and Stuff Software, Inc. acquisitions as if they had occurred on January 1, 1998. The pro forma financial data set forth below may not be indicative of our financial condition or results of operations had these acquisitions actually occurred on the dates assumed, nor do they purport to be indicative of our future financial position or results of operations. Pro forma basic and diluted net loss per share have been calculated assuming the conversion of all outstanding preferred stock into common stock, as if the shares had converted immediately upon their issuance. <TABLE> <CAPTION> PRO FORMA INCEPTION PRO FORMA YEAR THROUGH YEAR ENDED YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1998 1998 1999 1999 ------------ ------------ ------------ ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................... $ 77 $ 1,629 $ 2,294 $ 14,259 $ 14,906 ---- ------- ------- -------- -------- Total operating expenses..... 246 3,508 5,090 34,603 36,079 ---- ------- ------- -------- -------- Operating loss............... (169) (1,879) (2,796) (20,344) (21,173) ---- ------- ------- -------- -------- Net loss......................... (170) (1,998) (2,960) (19,653) (20,482) Pro forma basic and diluted net loss per share................. $ (0.07) $ (0.50) Shares used in computing pro forma basic and diluted net loss per share................. 30,069 56,855 </TABLE> The pro forma balance sheet data as of December 31, 1999 gives effect to the conversion of all outstanding shares of preferred stock into common stock and all preferred stock warrants to common stock warrants upon the closing of the offering. The pro forma as adjusted balance sheet data as of December 31, 1999 also give effect to the sale of 11,000,000 shares of common stock by us in this offering at an assumed initial public offering price of $12.00 per share, after deducting an assumed underwriting discount and estimated offering expenses. <TABLE> <CAPTION> PRO FORMA AS ADJUSTED DECEMBER 31, 1999 --------------- (IN THOUSANDS) <S> <C> BALANCE SHEET DATA: Cash........................................................ $159,284 Total assets................................................ 185,525 Total long-term debt, net of current portion................ 2,369 Total stockholders' equity.................................. 173,302 </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights information that we present more fully elsewhere in this prospectus. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision. Except where we state otherwise, we present information in this prospectus assuming no exercise of the underwriters' over-allotment option. IMAGEX.COM, INC. ImageX.com is a leading business-to-business Internet market maker for printed business materials. We offer an end-to-end solution that streamlines the procurement process for business printing customers, their employees and other end users of printed products, printing manufacturers and raw material suppliers to the printing industry. We provide e-commerce solutions that improve the way businesses acquire marketing communications materials, ranging from business cards to high-end printed materials. ImageX.com's nationwide Web-based services include the Corporate Online Printing Center, the Small Business Printing Center, PrintBid.com, an online bidding system for over 2,800 print buyers and more than 4,000 printers, and PaperDeals.com, an online auction site for commercial paper stock with approximately 280 registered paper mills and printers. Industry observers predict the next phase in the Internet revolution will be business-to-business electronic commerce. Forrester Research estimates that business-to-business electronic commerce will grow to $1.3 trillion by 2003, or more than 90% of the total projected electronic commerce market. Sales in the U.S. printing industry totaled $292 billion in 1998 of which $58 billion was derived from commercial printing operations including sales of printed business materials for corporate and small office/home office print buyers, according to data provided by CAP Ventures. This large industry is extremely fragmented, with over 30,000 local and regional printers operating nationwide in 1998. We believe most printing is purchased from local and regional printers, and that few of these printers deliver automated service over the Internet. ImageX.com provides an Internet-based end-to-end solution to produce printed business materials for corporate and small office/home office customers. The Corporate Online Printing Center allows medium to large size businesses to access their own customized, secure Web site that contains a digital catalog of their custom-printed business materials -- from marketing brochures to stationery and business cards. Each business can modify, proof, procure and manage its printed business materials from any Windows-based, Internet-enabled personal computer. Our Small Business Printing Center provides quick and easy access via the Internet to a wide range of personalized printed business materials based on standard templates at competitive prices. PrintBid.com is an online bidding service for customized print jobs that links over 2,800 print buyers with more than 4,000 printers. PaperDeals.com is an online auction site for paper stock, offering a forum to link buyers with sellers. To date, we have derived substantially all our revenues from our Corporate Online Printing Center and from customers obtained through acquisitions. Our objective is to be the leading business-to-business Internet market maker for printed business materials. The following are the key components of our strategy: - Exploit our first mover advantage as the leading end-to-end printing solution; - Acquire enabling technology and broaden our service offerings; - Expand our direct sales force; - Grow our customer base through acquisitions; - Increase revenues from existing customers; - Build brand name awareness; and - Maintain product and technology leadership. Our customer and revenue base has been grown rapidly since we introduced the ImageX.com solution in October 1997. Our customers include Automated Data Processing (ADP), Bell Atlantic Mobile, CB Richard Ellis, CIBC World Markets, Donaldson, Lufkin & Jenrette, Merck & Co., New Energy Ventures, PricewaterhouseCoopers, United Behavioral Health and Waddell & Reed. We have approximately 280 employees and offices in 15 metropolitan markets across the United States. We also have 52 patent applications pending on our proprietary technology. THE OFFERING <TABLE> <S> <C> Common stock offered by ImageX.com......... 4,000,000 shares Common stock offered by the selling shareholders............................. 1,000,000 shares Common stock to be outstanding after this offering................................. 21,381,639 shares Use of proceeds by ImageX.com.............. For working capital, capital expenditures and acquisitions of businesses. See "Use of Proceeds." Nasdaq National Market symbol.............. IMGX </TABLE> The amount of common stock that will be outstanding after this offering is based on shares outstanding on December 31, 1999. It excludes: - 1,625,751 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999, of which 352,585 shares were exercisable under our stock option plans at a weighted average exercise price of $5.57 per share, and 682,668 shares available for issuance under our stock option plans pursuant to options that have not yet been granted; - 1,343,731 shares issuable upon exercise of warrants outstanding as of December 31, 1999, all of which are currently exercisable at a weighted average exercise price of $4.26 per share; and - 250,000 shares available for future issuance under our employee stock purchase plan. SUMMARY FINANCIAL DATA The following table summarizes certain financial data for our business. When you read this summary financial data, it is important that you also read the historical financial statements and related notes included in this prospectus, as well as the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." The actual statement of operations data for the year ended December 31, 1999 includes the results of operations of Fine Arts Graphics since April 13, 1999 and Image Press since September 21, 1999. The pro forma statement of operations data give effect to the acquisitions of Fine Arts Graphics and Image Press as if each had occurred at the beginning of the period presented. See Unaudited Pro Forma Condensed Consolidated Financial Statements. <TABLE> <CAPTION> ACTUAL PRO FORMA ------------------------------ ------------ YEAR ENDED DECEMBER 31, YEAR-ENDED ------------------------------ DECEMBER 31, 1997 1998 1999 1999 ------- ------- -------- ------------ (UNAUDITED) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA (IN THOUSANDS): Revenues.................................................... $ 87 $ 968 $ 11,499 $ 19,346 Cost of sales............................................... 100 998 8,541 14,133 ------- ------- -------- -------- Gross profit (loss)......................................... (13) (30) 2,958 5,213 ------- ------- -------- -------- Operating expenses: Sales and marketing....................................... 1,018 2,207 6,765 7,226 Product development....................................... 1,316 2,750 3,770 3,770 General and administrative................................ 1,285 3,549 11,002 12,800 Amortization of unearned compensation..................... 380 2,284 2,284 Amortization of goodwill and other intangibles............ 213 310 ------- ------- -------- -------- Total operating expenses................................ 3,619 8,886 24,034 26,390 Loss from operations........................................ (3,632) (8,916) (21,076) (21,177) ------- ------- -------- -------- Net loss.................................................... $(3,570) $(8,964) $(20,835) $(21,021) ======= ======= ======== ======== </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS): Cash and cash equivalents................................... $ 18,257 $150,177 Working capital............................................. 18,053 149,973 Total assets................................................ 35,668 167,588 Accumulated deficit......................................... (33,832) (33,832) Total shareholders' equity.................................. 30,774 162,694 </TABLE> The preceding consolidated balance sheet data summarizes: - actual consolidated balance sheet data at December 31, 1999; and - unaudited consolidated balance sheet data, as adjusted to reflect the sale of 4,000,000 shares of common stock by ImageX.com in this offering at an assumed offering price of $35.00 per share less underwriting discounts and commissions and estimated offering expenses we expect to pay in connection with this offering. See "Use of Proceeds" and "Capitalization."

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+ SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE TERM "YOU" REFER TO A PROSPECTIVE INVESTOR. DIGITAL:CONVERGENCE CORPORATION We are a company whose technology allows media companies, manufacturers and virtually all organizations to link their printed or broadcast content and advertisements as well as their products directly to web pages deep within their websites. Our technology reduces the need for time-intensive input of website addresses and web navigation, allowing Internet users to quickly and easily obtain relevant information or conduct e-commerce activities. Our technology, which is based on our :CRQ-TM- software, works with both television and print applications. When used with television and electronic media, :CRQ sends an Internet user's web browser to a specific web page in response to an audio signal called a "cue" embedded in the broadcast or other electronic media. In the print application, :CRQ responds to a digital signal generated by our :CueCat device. Our :CueCat, a hardware device similar in size to a computer mouse, generates the signal when it is used to swipe our proprietary codes called "print cues" in print media or to swipe barcodes on consumer products. We believe that our technology empowers media companies and corporate advertisers to enhance their content and advertisements and to transform television broadcasts or other electronic media, print media or items bearing print cues or barcodes into powerful new editorial, advertising, promotional or e-commerce opportunities. We initiated a nationwide roll-out of our technology in August 2000. We have purchased 10 million :CueCat devices and plan to distribute, free to the public, approximately 10 million :CueCat devices and approximately 10 million CD-ROMs containing our :CRQ software by March 31, 2001. As of November 30, 2000, over million of each of our :CueCat devices and :CRQ CD-ROMs had been distributed to the public and over million users had installed our :CRQ software. We plan to distribute, both through sales and free of charge, up to an additional 20 million of each of our :CueCat devices and :CRQ CD-ROMs by the end of 2001. The number of :CueCat devices and :CRQ CD-ROMs that we will distribute depends upon the amount of funds raised in this offering and our ability to raise additional capital. We intend only to order the number of devices and CD-ROMs that will allow us to continue operating for at least 12 months following the completion of this offering. See "Use of Proceeds." RadioShack Corporation produces our :CueCat devices and distributes them along with audio cables and our :CRQ CD-ROMs in over 7,000 RadioShack retail outlets throughout the U.S. We also are working with A.T. Cross Company to produce by the end of 2000 a mobile scanning device that can be used to swipe and store print cues and barcodes for later uploading to a computer. We are also in discussions with manufacturers to produce other mobile scanning devices. Until our wireless :CRQ technology is released, an Internet user must connect an audio cable from the television to the computer in order to use our technology with television broadcasts or other electronic media. We expect companies with whom we have strategic relationships to distribute at least two million audio cables by the end of 2000 without charge to their customers or subscribers, and we additionally plan to distribute to Internet users at least another two million audio cables for free through RadioShack. To assist in the promotion, marketing and deployment of our technology, we have established strategic media, advertising and distribution relationships with National Broadcasting Company, Inc., Belo Corp., Forbes, The Milwaukee Journal Sentinel, Wired Magazine, the E.W. Scripps Company, Parade Magazine, Adweek Magazines, Verizon Directories and others. These companies have agreed to [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING GENERAL We are offering our shares outside the U.S. and Canada through the international managers and in the U.S. and Canada through the U.S. underwriters. Merrill Lynch International, ING Barings Limited, as agent for ING Bank, N.V., London Branch, Bank of America International Limited and Bear, Stearns International Limited are acting as lead managers of the international managers named below. Subject to the terms and conditions described in an international purchase agreement among us and the international managers, and concurrently with the sale of shares to the U.S. underwriters, we have agreed to sell to the international managers, and the international managers severally and not jointly have agreed to purchase from us, the number of shares listed opposite their names below. <TABLE> <CAPTION> NUMBER INTERNATIONAL MANAGER OF SHARES --------------------- ----------- <S> <C> Merrill Lynch International................................. ING Barings Limited, as agent for ING Bank, N.V., London Branch.................................................... Bank of America International Limited....................... Bear, Stearns International Limited......................... ----------- Total................................................... =========== </TABLE> We have also entered into a U.S. purchase agreement with the U.S. underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, ING Barings LLC, Banc of America Securities LLC and Bear, Stearns & Co. Inc. are acting as U.S. representatives, for sale of the shares in the U.S. and Canada. Subject to the terms and conditions set forth in the U.S. purchase agreement, and concurrently with the sale of shares to the international managers pursuant to the international purchase agreement, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase from us, shares. The initial public offering price per share and the total underwriting discount per share are identical under the international purchase agreement and the U.S. purchase agreement. The international managers and the U.S. underwriters have agreed to purchase all of the shares sold under the international and U.S. purchase agreements if any of these shares are purchased. If an underwriter defaults, the U.S. and international purchase agreements provide that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings for the sale of shares to be purchased by the international managers and the U.S. underwriters are conditioned on one another. We have agreed to indemnify the international managers and the U.S. underwriters against specified liabilities, including liabilities under the Securities Act, or to contribute to payments the international managers and the U.S. underwriters may be required to make in respect of those liabilities. The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE -------- <S> <C> Summary..................................................... 1 Risk Factors................................................ 9 Forward-Looking Statements.................................. 22 Use of Proceeds............................................. 23 Dividend Policy............................................. 24 Capitalization.............................................. 25 Dilution.................................................... 26 Selected Consolidated Financial Data........................ 27 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 29 Business.................................................... 39 Management.................................................. 60 Certain Relationships and Related Transactions.............. 67 Security Ownership of Principal Stockholders and Management................................................ 72 Description of Capital Stock................................ 74 Shares Eligible for Future Sale............................. 81 Certain Material U.S. Federal Tax Considerations for Non-United States Holders of Common Stock................. 83 Underwriting................................................ 86 Legal Matters............................................... 90 Experts..................................................... 90 Where You Can Find More Information......................... 90 Index to Financial Statements............................... F-1 </TABLE> ------------------------ You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date. implement our technology in television and cable networks, local television broadcasts and print publications. Forbes and Wired Magazine have mailed over 1.2 million of our :CueCat devices, :CRQ CD-ROMs and audio cables to their subscribers and also began using print cues starting with their September and October magazine issues, respectively. We expect that the NBC Television Network and NBC's cable networks, CNBC and MSNBC, will begin using cues in their broadcasts in the first quarter of 2001. We expect that these relationships, taken together, will provide us with broad media exposure. The NBC Television Network reaches approximately 99% of U.S. households, and CNBC and MSNBC reach more than 71 million and 54 million cable households, respectively. On the local television station level, we expect to deploy our technology in markets covering over 60% of U.S. households between now and the end of 2002. We expect that our principal source of revenues will be fees from the licensing of cues to media companies and other businesses and fees paid by corporations for linking existing barcodes to web pages. For example, beginning in the first half of 2001, we anticipate generating revenues by charging broadcasters, publishers, merchants and advertisers an annual license fee and/or usage fees for the use of broadcast and print cues. Our net revenues and net losses for the year ended December 31, 1999 were $1.5 million and $4.0 million, respectively. Our net revenues and net losses for the nine months ended September 30, 2000, were $304,000 and $174.6 million, respectively. MARKET OPPORTUNITY Companies are investing billions of dollars in the development, execution and promotion of Internet strategies. The growth in the number of websites and web pages, combined with the rapidly expanding number of Internet users and volume of e-commerce transactions, creates significant challenges and opportunities for businesses across multiple industries. For example, advertisers are increasingly seeking highly targeted marketing programs that will generate measurable returns on investment, intensifying the pressure on television programmers to efficiently convert viewers into customers of their advertising clients. Traditional publishers are experiencing competitive pressures from the electronic distribution of information and content because information in print is static and often out of date by the time it reaches the reader. We believe that our technology provides powerful solutions for a number of these and other challenges, as well as new revenue opportunities. We also believe that it is critical that we establish our technology as the market standard as rapidly as possible in order to take full advantage of this market opportunity. To quickly establish our technology on a broad scale, we have initially targeted the following sectors for our roll-out: - broadcast and cable media; - print media, including newspapers, magazines, catalogs and direct mail; - barcoded consumer products; and - targeted industry segments, including the travel, advertising, education and insurance industries. Broadcast, cable and the print media alone represented approximately $153.6 billion in advertising expenditures and approximately $391.7 billion in direct response purchases of goods and services, including catalog sales, in 1999. While the number of Internet users is growing at an unprecedented pace, we believe the volume of online information has made it increasingly difficult for users to navigate the Internet effectively and efficiently. We believe that this volume often has made finding relevant information a frustrating and time-consuming experience. As websites continue to proliferate and grow in size and complexity, we believe that users want a more precise tool than is currently available that takes them directly to a specific web page deep within a website. Merrill Lynch will be facilitating Internet distribution for this offering to several of its Internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the website maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch website relating to this offering is not a part of this prospectus. COMMISSIONS AND DISCOUNTS The lead managers have advised us that the international managers propose initially to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The international managers may allow, and the dealers may re-allow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concessions and discount may be changed. The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the international managers and the U.S. underwriters of their over-allotment options. <TABLE> <CAPTION> PER WITHOUT WITH SHARE OPTIONS OPTIONS ----------- ----------- ----------- <S> <C> <C> <C> Public offering price...................................... $ $ $ Underwriting discount...................................... $ $ $ Proceeds, before expenses, to us........................... $ $ $ </TABLE> The expenses of the offering, not including the underwriting discount, are estimated at $ and are payable by us. OVER-ALLOTMENT OPTIONS We have granted an option to the international managers to purchase up to additional shares at the public offering price less the underwriting discount. The international managers may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the international managers exercise this option, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that international manager's initial amount reflected in the above table. We have also granted an option to the U.S. underwriters, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover any over-allotments on terms similar to those granted to the international managers. INTERSYNDICATE AGREEMENT The international managers and the U.S. underwriters have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the intersyndicate agreement, the international managers and the U.S. underwriters may sell shares to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the intersyndicate agreement, the international managers and any dealer to whom they sell shares will not offer to sell or sell shares to U.S. or Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to whom they sell shares will not offer to sell or sell shares to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, except in the case of transactions under the intersyndicate agreement. THE DIGITAL:CONVERGENCE SOLUTION We believe that our technology provides broadcasters, publishers, retailers, manufacturers and advertisers with a simple, cost-effective means of applying the potential of the Internet with all forms of traditional media. In addition, our technology addresses the needs of Internet users for a more satisfying Internet experience. Elements of our solution include Internet Enhanced-TM- broadcasting, print and coded products and our :CueChannel-TM-, a horizontal bar containing related information and advertisements that appears at the bottom of a user's Windows-Registered Trademark- desktop. INTERNET ENHANCED BROADCASTING A broadcast can be linked to a website, or Internet Enhanced, by simply embedding a cue in the broadcast. Instead of requiring viewers to recall and manually enter a website address briefly displayed on their television screens, our :CRQ software enables an Internet Enhanced broadcast to load the web page on a user's web browser for immediate access or store the link for later use. Cues collected by our :CRQ software can be used to launch web pages, and, at the user's option, can be sorted or deleted. By embedding cues in programming, our technology enables broadcasters and advertisers to enhance content and deliver immediate buying opportunities to selected consumer groups. Because our technology will help drive consumers to selected web pages, we believe it will increase advertising revenue and generate additional e-commerce opportunities. As a result, we believe broadcasters will be able to command premium rates for Internet Enhanced advertisements. For example, our technology can be used in the following ways: - While reporting the weather, a local television station can broadcast a cue that directs a viewer's web browser to the broadcaster's web page that includes detailed forecast information for each city and town in the viewing area. - An automobile company can insert a cue in a television advertisement, which launches an Internet user's web browser to a web page designated by the company. This web page may contain more detailed information than can be presented in the advertisement, including specific information on an automobile's features and pricing, local dealerships and immediate e- commerce opportunities. INTERNET ENHANCED PRINT Our :CueCat device enables an Internet user to swipe our print cues to link the user to a particular web page designated by the publisher or advertiser. With the swipe of a :CueCat device, users are immediately directed to more detailed information impractical to include in print copy. Now traditional media can provide readers who have a general interest in a subject with the information they seek, and with our cue provide a direct link to additional information readers with a high level of interest in that subject are seeking. For example, our technology can be used in the following ways: - For many readers, knowing the outcome and highlights of a Super Bowl is all they want to know. But for more avid football fans, our cues can now directly link them to web pages that provide play-by-play analysis, streaming video and other detailed information that is normally too time-consuming and cumbersome to find. - In Forbes' September 2000 BEST OF THE WEB issue, General Motors placed a print cue in its Corvette ad that linked the user to a web page featuring the Corvette Z06 model. Without our technology, accessing this web page would have required a user to click through at least four intermediate pages after entering the General Motors web page, or to enter a lengthy web page address. NO SALES OF SIMILAR SECURITIES We and our executive officers and directors and several existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch, Pierce & Co. Specifically, we and these other individuals have agreed not to directly or indirectly - offer, pledge, sell or contract to sell any common stock, - sell any option or contract to purchase any common stock, - purchase any option or contract to sell any common stock, - grant any option, right or warrant for the sale of any common stock, - lend or otherwise dispose of or transfer any common stock, - request or demand that we file a registration statement related to the common stock, or - enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. QUOTATION ON THE NASDAQ NATIONAL MARKET We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "DGTL." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the U.S. representatives and lead managers. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are - the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us, - our financial information, - the history of, and the prospects for, our company and the industry in which we compete, - an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, - the present state of our development, and - the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price. The underwriters do not expect to sell more than 5% of the shares being offered in this offering to accounts over which they exercise discretionary authority. - A travel agency can insert a print cue in a travel brochure or pamphlet, which launches an Internet user's web browser to a web page that provides additional information about a particular travel destination or enables the user to make reservations or obtain special pricing packages. INTERNET ENHANCED PRODUCTS AND OTHER :CUECAT DEVICE APPLICATIONS We are compiling a massive database that links existing barcodes, including UPC, ISBN, EAN and other codes, to websites, thereby enabling manufacturers to utilize their existing barcodes for advertising and other marketing purposes. There are approximately 60 million active barcodes that, if swiped with our :CueCat device, will take the user to a related website through our system. When a user of our :CueCat device swipes the barcode on an item which has been entered into our database, the Internet user is linked to a specified web page related to that product. For example, the existing barcode on a prescription drug bottle from a pharmacy could now direct the recipient's web browser to the drug manufacturer's website containing information regarding the illness for which the drug was prescribed, side effects of the drug, and additional products that may be useful in treating the illness. Because our :CueCat device reads substantially all barcodes and does not require consumer goods manufacturers to alter product labels in any way, our solution is an inexpensive and unobtrusive way of turning an existing product label into a powerful new marketing tool. In addition, we have begun developing customized applications of our technology to address specific needs of industry, education and other users. For example, placing a print cue on policyholder cards would allow an insurance company to handle service needs of policyholders through its website rather than through insurance company service representatives. As a result, policyholders would experience a dramatic improvement in the level of service and the insurance company would realize a substantial reduction in service center expense levels. We believe that our technology allows virtually any item to become Internet Enhanced. :CUECHANNEL When our :CueCat device or :CRQ software directs a user's web browser to a specific web page, a horizontal bar called the ":CueChannel" appears at the bottom of a user's Windows desktop. The :CueChannel is populated by a series of tabs that, when clicked, display topical information. The :CueChannel is only visible when an individual is using our technology. We believe that our :CueChannel, through modest usage of our :CueCat and :CRQ technology, will generate a significant number of ad impressions. WHY WE BELIEVE THAT OUR TECHNOLOGY WILL BE THE MARKET STANDARD We believe that our technology will be the market standard because: - we have the first-mover advantage; - 10 million :CueCat devices will be distributed by March 31, 2000; - mobile scanning devices will be available by the end of 2000; - our technology works with virtually all types of barcodes; - it is the only multimedia solution; and - we have an open licensing policy for new devices. However, we cannot assure you that we will be able to establish our technology as the market standard due to a number of the risks and uncertainties described in "Risk Factors." PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the shares is completed, SEC rules may limit underwriters from bidding for and purchasing our common stock. However, the U.S. representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price. If the underwriters create a short position in the common stock in connection with the offering, i.e., if they sell more shares than are listed on the cover of this prospectus, the U.S. representatives may reduce that short position by purchasing shares in the open market. The U.S. representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of the purchases. The U.S. representatives may also impose a penalty bid on underwriters and selling group members. This means that if the U.S. representatives purchase shares in the open market to reduce the underwriter's short position or to stabilize the price of the shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the U.S. representatives or lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. UK SELLING RESTRICTIONS Each international manager has agreed that - it has not offered or sold and will not offer or sell any shares of common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; - it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom; and - it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1996 as amended by the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1997 or is a person to whom the document may otherwise lawfully be issued or passed on. NO PUBLIC OFFERING OUTSIDE THE UNITED STATES No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares of common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us or shares of our common stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of our common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or STRATEGY Our objective is to establish our technology as the primary means for television and cable networks, local television broadcasters, newspaper and magazine publishers, and other mass media companies, as well as corporate advertisers, manufacturers, retailers, catalog publishers, financial services companies, healthcare organizations and educational institutions, to link their broadcasts, publications and products to the Internet. To achieve this objective, we have adopted the following strategies: - use strategic media relationships to support adoption and sustain our first mover advantage; - execute a nationwide roll-out of our :CueCat and :CRQ technology; - promote adoption and achieve high levels of usage on a city-by-city basis through our strategic relationships with local newspaper and television companies; - promote adoption and achieve high levels of usage by, and generate business-to-business applications in, targeted business sectors, such as travel, marketing and advertising, through adoption by leading trade publications; - establish our technology as the "system standard" on personal computers and mobile and wireless devices; - develop multiple revenue streams from multi-billion dollar advertising markets; - develop customized applications of our technology for leading businesses; - pursue international markets; and - develop sophisticated research on the aggregated behavior of our users and demographic marketing capabilities as a value-added service to our customers. Successful implementation of our strategies is dependent upon our ability to, among other things: - effectively distribute our :CueCat devices, :CRQ CD-ROMs and audio cables; - generate widespread acceptance of our technology; - maintain our current strategic relationships and establish new strategic relationships; - generate significant revenues through the licensing of cues to media companies and other businesses; and - generate significant revenues from fees paid by corporations for linking existing barcodes to web pages. We cannot assure you that we will be able to implement our strategies successfully. See "Risk Factors." Our privacy policy and our technology are constructed to prevent tracking of individual activities. OTHER INFORMATION We were incorporated in Delaware in September 1998 and began operations in January 1999. Our executive offices are located at 9101 N. Central Expressway, 6th Floor, Dallas, Texas 75231, and our telephone number is (214) 292-6000. Information contained on any website to which you are directed by this prospectus does not constitute part of this prospectus. advertisements in connection with the shares of common stock may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of the country or jurisdiction. Purchasers of the shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price on the cover page of this prospectus. OTHER RELATIONSHIPS ING Barings LLC has performed investment banking and financial advisory services for us in the past for which it has received customary fees and may, in the future, perform similar services for us and receive additional compensation from us for those services. In connection with our private placement of Series A preferred stock in September 1999, ING Barings LLC received a placement fee of approximately $1.7 million in December 1999 for acting as placement agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock, respectively, in our Series A financing for a purchase price of $4,999,050 and $9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC will convert automatically into 999,810 and 1,811,250 shares of our common stock, respectively, upon completion of this offering. In addition, an affiliate of ING Barings LLC, ING Furman Selz Asset Management, has performed financial advisory services for us in the past in connection with short-term investments of our cash resources, for which it has received customary fees, and may perform similar services for us in the future and receive additional compensation from us for those services. As of November 6, 2000, we had paid ING Furman Selz Asset Management $22,140. THE OFFERING <TABLE> <S> <C> Common stock offered by Digital:Convergence Corporation: U.S. offering................................ shares International offering....................... shares Total...................................... 10,000,000 shares Common stock outstanding after the offering.... 95,803,693 shares(1) Use of proceeds................................ We estimate that our net proceeds from this offering without exercise of over-allotment options will be approximately $100.7 million. We intend to use these net proceeds: - to pay expenses related to the manufacture and distribution of our :CueCat devices, :CRQ CD-ROMs and audio cables; - to market and promote the adoption of our technology by Internet users; - to purchase additional network server and support equipment; - to pay the cash portion of an annual license fee to NeoMedia Technologies, Inc.; - to repay outstanding indebtedness to Infotainment Telepictures, Inc.; and - for general corporate purposes, including operating expenses, working capital and other capital expenditures. See "Use of Proceeds."

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+ PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE NOTES RELATING TO THOSE STATEMENTS. AS REFERRED TO IN THIS PROSPECTUS, THE TERMS "WE," "US," "OUR," "FREEINTERNET.COM" AND SIMILAR TERMS REFER TO FREEI NETWORKS, INC. OUR BUSINESS Freeinternet.com is a leading provider of free internet access to consumers and also offers private label and co-branded free internet access solutions to businesses and affinity groups, both domestically and internationally. We provide access to the internet that is free, anonymous and reliable. We help maximize the effectiveness of the online marketing efforts of our advertisers and sponsors by enabling them to target specific demographic segments of our large consumer audience on both a local and national basis. Since the launch of our service in December 1998, the number of our registered users has grown to approximately 2.2 million as of March 26, 2000. During the 30 days prior to March 26, 2000, approximately 1.1 million of these registered users accessed our service and over 1.3 billion advertising impressions were delivered to our active users in the United States. Our free internet access service is designed to be reliable, easy to use and fun. We offer a content-rich website featuring a wide selection of channels, such as business, entertainment and health; customizable homepages with pre-selected user preferences and localized information; a fully enabled e-commerce site; and comprehensive customer service and technical support. We were ranked as the overall number one free internet service provider, or ISP, by PC WORLD MAGAZINE in its April 2000 edition. Our private label and co-branding programs offer our strategic partners a wide range of turnkey internet solutions. Through these solutions, our partners have the ability to offer free internet services to their customers, increasing their website traffic, building brand loyalty and expanding their revenue streams. We anticipate that these programs will allow us to rapidly increase the number of consumers to whom our advertising offerings are delivered and expand our revenue-sharing opportunities. We have entered into private label agreements with companies such as AT&T Corp. and InfoSpace.com, Inc., and anticipate launching these services in the near future. We have also recently entered into a co-branding arrangement to provide free internet access to the customers of Subway Restaurants. Moreover, in December 1999, our free service was launched in Singapore, and we are currently in discussions to initiate service in several other countries. When users register for our service, they anonymously provide selected demographic information, which allows advertisers and sponsors to customize their marketing to specific online audiences. Our advertisers and sponsors are able to reach their target audience through a variety of advertising options. Our iSee Window(SM), a small advertising and navigational banner displayed on the user's computer screen while online, provides our advertisers with a continuous medium to reach our large user base. In addition, we offer sponsorship and advertisements in content-specific channels, targeted emails and placement within our online shopping channel, the FreeiMall. Since we do not require a user's name, street address or phone number, registered users enjoy complete anonymity. We also voluntarily adhere to the same decency standards followed by the radio and television industries. We believe a key competitive advantage is our national telecommunications infrastructure. Unlike most other free ISPs, we maintain our own "points of presence," or POPs, in major markets. POPs are telecommunications facilities located in a particular market which allow users to access the internet through a local telephone call. We established our first POP in December 1998 and currently maintain 25 POPs in major markets. In addition, we supplement our POPs and help ensure service redundancy by contracting with third-party telecommunications service providers such as Cable & Wireless USA, Inc., PSINet, Inc. and Splitrock Services, Inc. We believe this approach enhances the reliability of our services and provides us with lower network costs compared to other free ISPs. Users can access our services through a local telephone call in more than 1,300 cities throughout the United States. OUR MARKET OPPORTUNITY We believe we are well positioned to capitalize on the significant market opportunity to provide free internet access, online services and targeted advertising. The internet has become an increasingly significant medium for communication, information and commerce. International Data Corporation, or IDC, an industry research firm, estimates that as of 1999, there were over 80 million web users in the United States and over 106 million users outside of the United States. IDC projects that by the end of 2003, these numbers will increase to over 177 million web users in the United States and over 325 million users outside of the United States. There has also been a substantial increase in online advertising expenditures and consumer e-commerce revenues. Jupiter Communications, an industry research firm, has projected that online advertising expenditures in the United States will grow from an estimated $3.2 billion in 1999 to $11.5 billion in 2003. Furthermore, according to the GartnerGroup, an industry research firm, worldwide consumer electronic commerce revenues are expected to grow from $31.2 billion in 1999 to $380.5 billion in 2003. OUR STRATEGY Our goal is to become the dominant provider of access to the internet. We intend to achieve this goal by: - attracting users through brand promotion and appealing marketing programs; - retaining users by offering reliable internet access while providing a user-friendly and fun online experience; - offering our advertisers and sponsors effective marketing solutions to reach their target audiences; - continuing to develop private label and other strategic relationships; - building out a reliable and cost-effective telecommunications network; - pursuing aggressive international expansion; and - capitalizing on wireless, broadband and other emerging technologies. We were incorporated in the State of Washington in September 1998. Our principal executive offices are located at 2505 South 320(th) Street, Suite 200, Federal Way, Washington 98003, and our telephone number is (253) 796-6500. Our World Wide Web address is www.freeinternet.com. Information on our website does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by us................... shares Common stock to be outstanding after this offering................................... shares Use of proceeds.............................. To operate and expand our network infrastructure; to promote brand awareness and other user acquisition activities; and other general corporate purposes. See "Use of Proceeds" on page 19. Proposed Nasdaq National Market Symbol....... FREI </TABLE> UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS THE NUMBER OF SHARES OUTSTANDING ON MARCH 26, 2000, ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT, UPON THE CLOSING OF THIS OFFERING, TO THE CONVERSION OF ALL CURRENTLY OUTSTANDING SHARES OF OUR OUTSTANDING PREFERRED STOCK INTO SHARES OF COMMON STOCK. THE NUMBER OF SHARES OF COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING EXCLUDES 10,421,128 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER OUR STOCK OPTION PLAN, OF WHICH 4,749,003 SHARES ARE ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS AS OF MARCH 26, 2000, AND 2,000,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER OUR EMPLOYEE STOCK PURCHASE PLAN. PLEASE SEE "CAPITALIZATION" ON PAGE 20 FOR A MORE COMPLETE DISCUSSION REGARDING THE OUTSTANDING SHARES OF COMMON STOCK, OPTIONS TO PURCHASE COMMON STOCK AND OTHER RELATED MATTERS. SUMMARY FINANCIAL DATA The following table sets forth our summary financial data. The summary financial data as of and for the year ended December 31, 1999 have been derived from and are qualified by reference to our audited financial statements. The summary financial data for the quarterly periods ended March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999 have been derived from our unaudited financial statements. See Note 2 to our audited financial statements for a description of how pro forma net loss per share is calculated. This table does not present all of our financial information. You should read this information together with our financial statements and the related notes included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, YEAR ENDED 1999 1999 1999 1999 DEC. 31, 1999 --------- -------- --------- -------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................................... $ 17 $ 91 $ 213 $ 662 $ 983 Gross profit (loss)............................ (359) (705) (2,059) (4,586) (7,709) Net loss....................................... (737) (1,249) (3,739) (13,020) (18,745) Pro forma net loss per share................... $ (0.03) $ (0.05) $ (0.12) $ (0.34) $ (0.62) Shares used to compute pro forma net loss per share........................................ 24,704 26,879 32,061 38,175 30,477 </TABLE> The following table presents summary balance sheet data at December 31, 1999, on a pro forma basis adjusted to reflect the conversion of shares of preferred stock then-outstanding as of December 31, 1999 into 12,729,458 shares of common stock and on a pro forma as adjusted basis to reflect the sale of shares of our common stock in this offering and the application of the estimated proceeds, less estimated expenses. See "Use of Proceeds" and "Capitalization."

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+ PROSPECTUS SUMMARY YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. OTHER THAN IN THE FINANCIAL INFORMATION OR UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO OUR RECAPITALIZATION AND REINCORPORATION AS A DELAWARE CORPORATION PRIOR TO THIS OFFERING AND ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. ALL INFORMATION IN THIS PROSPECTUS RELATING TO THE NUMBER OF SHARES OF OUR COMMON STOCK OR OPTIONS IS BASED UPON INFORMATION AS OF DECEMBER 31, 1999. METAPATH SOFTWARE INTERNATIONAL, INC. We are a leading global provider of business and operational support systems, or OSS, software used by the wireless telecommunications industry to launch and support mobile voice and data services. Fixed wireless and mobile wireless operators and service providers turn to us for software and service solutions that support key stages of their network and business lifecycle, from wireless license acquisition and network design and build-out to ongoing service management and customer relationship management. We began our business in 1989 as a provider of radio frequency engineering services and network planning software to leading wireless operators. Building on this experience, we expanded our product and service offerings to address areas of increasing importance to the wireless communications industry. We now have products and services that enable our clients to create and support new and existing services, improve network quality, evolve to third generation networks and address customer experiences and demands. We derive substantially all of our revenue from the sale of software product licenses, radio frequency engineering services and other services, including customer services and customer relationship management consulting, to these wireless operators and service providers. We currently offer to our clients five software packages that provide solutions for network planning, network performance management, usage data mediation (gathering usage information for use in business operations), service provisioning (activating and deactivating subscriber services) and customer relationship management. In addition to our software products, we offer radio frequency, or RF, engineering services to help our clients implement and rollout new products and services as well as to facilitate their network build-out and project management. We have also recently expanded our other service offerings from traditional customer support services, such as implementation, technical, maintenance and training services, to include consulting capabilities in the customer relationship management and network optimization areas. Telecommunications service providers operate in an increasingly competitive and complex marketplace that is undergoing vast changes. Deregulation and privatization have increased competition worldwide. At the same time, advances in technology and increased customer demand have resulted in the proliferation of communications services, including both traditional and Internet-based voice, wireless, data and video services. These same factors have similarly transformed the wireless telecommunications industry, which is experiencing rapid subscriber growth, intense competition, consolidation, introduction of new third generation, or 3-G, network technologies, convergence of traditional wireline, wireless and cable television services, and the introduction of new wireless data services. These trends have created challenges for operators and service providers in effectively managing their network operations, service offerings and customer relationships. As they seek to meet these challenges, wireless service operators and providers are increasingly turning to third-party vendors for superior software solutions and consulting services. By utilizing commercial software applications, operators seek state of the art solutions, capable of supporting growth, that they can implement at significantly lower costs rather than building these applications internally. Our software and service solutions are targeted at the three key areas--network management, service management and customer relationship management--where we believe operators and service providers are focusing their attention. Our objective is to be the leading provider of OSS software and services to the wireless communications industry. The key elements of our strategy include: - further penetrating our existing world-class client base; - enhancing our products to support wireless data applications; - pursuing acquisitions, strategic alliances and partnerships; and - attracting new clients. We have over 100 clients in more than 60 countries across North America, Europe, Asia, South America and Africa. Our clients include some of the world's leading wireless operators and service providers such as AT&T Wireless, Nextel, PrimeCo, Sprint PCS, Vodafone AirTouch, Telstra, Diax, Connect (Austria), various entities in China through China Telecom and SingTel Mobile. We typically provide our software and services to our clients on a direct relationship basis. We operate under the "MSI" trade name. Our principal executive offices are located at Strand Bridge House, 138-142 Strand, London WC2R 1HH, United Kingdom and our telephone number is (44) (207) 898-8800. Our Web site is www.msi-world.com. The information on our Web site is not incorporated by reference into this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered......................... - shares Common stock to be outstanding after the offering................................... - shares Use of proceeds.............................. For working capital, general corporate purposes and potential acquisitions of businesses. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... MSII </TABLE> The number of shares of common stock to be outstanding after this offering includes: - [ ] number of shares of common stock outstanding as of December 31, 1999; and - [ ] shares of common stock issuable upon the assumed exercise of warrants prior to the closing of this offering. The number of shares of common stock to be outstanding after the offering does not include: - [ ] shares of common stock issuable upon exercise of options outstanding as of December 31, 1999, of which options for shares are currently exercisable; and - [ ] shares of common stock reserved for future issuance in connection with options that maybe granted under our stock plans as of December 31, 1999. We have a registered trademark for "Planet" in the United States for certain uses, and have submitted trademark applications in the United States and abroad for the names "MSI-TM-," "Planet-TM-" (for other uses), "Maxxer-TM-," "Ceos-TM-," "Cerve-TM-," "Ceer-TM-," and "Customer-Adaptive-TM-." All other trademarks and trade names appearing in this prospectus are the property of their respective holders. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) THE FOLLOWING FINANCIAL INFORMATION SHOULD BE READ TOGETHER WITH THE "SELECTED CONSOLIDATED FINANCIAL DATA" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" INCLUDED ELSEWHERE IN THIS PROSPECTUS. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- --------- --------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Product licenses........................................ $22,290 $ 27,725 $ 34,384 RF engineering services................................. 40,445 51,682 30,301 Other services.......................................... 7,962 14,862 27,843 ------- -------- -------- Total revenue........................................... 70,697 94,269 92,528 Cost of revenues: Product licenses........................................ 954 311 500 RF engineering services................................. 25,698 32,862 24,862 Other services.......................................... 5,152 8,072 16,497 ------- -------- -------- Total cost of revenues.................................. 31,804 41,245 41,859 Gross profit.............................................. 38,893 53,024 50,669 Total operating expenses.................................. 41,833 61,522 71,293 Operating loss............................................ (2,940) (8,498) (20,624) Net loss.................................................. (10,358) (11,128) (19,909) Loss per share: Basic and diluted....................................... $ (0.54) $ (0.49) $ (0.57) Weighted-average shares outstanding: Basic and diluted....................................... 19,095 22,561 34,766 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 5,105 Working capital............................................. (820) Total assets................................................ 94,711 Long-term debt, excluding current portion................... 976 Total stockholders' equity.................................. 51,724 </TABLE>

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+ SUMMARY This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. CORPORATE AND TRANSACTION STRUCTURE Chart of Corporate and Transaction Structure appears here. * TXU Europe Funding I, L.P. will also invest in junior subordinated debentures of one or more eligible subsidiaries of TXU Europe Limited and eligible debt securities, as described in this prospectus. The junior subordinated debentures will be guaranteed by TXU Europe Limited. TXU EUROPE LIMITED AND TXU EASTERN FUNDING COMPANY TXU Europe Limited, formerly TXU Eastern Holdings Limited, is a private limited company (Company No. 3505836) incorporated under the laws of England and Wales on February 5, 1998. TXU Europe Limited is an indirect wholly-owned subsidiary of Texas Utilities Company. Texas Utilities Company is now doing business as TXU Corp. TXU Europe Limited is a holding company for TXU Corp's UK and other European operations. TXU Eastern Funding Company (Funding) is a private unlimited company (Company No. 3710529) incorporated on February 4, 1999 under the laws of England and Wales. It is a wholly-owned indirect subsidiary of TXU Europe Limited. Funding was organized solely to provide funding for the operations of TXU Europe Limited and its subsidiaries by issuing debt securities, including the subordinated debentures that will be issued to the partnership, and lending the proceeds to TXU Europe Limited. In May 1999, Funding issued $1.5 billion ((pound)921 million) of senior notes guaranteed on a senior basis by TXU Europe Limited. On December 17, 1999, Funding exchanged these senior notes for the same amount of new senior notes registered under the Securities Act of 1933. Funding is currently offering in the UK (pound)200 million of senior notes guaranteed on a senior basis by TXU Europe Limited. The proceeds of this offering are expected to be used to repay corporate debt. TXU Europe Limited's and Funding's principal offices are located at The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT and the telephone number is (011) 44 207 879-8081. TXU EUROPE GROUP PLC TXU Europe Group plc (TXU Europe Group or Group), formerly Eastern Group plc, which is an indirect subsidiary of TXU Europe Limited, is the holding company for a group of companies engaged in a variety of energy businesses in Europe. The management of these businesses is coordinated to give TXU Europe Group access to many energy markets, to provide the Group's customers access to a range of energy products and to enable the Group to respond efficiently to changes in demand for and prices of energy throughout Europe. The Group's principal business operations are electricity networks and energy businesses in the UK. The networks, or electricity distribution, business of TXU Europe Group is the largest distributor of electricity in England and Wales, with over 3 million customers in an authorized service area covering approximately 20,300 square kilometers in the east of England and parts of north London. The energy businesses include retailing of electricity and gas, as well as generation of electric power, gas production and energy portfolio management operations. TXU Europe Group is one of the largest generators of electricity in the UK, based on registered generating capacity as of December 31, 1999. It currently owns, operates or has an interest in approximately 9.4% of the total UK generating capacity. TXU Europe Group is also one of the largest retailers of electricity and natural gas in England and Wales, with approximately 3.9 million electric and natural gas customers. TXU Europe Group is also forming business alliances with European power companies in order to position itself to implement its strategy of integrating energy businesses across the rest of Europe, as these markets open to competition. SUMMARY INFORMATION REGARDING TXU EUROPE CAPITAL I, TXU EUROPE FUNDING I, L.P. AND THE TOPRS This summary includes questions and answers that highlight selected information from this prospectus to help you understand the TOPrS. You should carefully read this prospectus to fully understand the terms of the TOPrS, as well as the tax and other considerations that are important in making a decision about whether to invest in the TOPrS. You should pay special attention to the section of this prospectus titled RISK FACTORS to determine whether an investment in the TOPrS is appropriate for you. WHAT ARE THE TOPRS? Each TOPrS represents an undivided beneficial interest in the assets of TXU Europe Capital I, or the trust. The assets of the trust will be Preferred Partnership Securities of TXU Europe Funding I, L.P., or the partnership, which represent preferred ownership interests in the partnership. The partnership will use the proceeds from the sale of the Preferred Partnership Securities and the capital contribution from TXU Europe Limited, as general partner of the partnership, to purchase subordinated debentures of Funding and one or more other eligible subsidiaries of TXU Europe Limited and certain eligible debt securities as described in this prospectus under DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Partnership Investments." WHAT IS THE TRUST? TXU Europe Capital I is a Delaware statutory business trust that exists for the sole purpose of issuing the TOPrS, investing the proceeds from that issuance and engaging in incidental activities. The sole assets of the trust will be the Preferred Partnership Securities. WHAT IS THE PARTNERSHIP? TXU Europe Funding I, L.P. is a Delaware limited partnership. Generally, the partnership, subject to the investment criteria described in this prospectus, may invest in debentures of eligible subsidiaries of TXU Europe Limited and in other eligible debt securities. The assets of the partnership initially will consist solely of subordinated debentures of Funding and, to a limited extent, one or more other eligible subsidiaries of TXU Europe Limited and other eligible debt securities. TXU Europe Limited is the general partner of the partnership. WHAT DISTRIBUTIONS WILL I RECEIVE ON THE TOPRS? The trust expects to pay the holders of the TOPrS a quarterly cash distribution at the rate of % per annum. Distributions are expected to be paid on each March 31, June 30, September 30 and December 31, commencing June 30, 2000. Distributions on the TOPrS will be paid out of distributions by the partnership on the Preferred Partnership Securities if declared by the general partner. These distributions will accumulate from February , 2000, the date of original issuance of the TOPrS. The initial cash distribution is expected to be paid on June 30, 2000, and to equal $ for each $25 TOPrS. Distributions on the TOPrS will be deferred if interest payments on the subsidiary debentures are deferred as described below. WHAT WILL AFFECT THE TRUST'S DISTRIBUTIONS? The ability of the trust to pay the holders of the TOPrS is entirely dependent on its receipt of corresponding distributions on the Preferred Partnership Securities held by the trust. In turn, the partnership's ability to pay the trust is entirely dependent on its receipt of payments on the subsidiary debentures and the eligible debt securities held by the partnership. In addition, the partnership has no obligation to make distributions to the trust. If distributions are not made to the holders of the TOPrS, TXU Europe Limited and its subsidiaries will not be permitted to make specified payments and loans as described below. WHAT ARE THE SUBSIDIARY DEBENTURES? The subsidiary debentures are long term debt obligations of Funding and one or more other eligible subsidiaries of TXU Europe Limited. These subsidiary debentures will be unsecured and subordinated obligations and will be junior in right of payment to the senior debt of those subsidiaries, as defined in the indentures under which the subsidiary debentures are issued. All of the subsidiary debentures in which the partnership initially holds beneficial interests will be fully and unconditionally guaranteed on a subordinated basis by TXU Europe Limited. An issuer of subsidiary debentures may elect to defer interest payments for a period not exceeding six consecutive quarters. WHAT ARE THE GUARANTEES? TXU Europe Limited provides several subordinated guarantees in connection with the issuance of the TOPrS. These are guarantees of o distributions by the partnership to the trust, and by the trust to the holders of the TOPrS; o the amount due to the holders of the TOPrS upon redemption of the TOPrS; o the liquidation amount of the TOPrS if the trust is dissolved; and o payments under the subsidiary debentures initially held by the partnership. The guarantees, when taken together with TXU Europe Limited's obligations to pay all fees and expenses of the trust and the partnership, constitute a guarantee, to the extent set forth in the guarantees, by TXU Europe Limited of selected obligations relating to the distribution, redemption and liquidation amounts payable to the holders of the TOPrS. However, the guarantees do not apply to (1) current distributions by the partnership unless and until the partnership declares distributions out of funds legally available for payment, (2) current distributions by the trust unless and until the trust has funds legally available for payment or (3) liquidating distributions by the partnership and the trust unless there are partnership or trust assets, as the case may be, legally available for payment. TXU Europe Limited's obligations under the guarantees of subsidiary debentures are subordinate and junior in right of payment to all other unsubordinated liabilities of TXU Europe Limited and will be effectively subordinated to existing and future liabilities and preference share capital of TXU Europe Limited's subsidiaries. TXU Europe Limited's obligations under the guarantees of subsidiary debentures will rank equally with other subordinated obligations of TXU Europe Limited that are not subordinated by their terms to the guarantees and with similar guarantees issued by TXU Europe Limited in respect of any subordinated debentures of any other subsidiary. TXU Europe Limited's obligations under the guarantees of the TOPrS and the Preferred Partnership Securities will be subordinated to its obligations under the guarantees of subsidiary debentures and will rank equally with any preference share capital of TXU Europe Limited issued in the future and with similar guarantees issued by TXU Europe Limited in respect of any preferred security of any other finance subsidiary. ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE TOPRS? Yes, an investment in the TOPrS involves risks. Please refer to the section entitled RISK FACTORS in this prospectus. WHAT HAPPENS IF THE TRUST DOESN'T PAY A DISTRIBUTION ON THE TOPRS? If at any time: o the holders of the TOPrS have not received a distribution in the full expected quarterly amount of $ for each $25 TOPrS (plus any compounded amounts) for six consecutive quarters, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited defaults on its obligations under the trust guarantee or the partnership guarantee, then: o the Property Trustee on behalf of the trust may direct a special representative appointed on behalf of holders of Preferred Partnership Securities to enforce the partnership's creditors' rights and other rights, including the right to receive payments under the subsidiary debentures and any of TXU Europe Limited's guarantees of the subsidiary debentures, o the Property Trustee on behalf of the trust has the right to direct the special representative to enforce the terms of the Preferred Partnership Securities to receive distributions only if and to the extent declared out of funds legally available for payment on the Preferred Partnership Securities, and o the Trust Guarantee Trustee, as the holder of the trust guarantee, the Partnership Guarantee Trustee, as the holder of the partnership guarantee, or the special representative appointed on behalf of holders of Preferred Partnership Securities may enforce those guarantees, including the right to enforce the covenant restricting specified payments and loans by TXU Europe Limited and its subsidiaries as described below. You should be aware that a special representative would not have the authority to cause the partnership to declare distributions on the Preferred Partnership Securities. If the partnership does not declare and pay distributions on the Preferred Partnership Securities, the trust will not have sufficient funds to make distributions on the TOPrS. TXU Europe Limited and any issuer of subsidiary debentures will agree that if: o for any quarterly period, the trust does not pay to holders of TOPrS an amount equal to distributions at the full fixed rate on a cumulative basis on any Preferred Partnership Securities, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited is in default on any of its obligations under the trust guarantee or the partnership guarantee, then, during that period, TXU Europe Limited and any issuer of subsidiary debentures will not, directly or indirectly, make distributions on their issued share capital or payments on specified obligations that rank equally with or junior to the subsidiary debentures or the guarantees. In addition, TXU Europe Limited, any issuer of subsidiary debentures and any subsidiary of TXU Europe Limited will not make specified payments in respect of debt held or issued by, or loans to, affiliates (other than TXU Europe Limited or its subsidiaries). There are a number of exceptions to this limitation. For a more detailed discussion, see DESCRIPTION OF THE TRUST GUARANTEE -- "Covenants in the Trust Guarantee" and DESCRIPTION OF THE PARTNERSHIP GUARANTEE -- "Covenants in the Partnership Guarantee". OPTIONAL REDEMPTION The partnership has the option to redeem the Preferred Partnership Securities, in whole at any time or in part from time to time, on and after for an amount equal to $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. If the Preferred Partnership Securities are redeemed, the TOPrS will in turn be redeemed for $25 per TOPrS plus accumulated and unpaid distributions. Neither the Preferred Partnership Securities nor the TOPrS have any scheduled maturity. WHO WILL CONTROL THE TRUST? A wholly-owned subsidiary of TXU Europe Limited organized in the US and designated under the terms of the trust agreement, known as the Control Party, will retain administrative and appointment powers with respect to the trust by virtue of its ownership of the trust's control certificate. The control certificate will not provide any economic interest in the trust to the Control Party. DO I HAVE VOTING RIGHTS? Generally, holders of the TOPrS will not have any voting rights. However, the holders of a majority in liquidation amount of the TOPrS have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee on behalf of the Trust, or direct the exercise of any trust or power conferred upon the Property Trustee on behalf of the Trust. See DESCRIPTION OF THE TOPrS -- "Voting Rights" and DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Voting Rights". WHAT HAPPENS IF THE TRUST IS DISSOLVED? If the trust is dissolved, other than in connection with the occurrence of changes in the US or UK tax laws, sometimes referred to as a tax event, or changes in the US Investment Company Act of 1940, sometimes referred to as an investment company event, that affect the status of the trust, the partnership or the subsidiary debentures, the partnership will be dissolved and the Preferred Partnership Securities will be redeemed, in whole, but not in part, for $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. This, in turn, would cause a redemption of the TOPrS at the same price. WHAT ARE ADDITIONAL AMOUNTS? All payments made on the subsidiary debentures or with respect to the TXU Europe Limited subordinated guarantees will be made without withholding or deduction for taxes or other governmental charges, unless required by law. Subject to customary exceptions, if withholding is required with respect to payments made on the subsidiary debentures or these guarantees, the issuers of the subsidiary debentures or TXU Europe Limited, as applicable, will pay "Additional Amounts" so that the partnership, in the case of the subsidiary debentures or the related TXU Europe Limited guarantees, or the holders of the Preferred Partnership Securities or the holders of the TOPrS, in the case of the Partnership Guarantee and the Trust Guarantee, respectively, would receive the same payments with respect to these instruments as if no withholding or deduction had been made. WHAT HAPPENS IF A TAX EVENT OR AN INVESTMENT COMPANY EVENT OCCURS? Upon the occurrence of a trust tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the trust, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a trust investment company event, which event will generally be triggered if the trust is considered an "investment company" under the Investment Company Act as a result of a change in law, except in limited circumstances, the Administrative Trustees will have the right to liquidate the trust and cause Preferred Partnership Securities to be distributed to the holders of the TOPrS. In most circumstances involving a partnership tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the partnership, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a partnership investment company event, which event will generally be triggered if the partnership is considered an "investment company" under the Investment Company Act as a result of a change in law, the partnership will have the right to redeem the Preferred Partnership Securities, in whole, but not in part, at $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities and, therefore, cause a redemption of the TOPrS at the same price. LISTING TXU Europe Limited will apply to have the TOPrS listed on The New York Stock Exchange, or NYSE. FORM OF THE TOPRS The TOPrS will be represented by one or more global certificates registered in the name of Cede & Co., as nominee for The Depository Trust Company, or DTC. Beneficial interests in the TOPrS will be evidenced by, and transfers of beneficial interests will be effected through, records maintained by the participants in either DTC (in the United States) or Clearstream Banking, societe anonyme, or Morgan Guaranty Trust Company of New York, Brussels Office, as operator of Euroclear (in Europe). Except in certain limited circumstances, TOPrS in certificated form will not be issued in exchange for the global certificate or certificates. USE OF PROCEEDS All of the proceeds from the issuance and sale of the TOPrS will be invested by the trust in the Preferred Partnership Securities. The partnership will use the funds, together with the capital contribution of TXU Europe Limited, as general partner, to make investments in the subsidiary debentures and other eligible debt securities. Funding will lend the proceeds from the sale of its junior subordinated debentures to TXU Europe Limited. TXU Europe Limited will use the funds to repay corporate debt and for general corporate purposes. Any other subsidiary of TXU Europe Limited that will issue initial subsidiary debentures will use the proceeds from the sale of these debentures to repay corporate debt and for general corporate purposes. SELECTED FINANCIAL INFORMATION On May 19, 1998, TXU Europe Limited obtained control of The Energy Group PLC, or TEG, the former holding company of TXU Europe Group. At the same time, TEG disposed of its US and Australian coal businesses and its US energy marketing business. For financial reporting purposes, TXU Europe Group is considered to be the "Predecessor Company" to TXU Europe Limited. TXU Europe Group constituted 97% of TXU Europe Limited's assets as of September 30, 1999 and generated 100% of TXU Europe Limited's operating revenues for the nine months ended September 30, 1999. The principal difference between the results of operation of TXU Europe Group and the results of operation of the continuing businesses of TEG is the interest expense associated with debt securities issued by Energy Group Overseas, B.V., or Overseas, a financing subsidiary of TEG. See TXU Europe Limited's unaudited condensed consolidated pro forma statement of income for the year ended December 31, 1998 included elsewhere in this prospectus. This pro forma statement of income includes TXU Europe Group's operation and the interest expense of Overseas, as if TXU Europe Limited had acquired TEG on January 1, 1998. See also the financial statements of Overseas included elsewhere in this prospectus. The selected financial data of TXU Europe Group for, and as of, each of the four years in the period ended March 31, 1998 and for the period from April 1, 1998 through May 18, 1998, have been derived from financial statements of TXU Europe Group, which have been audited by PricewaterhouseCoopers, independent accountants. The financial statements of TXU Europe Group for each of the four years in the period ended March 31, 1998 have been prepared in accordance with UK GAAP. The financial statements of TXU Europe Group for the years ended March 31, 1997 and 1998 also have been prepared in accordance with US GAAP. TXU Europe Group's financial statements for the period from April 1, 1998 through May 18, 1998 have been prepared in accordance with US GAAP. In October 1997, Overseas issued $500 million aggregate principal amount of guaranteed debt securities. Overseas is now a subsidiary of TXU Europe Limited, and its financial statements for the periods from its formation through March 31, 1998 and from April 1, 1998 through May 18, 1998 are included elsewhere in this prospectus. If interest expense of Overseas had been included in TXU Europe Group's financial statements, (1) UK GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)42 million, 2.5 and (pound)95 million, respectively, for the year ended March 31, 1998, (2) US GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)(45) million, 1.7 and (pound)136 million, respectively, for the year ended March 31, 1998 and (pound)(23) million, 0.1 and (pound)19 million, respectively, for the period from April 1, 1998 through May 18, 1998, (3) UK GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)1.8 billion as of March 31, 1998 and (4) US GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)2.3 billion as of March 31, 1998. The selected financial data of TXU Europe Limited for the period from formation (February 5, 1998) through December 31, 1998, for the period from formation through March 31, 1999 and as of December 31, 1998 and March 31, 1999, have been derived from financial statements of TXU Europe Limited, which have been audited by PricewaterhouseCoopers, independent accountants. The selected financial data of TXU Europe Limited for the nine months ended September 30, 1999 have been derived from the unaudited financial statements of TXU Europe Limited. The financial statements of TXU Europe Limited have been prepared in accordance with US GAAP. TXU Europe Limited recorded its approximately 22% equity interest in the net income of TEG for the period from March to May 18, 1998 and has accounted for TEG and TXU Europe Group as consolidated subsidiaries since May 19, 1998. Results of TXU Europe Limited for the periods from formation through December 31, 1998 and March 31, 1999 and for the nine months ended September 30, 1999 are not indicative of results for an annual period. Because TXU Europe Limited obtained control of TEG on May 19, 1998, earnings of TXU Europe Group are not reflected in TXU Europe Limited's results before May 19, 1998, other than as a result of TXU Europe Limited's 22% equity interest in the net income of TEG for the period from March through May 18, 1998. In addition, TXU Europe Limited's operations are affected by seasonal weather patterns. For more information, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the consolidated financial statements and related notes of TXU Europe Group as of March 31, 1998 and for the two years in the period then ended, and for the period from April 1, 1998 through May 18, 1998 and of TXU Europe Limited as of, and for the periods from formation through December 31, 1998 and March 31, 1999 and as of, and for, the nine months ended September 30, 1999 included elsewhere in this prospectus. TXU Europe Limited's unaudited pro forma condensed consolidated income statement and other consolidated data presented below for the year ended December 31, 1998 reflect the acquisition by TXU Europe Limited of TEG as if it had occurred as of January 1, 1998. That unaudited pro forma condensed consolidated income statement and other consolidated data have been prepared by TXU Europe Limited from US GAAP historical information and assumptions deemed proper by it and include the effects of an allocation of the purchase price paid. The unaudited pro forma condensed consolidated income statement and other data presented in this prospectus are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of TXU Europe Limited or of the results of operations of TXU Europe Limited if the transaction had occurred as of January 1, 1998. This information should be read in conjunction with the unaudited condensed consolidated pro forma statement of income and related notes of TXU Europe Limited included elsewhere in this prospectus. TXU EUROPE GROUP PLC (PREDECESSOR COMPANY) <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION) (UNAUDITED) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating revenues................ 2,061 2,119 2,984 3,475 2,984 3,475 425 1,563 Operating income/(loss)........... 244 43 346 337 298 267 (11) 91 Net income/(loss)................. 141 221 265 49 (90) (38) (21) 16 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP -------------------------------------- ----------------------------------- AS OF MARCH 31, ------------------------------------------------------------------------------ 1995 1996 1997 1998 1997 1998 ---- ---- ---- ---- ---- ---- ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> <C> <C> <C> Total assets...................... 2,053 2,364 3,709 3,888 5,422 5,826 Common stock equity............... 832 1,189 1,314 1,167 2,025 1,802 Minority interest................. (1) (2) 19 6 19 6 Long-term debt and other obligations, less amounts due currently....................... 484 682 1,466 1,499 1,837 1,976 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION, EXCEPT RATIOS) (UNAUDITED) CONSOLIDATED CASH FLOW DATA (1): <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating activities.............. 284 (189) (116) 614 292 341 74 154 Investing activities.............. (452) 306 (1,052) (238) (229) (234) (78) (139) Financing activities.............. (5) 560 915 (148) (316) 121 16 27 OTHER CONSOLIDATED DATA: Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2).................. 217 280 364 347 303 277 (10) 92 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2).................. 273 345 436 436 464 462 16 165 Ratio of earnings to fixed charges (unaudited)(3).................. 5.8 4.9 4.2 2.6 2.5 1.7 0.1 1.6 Net interest expense.............. 14 22 46 85 88 126 16 41 </TABLE> TXU EUROPE LIMITED (SUCCESSOR COMPANY) US GAAP <TABLE> <CAPTION> PERIOD FROM FORMATION (FEBRUARY 5, 1998) THROUGH PERIOD FROM -------------------------- PRO FORMA YEAR FORMATION NINE MONTHS ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ----------- --------------- -------------- -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> Operating revenues................. 2,165 3,338 3,690 939 2,686 Operating income................... 314 484 508 53 354 Net income (loss).................. 77 126 94 (25) 71 </TABLE> <TABLE> <CAPTION> AS OF AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1999 ------------------ ---------------- ------------------ (UNAUDITED) ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> Total assets....................... 8,529 8,583 8,429 Total common stock equity.......... 1,535 1,581 1,607 Minority interest.................. 190 200 197 Note payable to TXU Corp........... 682 682 - Long-term debt, less amounts due currently........................ 3,629 3,754 4,495 </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION NINE MONTHS (FEBRUARY 5, 1998) THROUGH PERIOD FROM ENDED -------------------------- FORMATION THROUGH SEPTEMBER 30, DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998 1999 ----------------- -------------- ------------------ -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED CASH FLOW DATA: <S> <C> <C> <C> <C> Operating activities............... 37 44 12 447 Investing activities............... (1,767) (1,858) (1,569) (347) Financing activities............... 2,197 2,228 3,427 (206) </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION PERIOD FROM (FEBRUARY 5, 1998) THROUGH PRO FORMA YEAR FORMATION NINE MONTHS -------------------------- ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ------------ ---------------- ------------- -------------- (UNAUDITED) ((POUND) MILLION) OTHER CONSOLIDATED DATA: <S> <C> <C> <C> <C> <C> <C> Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2)................... 360 531 539 81 359 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2)................... 504 733 771 165 542 Ratio of earnings to fixed charges (unaudited)(3)..................... 1.5 1.7 1.4 0.7 1.6 Net interest expense................. 205 278 341 128 213 </TABLE> (1) Cash flow information on a UK GAAP basis for the years ended March 31, 1995, 1996, 1997 and 1998 has been reformatted to US GAAP presentation style. (2) EBIT equals earnings before interest income, interest expense, income taxes and minority interest. EBITDA equals earnings before interest income, interest expense, income taxes, minority interest, depreciation and amortization. This information is provided for informational purposes only. EBIT and EBITDA are not measures defined under US GAAP and have not been presented in accordance with US GAAP. Neither EBIT nor EBITDA should be construed as an alternative to operating income under US GAAP as an indicator of operating performance, or as an alternative to cash flows from operating activities under US GAAP as a measure of liquidity. EBIT and EBITDA are widely accepted financial indicators of a company's ability to incur and service debt. However, these measures of EBIT and EBITDA may not be comparable to similar measures presented by other companies. (3) The ratio of earnings to fixed charges is computed as the sum of earnings plus fixed charges divided by fixed charges. Earnings consist of the aggregate of net income (loss) before minority interests, income taxes and fixed charges excluding interest capitalized. Fixed charges consist of interest expensed and capitalized and the estimated interest portion of rent expense. For TXU Europe Group, for the period from April 1, 1998 through May 18, 1998 total fixed charges exceeded total earnings by (pound)26 million. FOR TXU Europe Limited, for the period from formation through September 30, 1998, total fixed charges exceeded total earnings by (pound)50 million.

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+ PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. NEW FOCUS, INC. We design, manufacture and market innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks(TM) brand. We leverage our ten years of experience in developing advanced optical products to enable networking solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. Our high performance products are compact, consume less power and are designed to be manufacturable in high volumes. We sell our products to over 50 customers including Agilent Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks Corporation. The increase in data traffic, coupled with demand for enhanced services and improved connection times, has increased demand for communications networks capable of handling large volumes of traffic. Network service providers have had difficulty in meeting this increased demand due to significant constraints of the existing communications infrastructure, which was originally designed to carry only voice traffic. To alleviate this bottleneck, network service providers are increasingly deploying next-generation optical networks. Next-generation optical networks will depend on systems and components that enable extremely long reach, high data rates, increased channel counts and new services at a low network cost of ownership. The optical networking market is one of the fastest growing portions of the telecommunications market. Ryan, Hankin & Kent estimates that the market for fiber optic components was approximately $6.6 billion in 1999 and is expected to grow to over $22.5 billion by 2003. Our Smart Optics for Networks(TM) products enable systems providers to meet the dynamic demands of next-generation optical networks. Our fiber amplifier products are widely deployed in optical networks to enable the transmission of an increased amount of information at very high speeds over extended distances. Fiber amplifiers enhance the strength of optical signals. Our wavelength management products, which process and control the many wavelengths on an optical fiber, enable network equipment providers to increase the number of channels transmitted and to accurately, efficiently and reliably manage a vast number of optical signals. We offer high-speed opto-electronic products, or products that process both optical and electrical signals, that enable interconnections between equipment in a network service provider's site at 10 gigabits per second. Our high performance tunable laser modules, or laser modules that have a dynamically adjustable wavelength, enable rapid development, manufacturing and testing of fiber optic components and systems. We also offer advanced photonics, or optical, tools that enable network service and equipment providers to develop their next-generation products. These products leverage our core competencies for a variety of optical networking applications. We are committed to designing and manufacturing high quality products that have been thoroughly tested for reliability and performance. We perform extensive in-house testing to industry accepted Telcordia, or Bellcore, standards and have also been recommended for ISO-9001 quality certification. Our in-house manufacturing capabilities include optical assembly, integration and testing of our fiber optic products and advanced photonics tools. To meet the growing demand for our products, we are continuing to expand our manufacturing capacity while leveraging our capabilities in rapid prototyping, automation, proprietary tools and processes. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 7 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS.................. 19 USE OF PROCEEDS....................... 20 PRICE RANGE OF COMMON STOCK........... 20 DIVIDEND POLICY....................... 20 CAPITALIZATION........................ 21 DILUTION.............................. 22 SELECTED CONSOLIDATED FINANCIAL DATA................................ 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 24 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> BUSINESS.............................. 35 MANAGEMENT............................ 50 CERTAIN TRANSACTIONS.................. 61 PRINCIPAL STOCKHOLDERS................ 65 DESCRIPTION OF CAPITAL STOCK.......... 67 SHARES ELIGIBLE FOR FUTURE SALE....... 69 UNDERWRITING.......................... 71 NOTICE TO CANADIAN RESIDENTS.......... 74 LEGAL MATTERS......................... 75 EXPERTS............................... 75 ADDITIONAL INFORMATION................ 75 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. Our objective is to be the leading provider of innovative, fiber optic products that enable our customers to deploy and optimize next-generation optical networks. Key elements of our strategy include: - leveraging our position as a leading market innovator; - focusing our research and development efforts on continuing to broaden our product offerings; - collaborating with leading innovative systems companies; - continuing to expand manufacturing capacity and improve process efficiency; and - pursuing strategic acquisitions. We were incorporated in April 1990 in California. We reincorporated in Delaware in May 2000. Our principal executive offices are located at 2630 Walsh Avenue, Santa Clara, California 95051, and our telephone number is (408) 980-8088. Our web site is located at "www.newfocus.com." Information contained on our web site does not constitute a part of this prospectus. "New Focus," our logo, and "Smart Optics for Networks" are some of the trademarks, trade names or service marks that we use. This prospectus contains other trademarks and trade names of our company and other entities. THE OFFERING Common stock offered by New Focus..... 3,500,000 shares Common stock to be outstanding after this offering......................... 63,121,717 shares Use of proceeds....................... General corporate purposes, including working capital, capital expenditures, and potential acquisitions. Nasdaq National Market symbol......... NUFO The total number of outstanding shares of our common stock as of July 2, 2000 is 59,621,717, excluding: - 5,250,000 shares issuable upon exercise of outstanding stock options with a weighted average exercise price of $8.57 per share; - 2,855,000 shares reserved for future issuance under our stock plans; and - 170,000 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.35 per share. Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) You should be aware that we recently changed our fiscal year end to December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers to the twelve-month period ended March 31, 1999. Fiscal year 1998 refers to the twelve-month period ended March 31, 1998. Beginning in 2000, we maintain a fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to December 31. <TABLE> <CAPTION> SIX-MONTH PERIOD NINE-MONTH PERIOD ENDED ENDED FISCAL YEAR ENDED MARCH 31, --------------------------- ------------------- ------------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, JULY 2, 1996 1997 1998 1999 1998 1999 1999 2000 ------- ------- ------- ------- ------------ ------------ -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues...................... $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 9,322 $ 24,233 Cost of net revenues.............. 5,095 5,946 8,186 9,225 6,625 12,525 5,421 23,842 Gross profit...................... 5,299 4,597 7,296 8,060 5,919 5,576 3,901 391 Operating income (loss)........... 678 (1,449) 27 (4,666) (3,168) (7,594) (2,870) (27,523) Net income (loss)................. 457 (1,661) (286) (4,971) (3,375) (7,677) (3,063) (26,588) Historical net income (loss) per share: Basic(1)........................ $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======= ======= ======= ======== Diluted(1)...................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (1.27) $ (1.36) ======= ======= ======= ======= ======= ======= ======= ======== Weighted average shares: Basic(1)...................... 1,011 1,096 1,148 2,284 2,245 2,468 2,413 19,546 ======= ======= ======= ======= ======= ======= ======= ======== Diluted(1).................... 18,768 1,096 1,148 2,284 2,245 2,468 2,413 19,546 ======= ======= ======= ======= ======= ======= ======= ======== Pro forma net loss per share: Basic and diluted(1)............ $ (0.24) $ (0.13) $ (0.52) ======= ======= ======== Weighted average shares(1)...... 32,223 24,191 51,000 ======= ======= ======== </TABLE> <TABLE> <CAPTION> JULY 2, 2000 -------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 94,998 Working capital........................................... 103,166 Total assets.............................................. 140,239 Long term debt, less current portion...................... 239 Total stockholders' equity................................ 126,391 </TABLE> ------------------------- (1) See note 10 of notes to consolidated financial statements for an explanation of the determination of the number of shares used in completing per share data. (2) The as adjusted amounts above give effect to the sale of shares of common stock in this offering at an offering price of $ per share, less estimated underwriting discounts and commissions and estimated offering expenses.

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+ PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors." We are a leading provider of comprehensive Internet-based advertising and direct marketing solutions for advertisers and Web publishers. We design and implement advertising campaigns for our advertising clients and place their ads on our network of Web sites. We provide our Web publishing clients with a fully-outsourced solution which includes the sale of advertising space on their Web site, as well as the technology required to deliver advertisements to their Web site. Our advertising clients want Web users to take actions such as visiting their Web sites or making an online purchase when they view advertisements. Our Web publishing clients seek to improve the sale of advertising space, or ad inventory, on their Web sites. Our design and development teams help our clients meet their objectives by creating advertising campaigns that incorporate sponsorships. Sponsorships are advertisements that employ advanced marketing techniques such as integrating advertisements into the text or graphical content of a Web page. In contrast, traditional banner advertisements are typically found at the top of a Web page and frequently contain content that is unrelated to that of the Web page. Because our sponsorship-focused solutions are specifically designed to promote interactivity between the Web user and our advertisers, we believe that our advertising campaigns are more effective than traditional banner advertisements in attracting a Web user's attention and encouraging action. In addition, we have developed adMonitor, our ad delivery, or ad serving and tracking technology that is used to deliver advertisements to our network of Web site partners. adMonitor enables our advertising and Web publishing clients to implement sophisticated advertising campaigns quickly and to selectively target ads to Web users based upon specific interests and characteristics. adMonitor also enables our clients to track, measure and manage the effectiveness of their ad campaigns. We believe that our solutions enable: . Advertisers to effectively target their ads to Web users, improve response rates to their advertisements and achieve a higher return on ad spending; and . Web publishers to realize increased ad sales, improved pricing for their ad inventory and more efficient ad inventory management. We believe that the growth of the Internet is driving advertisers to devote an increasing portion of their overall advertising and marketing budgets to online advertising and direct marketing. Forrester Research estimates that worldwide Internet advertising spending will be approximately $3.3 billion in 1999 and will increase to approximately $33.1 billion by 2004. In addition, the Direct Marketing Association estimates that worldwide expenditures for online direct marketing campaigns will grow from $603 million in 1998 to approximately $5.3 billion in 2003. As the acceptance and usage of online advertising continues to grow, online advertisers must find ways to differentiate themselves in a crowded marketplace. Increasingly, advertisers are seeking advertising campaigns that go beyond traditional banner ads by incorporating enhanced features such as sponsorships in order to gain a competitive edge. eStats estimates that sponsorship advertising will grow from approximately 40% of total online advertising in 1998 to approximately 58% in 2001. We believe that our focus on creating sponsorship-driven advertising campaigns, our in- depth industry knowledge and our adMonitor technology enable us to provide our clients with solutions that meet their complex and evolving needs. Our objective is to be the leading provider of comprehensive online advertising and direct marketing solutions. The following are key elements of our strategy: . Capture a greater share of online advertising budgets; . Grow our sales and marketing organization; . Selectively expand our network of Web publishers; . Enhance and expand our adMonitor technology; . Further develop and deploy our library of creative marketing solutions; and . Expand our direct marketing capabilities. Our business began in January 1997 as a proprietorship of one of our founders, John C. Bohan. We changed our form of operations in May 1997 to a California limited liability company known as John Bohan & Associates, LLC. We initially conducted business under the name AdNet Strategies, and in January 1998, we incorporated under the name AdNet Strategies, Inc. in California and elected S-corporation status. In December 1998, we changed our name to Latitude 90, Inc. and became a C-corporation. We reincorporated in Delaware as L90, Inc. in September 1999. Our principal executive offices are located at 2020 Santa Monica Boulevard, Suite 400, Santa Monica, California 90404. Our telephone number at that location is (310) 315-1199. Our Web address is www.L90.com. Information contained on our Web site does not constitute part of this prospectus. References in this prospectus to "the Company," "L90," "we," "our," and "us" refer to L90, Inc. and its predecessor businesses and entities. The Offering The following information excludes 2,752,327 shares of common stock issuable upon the exercise of stock options and warrants outstanding as of September 30, 1999, with a weighted average exercise price of $2.76 per share. <TABLE> <C> <S> Common Stock we are offering........................ 6,500,000 shares Common Stock to be outstanding after this offering.. 19,712,999 shares Use of Proceeds..................................... We intend to use the net proceeds of this offering for general corporate purposes. See "Use of Proceeds" for more information on the use of proceeds. </TABLE> [ALTERNATE PAGE] The Offering The shares being offered include shares which: . were issued to the selling stockholders upon their conversion of our Series C preferred stock upon the closing of our initial public offering, and . may be issued to the selling stockholders upon their exercise of warrants. The selling stockholders have agreed not to sell any of these shares until 180 days after commencement of this offering, at which time they may sell one- half of their shares. These holders have also agreed that they will not sell the other one-half of their shares until 270 days after commencement of this offering. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. Summary Financial Data (in thousands, except per share data) The following summary financial data is derived and qualified in its entirety by our financial statements. You should read this summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements. The following tables assume no exercise of any stock options or warrants outstanding as of September 30, 1999, except the pro forma data, which assume the cashless exercise of warrants to acquire 1,243,510 shares of common stock. As of September 30, 1999, there were options and warrants outstanding to purchase a total of 4,734,283 shares of common stock with a weighted average exercise price of $3.63 per share. <TABLE> <CAPTION> Period from Inception (January 5, Nine Months Ended 1997) through Year Ended September 30, December 31, December 31, ------------------- 1997 1998 1998 1999 ------------- ------------ ----------- ------- (unaudited) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue....................... $1,160 $2,189 $1,465 $ 3,973 ------ ------ ------ ------- Operating income (loss)....... 307 (306) (49) (4,462) ------ ------ ------ ------- Net income (loss) attributable to common stockholders....... $ 310 $ (313) $ (42) $(5,758) ====== ====== ====== ======= Pro forma basic and diluted net loss per share(1)........ $(0.04) $ (0.44) ====== ======= Weighted average shares outstanding used in pro forma basic and diluted per share calculation(1)............... 8,333 13,020 ====== ======= </TABLE> Summary Financial Data (in thousands, except per share data) The following summary financial data is derived and qualified in its entirety by our financial statements. You should read this summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements. The following tables assume no exercise of any stock options or warrants outstanding as of September 30, 1999, except the pro forma data, which assume the cashless exercise of warrants to acquire 1,243,510 shares of common stock. As of September 30, 1999, there were options and warrants outstanding to purchase a total of 4,734,284 shares of common stock with a weighted average exercise price of $3.63 per share. <TABLE> <CAPTION> Period from Inception (January 5, Nine Months Ended 1997) through Year Ended September 30, December 31, December 31, ------------------- 1997 1998 1998 1999 ------------- ------------ ----------- ------- (unaudited) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue....................... $1,160 $2,189 $1,465 $ 3,973 Operating income (loss)....... 307 (306) (49) (4,462) Net income (loss) attributable to common stockholders....... $ 310 $ (313) $ (42) $(5,758) ====== ====== ====== ======= Pro forma basic and diluted net loss per share........... $(0.04) $ (0.44) ====== ======= Weighted average shares outstanding used in pro forma basic and diluted per share calculation.................. 8,333 13,020 ====== ======= </TABLE> <TABLE> <CAPTION> September 30, 1999 ------------------- Pro Forma Actual As Adjusted ------- ----------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................. $11,556 $89,141 Current assets............................................ 14,895 92,480 Total assets.............................................. 15,611 93,196 Long-term capital lease obligations, net of current portion.................................................. 286 286 Total stockholders' equity ............................... 10,512 88,097 </TABLE> <TABLE> <CAPTION> Period from Inception (January 5, Nine Months Ended 1997) through Year Ended September 30, December 31, December 31, ------------------ 1997 1998 1998 1999 ------------- ------------ ----------- ------ (unaudited) <S> <C> <C> <C> <C> Supplemental Data: System revenue(1)................. $4,210 $8,024 $5,440 $9,232 ====== ====== ====== ====== </TABLE> - -------- (1) System revenue represents the full value of gross billings for ads sold under either commission-based contracts or service fee-based contracts. Although system revenue is not recognized under generally accepted accounting principles, we believe that system revenue is a standard measure of advertising volume for the Internet advertising industry that enables a meaningful comparison of activity from period to period and from one company to another.

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+ SUMMARY This summary highlights certain information found in greater detail elsewhere in this document. In addition to this summary, we urge you to read the entire document carefully, especially the discussion of the risks of investing in our ADSs or ordinary shares under "Risk Factors," before deciding to buy our ADSs or ordinary shares. References in this document to "Chartered," "our company," "we," "our" and "us" refer to Chartered Semiconductor Manufacturing Ltd, a limited liability company formed in the Republic of Singapore, and its subsidiary. THE COMPANY Chartered is one of the world's leading independent semiconductor foundries. We provide comprehensive wafer fabrication services and technologies to semiconductor suppliers and manufacturers of electronic systems. We focus on providing foundry services to customers that serve high growth, technologically advanced applications, including communications applications such as cable modems, data networking and telecommunications equipment. Our top five customers in 1999 were Agilent Technologies (a subsidiary of Hewlett-Packard), Ericsson, Lucent Technologies, Broadcom and Silicon Integration Systems. We offer a broad array of leading digital and analog technologies, including standard complementary metal oxide silicon, or CMOS, mixed-signal and embedded memory processes. We are also developing additional high performance technologies such as advanced embedded memory technologies and specialized CMOS for wireless applications. In order to augment our internal development efforts, we have entered into technology alliances with leading semiconductor companies such as Lucent, Motorola and Ericsson. Our alliance with Lucent includes an agreement to jointly develop 0.18 micron ( micron) process geometries for high density, low power and cost-effective applications. Our alliance with Motorola includes the licensing and process transfer of Motorola's leading edge copper interconnect technology for 0.15 micron, 0.13 micron and 0.10 micron process geometries. Our alliance with Ericsson involves the joint development of radio frequency CMOS, or RFCMOS, and bipolar CMOS, or BiCMOS, process technologies. We continue to expand the range of services we provide as our customers' needs evolve. We partner with leading providers of semiconductor electronic design automation, or EDA, software tools and intellectual property, or IP, and design services. Our partnerships and range of services enable our customers to integrate an increasing number of functions in their products while accelerating time-to-market and reducing design and manufacturing risk. Our EDA development and IP partners include Artisan Components, Avant!, Cadence, MIPS and Synopsys. We also offer our customers turnkey services, which incorporate wafer fabrication services and assembly and test, by partnering with assembly and test providers, principally our sister company ST Assembly Test Services Ltd. We currently own, or have an interest in, five fabrication facilities, all of which are located in Singapore. We are currently in the process of constructing a sixth fabrication facility in Singapore. Fabs 1, 2 and 3 are wholly-owned by our company. Fab 5 is operated by Silicon Manufacturing Partners, known as SMP, which is jointly-owned with a subsidiary of Lucent. Fab 6, known as Chartered Silicon Partners, or CSP, is jointly-owned with an affiliate of the Government of Singapore and a subsidiary of Agilent Technologies. Fab 7, which is also wholly-owned by our company, is in the design and initial construction phase. We plan to increase our total production capacity from approximately 68,000 eight-inch equivalent wafers per month in December 1999 to an estimated 171,000 eight-inch equivalent wafers per month (which figures include 49% of the production capacity of Fab 5 and 100% of the production capacity of Fab 6) by December 2002. On an aggregate annual basis, we expect our production capacity to increase from approximately 712,000 eight-inch equivalent wafers in 1999, to approximately 970,000, 1,400,000 and 1,780,000 eight-inch equivalent wafers in years 2000, 2001 and 2002, respectively (which figures include 49% of the production capacity of Fab 5 and 100% of the production capacity of Fab 6). We believe that Chartered is a trusted, customer-oriented service provider. We have service operations in 10 cities in seven countries in North America, Europe and Asia. All of our manufacturing operations are located in Singapore, a politically and economically stable nation with laws that protect our customers' proprietary technology. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 1, 2000 PROSPECTUS 175,000,000 ORDINARY SHARES DIRECTLY OR IN THE FORM OF AMERICAN DEPOSITARY SHARES [CHARTERED LOGO] S$ PER ORDINARY SHARE US$ PER ADS ------------------ We are offering 78,000,000 ordinary shares, directly or in the form of American Depositary Shares, or ADSs. Some of our shareholders are also offering an aggregate of 97,000,000 ordinary shares, directly or in the form of ADSs. We will not receive any proceeds from the sale of ordinary shares by these shareholders. Of the 175,000,000 ordinary shares that are being offered, 105,000,000 are being offered in the United States and Canada and 70,000,000 are being offered outside the United States and Canada, in each case, directly or in the form of ADSs. Each ADS represents the right to receive ten ordinary shares. The ADSs will be offered in U.S. dollars and the ordinary shares will be offered in Singapore dollars. Our ADSs are quoted on the Nasdaq National Market under the symbol "CHRT" and our ordinary shares are listed on the Singapore Exchange Securities Trading Limited under the symbol "Chartered". The last reported sale price of our ADSs on the Nasdaq National Market on April 28, 2000 was $87.375 per ADS, and the last reported sale price of our ordinary shares on the Singapore Exchange Securities Trading Limited on April 28, 2000 was S$14.70 per ordinary share. ------------------ INVESTING IN OUR ORDINARY SHARES AND ADSS INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF THOSE RISKS. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER ORDINARY SHARE PER ADS TOTAL -------------- -------------- -------------- <S> <C> <C> <C> Public Offering Price............................ S$ US$ US$ Underwriting Discount............................ S$ US$ US$ Proceeds to Chartered (before expenses).......... S$ US$ US$ Proceeds to Selling Shareholders (before expenses)...................................... S$ US$ US$ </TABLE> We and one of the selling shareholders have granted the U.S. and international underwriters a 30-day option to purchase up to an aggregate of 26,250,000 additional ordinary shares, directly or in the form of ADSs, to cover overallotments, if any. The underwriters are offering the ordinary shares and the ADSs subject to various conditions. The underwriters expect to deliver the ordinary shares and the ADSs to purchasers on or about , 2000. ------------------ SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON CHASE H&Q SG COWEN WIT SOUNDVIEW , 2000 We were incorporated in Singapore in 1987. As of March 31, 2000, we were 70.1% owned by Singapore Technologies Pte Ltd and its affiliates (60.3% following the global offering). Singapore Technologies is one of Singapore's largest industrial conglomerates and is indirectly wholly-owned by the Government of Singapore. Our principal executive and registered offices are located at 60 Woodlands Industrial Park D, Street 2, Singapore 738406. Our telephone number is (65) 362-2838. Our internet address is www.charteredsemi.com. INFORMATION CONTAINED ON OUR WEB SITE DOES NOT CONSTITUTE A PART OF THIS DOCUMENT. Please see "Annex A -- The Republic of Singapore" for additional information regarding the Republic of Singapore where we are located. [Description of inside front cover artwork: The inside front cover will contain a photograph of a fabrication operator visually inspecting a wafer during the fabrication process. It will also contain our logo.] RECENT DEVELOPMENTS On April 19, 2000, we announced our financial results for the first quarter ended March 31, 2000. These results are set forth below. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, -------------------- 1999 2000 -------- -------- <S> <C> <C> Net revenue................................................. $130,812 $238,409 Cost of revenue............................................. 118,127 154,340 -------- -------- Gross profit................................................ 12,685 84,069 -------- -------- Operating expenses: Research and development.................................. 12,081 17,306 Fab start-up costs........................................ -- 11,668 Sales and marketing....................................... 10,070 9,319 General and administrative................................ 10,302 15,509 Costs incurred on termination of development program...... 6,500 -- Stock-based compensation.................................. 1,644 1,109 -------- -------- Total operating expenses.......................... 40,597 54,911 -------- -------- Operating income (loss)..................................... (27,912) 29,158 Equity in loss of CSP(1).................................... (2,654) -- Equity in loss of SMP....................................... (5,838) (2,252) Other income................................................ 1,883 8,261 -------- -------- Income (loss) before income taxes........................... (34,521) 35,167 Income tax expenses......................................... (356) (3,770) -------- -------- Income (loss) before minority interest...................... (34,877) 31,397 Minority interest in loss of CSP(1)......................... -- 6,420 -------- -------- Net income (loss)........................................... $(34,877) $ 37,817 ======== ======== Net income (loss) per share and ADS Basic net income (loss) per share......................... $ (0.04) $ 0.03 Diluted net income (loss) per share....................... (0.04) 0.03 Basic net income (loss) per ADS........................... $ (0.35) $ 0.30 Diluted net income (loss) per ADS......................... (0.35) 0.29 Number of shares (in millions) used in computing: - basic net income (loss) per share....................... 985.7 1,279.9 - diluted net income (loss) per share..................... 985.7 1,307.8 Number of ADS (in millions) used in computing: - basic net income (loss) per ADS......................... 98.6 128.0 - diluted net income (loss) per ADS....................... 98.6 130.8 Other Data: Wafer shipped (8-inch equivalent)......................... 153.8 210.1 Depreciation and amortization............................. $ 64,810 $ 71,292 Capital expenditures...................................... $ 20,882 $203,715 </TABLE> Note (1): The equity accounting method was applied for the investment in CSP in the period prior to October 1, 1999. From October 1, 1999 forward, CSP was treated as a consolidated subsidiary. UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US DOLLARS) <TABLE> <CAPTION> AS OF -------------------------- DECEMBER 31, MARCH 31, 1999 2000 ------------ ---------- <S> <C> <C> ASSETS Cash and cash equivalents................................. $ 544,996 $ 509,396 Accounts receivable....................................... 141,226 130,942 Inventories............................................... 33,619 34,646 Other current assets...................................... 9,946 15,493 ---------- ---------- Total current assets.............................. 729,787 690,477 Property, plant and equipment, net........................ 1,282,106 1,414,213 Investment in SMP......................................... 47,036 53,569 Other non-current assets.................................. 73,979 59,469 ---------- ---------- Total assets...................................... $2,132,908 $2,217,728 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable.......................................... $ 152,401 $ 148,776 Current installments of obligations under capital leases................................................. 5,767 5,973 Current installments of long-term debt.................... 119,991 118,083 Accrued operating expenses................................ 127,147 158,654 Other current liabilities................................. 29,919 36,333 ---------- ---------- Total current liabilities......................... 435,225 467,819 Obligations under capital leases, excluding current installments........................................... 7,822 7,793 Long-term debt, excluding current installments............ 423,668 431,980 Other liabilities......................................... 67,279 54,135 ---------- ---------- Total liabilities................................. 933,994 961,727 Minority interest......................................... 57,164 74,170 Shareholders' equity...................................... 1,141,750 1,181,831 ---------- ---------- Total liabilities and shareholders' equity........ $2,132,908 $2,217,728 ========== ========== </TABLE> THE GLOBAL OFFERING SHARES OFFERED BY THE COMPANY...... 78,000,000 ordinary shares. SHARES OFFERED BY THE SELLING SHAREHOLDERS....................... 97,000,000 ordinary shares. THE GLOBAL OFFERING................ The global offering consists of the U.S. offering and the international offering, each of which is described below. U.S. OFFERING...................... An offering in the United States and Canada of 105,000,000 ordinary shares, directly or in the form of ADSs. INTERNATIONAL OFFERING............. An offering outside the United States and Canada of 70,000,000 ordinary shares, directly or in the form of ADSs. The international offering will occur at the same time as the U.S. offering. USE OF PROCEEDS FROM THE GLOBAL OFFERING........................... The net proceeds to us from the global offering will be used to fund a portion of our year 2001 capital expenditure requirements, principally in connection with the construction and equipping of our new fabrication facility, Fab 7, and for general corporate purposes. We will not receive any of the proceeds from the sale of ordinary shares (including ordinary shares represented by ADSs) by the selling shareholders. Please see "Use of Proceeds" for further discussion of how we intend to use the proceeds from the global offering. OVERALLOTMENT OPTIONS.............. We and one of the selling shareholders have granted the U.S. and international underwriters a 30-day option to purchase up to an aggregate of 26,250,000 additional ordinary shares (including ordinary shares represented by ADSs) in the global offering, solely to cover overallotments, if any. Unless we indicate otherwise, all information in this document assumes the underwriters have not exercised their overallotment option. SHARES OUTSTANDING AFTER THE GLOBAL OFFERING........................... 1,358,760,547 ordinary shares (including ordinary shares represented by ADSs) will be outstanding after the global offering. If the underwriters exercise their overallotment option in full, 1,370,460,547 ordinary shares (including ordinary shares represented by ADSs) will be outstanding. AMERICAN DEPOSITARY SHARES......... Each ADS represents ten ordinary shares. The ADSs are evidenced by American Depositary Receipts, or ADRs. Please see "Description of American Depositary Shares" for a summary of the material features of the ADSs and ADRs. LISTING............................ Our ADSs are quoted on the Nasdaq National Market under the symbol "CHRT" and our ordinary shares are listed on the Singapore Exchange Securities Trading Limited under the symbol "Chartered". SUMMARY FINANCIAL AND OTHER DATA You should read the following summary financial data in conjunction with our consolidated financial statements and the related notes, "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document. Our financial statements are reported in U.S. dollars and presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for the fiscal years ended December 31, 1995, 1996, 1997, 1998 and 1999. The as adjusted data set forth below give effect to the issuance by our company of 78,000,000 ordinary shares in the global offering (including ordinary shares represented by ADSs) and the application of the net proceeds to us from such offering at an assumed public offering price of $87.375 per ADS (the equivalent of S$14.893 per ordinary share based on an exchange rate of S$1.7045 to US$1.00.) When we refer to "Singapore dollars" and "S$" in this document, we are referring to Singapore dollars, the legal currency of Singapore. When we refer to "U.S. dollars," "dollars," "$" and "US$" in this document, we are referring to United States dollars, the legal currency of the United States. For your convenience, we have included in this document translations of certain Singapore dollar amounts into U.S. dollars amounts. These translations should not be construed as a representation that those Singapore dollar or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Singapore dollars, as the case may be, at any particular rate, the rate stated below, or at all. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1995 1996(1) 1997 1998(2)(3) 1999(4)(5) -------- -------- --------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue.............................. $287,026 $406,936 $ 379,761 $ 422,622 $ 694,258 Gross profit (loss)...................... 99,858 117,501 11,240 (17,046) 167,235 Operating income (loss).................. 51,107 42,171 (78,573) (160,177) (5,673) Net income (loss)........................ 54,882 47,476 (119,621) (190,006) (32,619) Net income (loss) per ordinary share: Basic.................................. $ 0.13 $ 0.10 $ (0.24) $ (0.24) $ (0.03) ======== ======== ========= ========= ========== Diluted................................ $ 0.13 $ 0.10 $ (0.24) $ (0.24) $ (0.03) ======== ======== ========= ========= ========== Shares used in per ordinary share calculation: Basic.................................. 418,661 488,296 490,407 784,541 1,035,181 Diluted................................ 418,661 488,824 490,407 784,541 1,035,181 Net income (loss) per ADS: Basic.................................. $ 1.31 $ 0.97 $ (2.44) $ (2.42) $ (0.32) ======== ======== ========= ========= ========== Diluted................................ $ 1.31 $ 0.97 $ (2.44) $ (2.42) $ (0.32) ======== ======== ========= ========= ========== ADSs used in per ADS calculation: Basic.................................. 41,866 48,830 49,041 78,454 103,518 Diluted................................ 41,866 48,882 49,041 78,454 103,518 OTHER DATA: Wafers shipped (8-inch equivalent)....... 186 254 344 440 712 Depreciation and amortization............ $ 61,109 $115,545 $ 173,762 $ 226,903 $ 271,406 Capital expenditures..................... $218,674 $481,230 $ 410,551 $ 279,368 $ 340,305 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------- ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 544,996 $1,207,696 Working capital............................................. 294,562 957,262 Total assets................................................ 2,132,908 2,795,608 Short-term borrowings and current portion of long-term debt...................................................... 119,991 119,991 Current installments of obligations under capital leases.... 5,767 5,767 Obligations under capital leases, excluding current installments.............................................. 7,822 7,822 Other long-term debt........................................ 423,668 423,668 Shareholders' equity........................................ 1,141,750 1,804,450 </TABLE> - --------------- (1) In 1996, gross profit and operating income included $23.2 million relating to a reduction in accrued liabilities for a change in estimate of cost to obtain certain licenses. (2) Effective July 1, 1998, we changed our functional currency from the Singapore dollar to the U.S. dollar. Please see note 2(e) to our consolidated financial statements. (3) In 1998 we recorded a charge of $31.8 million relating to the write-down of equipment in connection with the termination of a development program. Please see note 8 to our consolidated financial statements. (4) In 1999, we recorded a charge of $6.5 million in connection with the termination of a development program. Please see note 8 to our consolidated financial statements. (5) CSP was treated as a consolidated subsidiary from October 1, 1999 forward. Please see notes 1 and 6 to our consolidated financial statements.

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and notes thereto appearing elsewhere in this prospectus. ADVANCED SWITCHING COMMUNICATIONS, INC. We design and market a line of products that enable telecommunications service providers to offer high speed, or broadband, services to end-users. Our broadband access platforms are compact and software-configurable products that enable our customers to transmit voice, data and multimedia communications traffic more rapidly and cost-effectively while preserving their investments in existing communications systems. In response to the rapid increase in data communications traffic driven by the growth of the Internet and worldwide deregulation, telecommunications service providers are rapidly building advanced packet-based networks. Packet-based networks, which transport communications traffic in small bundles, or "packets," offer a significantly more flexible, cost-effective and efficient means for providing communications services than existing circuit-based networks, which were designed years ago to carry telephone calls. Telecommunications service providers typically situate high-speed packet transmission equipment at the core or backbone of their networks, but rely on voice-oriented technology for their access networks. Our products are deployed at the entry points to a telecommunications network. These sites, which serve as staging areas for the delivery of telecommunications services to the end-user, are called central offices for local telephone companies or points of presence for most other telecommunications service providers. By extending the benefits of packet technology beyond the network core, our products reduce transmission and operating costs, increase the efficiency of core network equipment, provide access to fiber optic core networks and allow our customers to develop networks for broadband services. We market our products to telecommunications service providers worldwide, focusing on established as well as emerging carriers, multi-tenant unit service providers and digital subscriber line service providers. We currently have 27 customers in three market segments. Broadband Office, 2nd Century Communications and Access Lan accounted for 53%, 11% and 10% of our revenue, respectively, for the six months ended June 30, 2000. We sell our products primarily through a direct sales force. We also increase awareness and customer acceptance of our products through strategic relationships with original equipment manufacturers, distributors and resellers. We designed our product line to meet the requirements of broadband service providers worldwide. Our products offer the following benefits and features: - Enhanced Revenue Opportunities. Our product design and multi-service capabilities enable service providers to efficiently add services and quickly penetrate new markets to capitalize on new revenue opportunities, with relatively low initial investment. - Highly Scalable Product Architecture. Our products are designed to proportionally meet our customers' network requirements. In small markets, a customer can deploy services with a single card in a stackable platform and add platforms as demand grows. In large markets, customers can deploy our multiple card system using the same individual cards from the stackable platforms. - Multi-Service Capabilities. Our products' ports, which transmit and receive data to and from physical access lines, are software-configurable, which means that they eliminate the need for service providers to predetermine the number of ports dedicated to each specific service. Service providers that use our products can set up or change the services supported on individual ports from a remote computer terminal. This enables our customers to quickly add services, with minimal service disruption and without dispatching personnel to physically change an end user's connection. - Reduced Operating Costs. Our products convert different end-user services to a single format for transmission to the core network, eliminating the need to deploy multiple core networks, one for each service offered. Our products also aggregate the local access lines that carry these services into fewer [INSIDE FRONT COVER] In the upper left corner, under the heading "We develop and market broadband access products" is the following text: "As the number of end-users increases, customers can stack individual systems and eventually move to our multi-slot products using the same cards." In the upper right corner, under the caption "Standalone Systems" are images of the A-1000, the A-1240, the A-2000 and the A-3010 stacked in vertical arrangement. Underneath the images are (i) the caption "More end-users..." and (ii) an arrow pointing to an image of the A-4000 in the center of the page. Underneath the A-4000 image is an arrow pointing to an image of the A-4500 in the lower left corner of the page. The caption "...higher speeds and expanded services" appears to the lower right of the A-4500 image. The Advanced Switching Communications logo appears in the lower right corner of the page. [TWO PAGE INSIDE GATEFOLD] Under the caption "Our Product Applications" is a diagram that illustrates how the company's products connect small and mid-sized businesses, home office and residential users to the optical telecommunications network. high-speed optical or electrical connections to the core network, allowing core network equipment to operate more efficiently. This service conversion and access line aggregation reduces the costs of building and operating a service provider network. - Interoperability with Existing Systems. Our products comply with stringent network facility standards for central office equipment and operate with leading core network components, allowing service providers to capitalize on the value of their existing investments. Our products utilize industry standard protocols and have built-in software flexibility to add new protocols as they are adopted and standardized in the marketplace. - Space and Physical Design Advantages. Our equipment's compact design and high port density of our equipment means that it occupies minimal space at central offices, multi-tenant unit office buildings, or other points of presence. In addition, the lower power requirements and the low heat output of our products allow service providers to deploy services to locations previously excluded from the network because of the physical limitations of the space. Our objective is to become a leading provider of broadband access platforms for integrated voice, data and multimedia services. To achieve our objective, we intend to: - broaden our customer base domestically and internationally; - leverage our technology leadership from the access network into the network core; - provide our customers with a smooth migration path to next-generation network architectures; - expand our global sales efforts and our customer service and support capabilities; and - continue to outsource our product manufacturing. Given our limited operating history and the competitive environment in our industry, we may face a number of difficulties in achieving our objective. Prior to 1999, we were a development stage company principally engaged in research and development. We shipped our first product in March 1999. We depend on a single contract manufacturer to manufacture substantially all of our products. We derive a substantial portion of our revenue from a limited number of customers. We have incurred significant losses since our inception and as of June 30, 2000 we had an accumulated deficit of $25.6 million. We expect to continue to incur net losses. For a discussion of these and other risks that may adversely affect our ability to become a leading provider of broadband access platforms, see "Risk Factors" beginning on page 5. We were incorporated in 1997 under the laws of the State of Delaware. Our headquarters are located at 8330 Boone Boulevard, Vienna, Virginia 22182, and our telephone number is (703) 448-5540. Our website address is www.asc.com. The information contained on our website is not part of this prospectus. ------------------------ Except as otherwise indicated, information in this prospectus is based on the following assumptions: - all outstanding shares of our redeemable convertible preferred stock will be converted into shares of common stock immediately prior to the completion of this offering; - the underwriters will not exercise their over-allotment option; and - we will file our amended and restated certificate of incorporation upon the completion of this offering. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued October 4, 2000 [ADVANCED SWITCHING COMMUNICATIONS, INC. LOGO] 6,250,000 Shares COMMON STOCK ------------------------ Advanced Switching Communications, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $13 and $15 per share. ------------------------ We have applied to list our common stock for quotation on the Nasdaq National Market under the symbol "ASCX." ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY -------- ------------- ----------- <S> <C> <C> <C> Per Share............................... $ $ $ Total................................... $ $ $ </TABLE> Advanced Switching Communications, Inc. has granted the underwriters the right to purchase up to an additional 937,500 shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER CHASE H&Q ROBERTSON STEPHENS , 2000 THE OFFERING <TABLE> <S> <C> Common stock offered............................ 6,250,000 shares Common stock to be outstanding after the offering...................................... 41,115,883 shares Over-allotment option........................... 937,500 shares Use of proceeds................................. We intend to use the net proceeds for working capital and other general corporate purposes. See "Use of Proceeds" on page 14 Proposed Nasdaq National Market symbol.......... ASCX </TABLE> The foregoing information is based upon shares outstanding as of September 30, 2000 and excludes: - 5,422,245 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2000 with a weighted average exercise price of $4.48 per share; - 359,000 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2000 with a weighted average exercise price of $10.61 per share; - 4,736,755 shares of common stock reserved for additional option grants under our stock plans as of September 30, 2000; and - additional shares of common stock issuable upon conversion of our outstanding preferred stock in respect of dividends accruing after September 30, 2000. ------------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock, only in jurisdictions where offers and sales are permitted. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.................... 1 Risk Factors.......................... 5 Special Note Regarding Forward-Looking Statements.......................... 13 Use of Proceeds....................... 14 Dividend Policy....................... 14 Capitalization........................ 15 Dilution.............................. 16 Selected Financial Data............... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Business.............................. 27 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Management............................ 40 Certain Transactions.................. 49 Principal Stockholders................ 53 Description of Securities............. 55 Shares Eligible for Future Sale....... 58 United States Tax Consequences to Non- United States Holders............... 60 Underwriters.......................... 64 Legal Matters......................... 66 Experts............................... 66 Where You Can Find More Information... 66 Index to Financial Statements......... F-1 </TABLE> ------------------------ UNTIL , 2000, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION (SEPTEMBER 10, SIX MONTHS 1997) YEAR ENDED ENDED THROUGH DECEMBER 31, JUNE 30, DECEMBER 31, ------------------ ------------------ 1997 1998 1999 1999 2000 -------------- ------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................... $ -- $ -- $ 4,278 $ 402 $ 12,933 Gross profit.......................... -- -- 1,439 65 3,377 Loss from operations.................. (309) (5,127) (9,781) (4,732) (10,146) Net loss.............................. (293) (5,111) (9,329) (4,640) (9,090) Accretion of transaction costs and accrued dividends on redeemable convertible preferred stock......... -- (367) (2,589) (482) (2,815) ------ ------- -------- ------- -------- Net loss applicable to common shareholders........................ $ (293) $(5,478) $(11,918) $(5,122) $(11,905) ====== ======= ======== ======= ======== Basic and diluted net loss per share............................... $(0.05) $ (0.48) $ (1.01) $ (0.43) $ (1.03) ====== ======= ======== ======= ======== Shares used in computing net loss per share............................... 5,742 11,389 11,789 11,958 11,601 ====== ======= ======== ======= ======== Pro forma basic and diluted net loss per share(1)........................ $ (0.38) $ (0.28) ======== ======== Shares used in computing pro forma basic and diluted net loss per share(1)............................ 24,251 32,462 ======== ======== </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA (2) AS ADJUSTED (3) -------- ------------- --------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 5,464 $ 5,464 $ 85,639 Working capital........................................ 20,082 20,082 100,257 Total assets........................................... 43,952 43,952 124,127 Long-term debt, less current portion................... 37 37 37 Redeemable convertible preferred stock................. 58,383 -- -- Total stockholders' equity (deficit)................... (25,371) 33,012 113,187 </TABLE> --------------- (1) Pro forma net loss per share for the year ended December 31, 1999 and the six months ended June 30, 2000 is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of our outstanding preferred stock into shares of common stock effective upon the completion of this offering as if such conversion occurred on January 1, 1999, or at date of original issuance, if later. (2) Pro forma to give effect to the conversion of all issued and outstanding shares of redeemable convertible preferred stock into common stock. (3) As adjusted to reflect the sale of 6,250,000 shares of common stock offered hereby at the assumed initial public offering price of $14 per share (the midpoint of the range) after deducting the underwriting discount and estimated offering expenses payable by us. See "Use of Proceeds" on page 14 for more information on our intended use of the proceeds from this offering and "Capitalization" on page 15 for more information on our capital structure.

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements, before making an investment decision. OUR BUSINESS Extensity provides Internet-based software applications designed to improve the productivity of employees across an enterprise and to enhance enterprise operating efficiency. We sell an integrated application suite that automates expense reporting, travel management, procurement and billable time management. These applications streamline traditionally inefficient and largely paper-based processes, and capture cost savings by automatically enforcing spending policies and tracking information valuable to management. In the intensely competitive global business environment, businesses have increasingly adopted the Internet to streamline their business processes and make their employees more productive. According to preliminary estimates by International Data Corporation, the worldwide market for workforce management applications will grow from $766 million in 1998 to $4.0 billion in 2003, and the Internet commerce procurement applications market will grow from $147 million in 1998 to $5.3 billion in 2003. Our objective is to become the leading Internet-based point of interactivity between a company's workforce and third-party content, commerce and service providers. We have designed our applications to be readily integrated with Internet-based third-party content, commerce and services. This will enable us and our partners to deliver relevant and timely content and business-to-business services targeted at the specific needs of employees. For example, a consultant planning an engagement can obtain internal travel expense approval, book airline tickets and hotel reservations through a travel service partner, plan business entertainment through a content partner, track billable time and record additional expenses for rapid approval and reimbursement - all through our integrated application suite accessible at the office or on the road. The growing network of organizations and employees using our applications will constitute a valuable target market for our Internet-based content, commerce and service partners. Our applications can be readily integrated with enterprise resource planning and other information technology software applications commonly used in organizations, including older, legacy systems. Our applications are universally accessible through a variety of devices including networked and mobile PCs and handheld computing devices, such as a PalmPilot or Visor. The architecture of our products typically enables us to fully install our applications for use by our customers in less than 90 days. Since the introduction of our first application in 1998, we have licensed our products to 70 customers, the largest of which, based on contract value, include AT Kearney, Cisco Systems, Gelco Information Network, Sara Lee and TransCanada PipeLines. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion, Dated January 25, 2000 LOGO - -------------------------------------------------------------------------------- 4,000,000 SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of Extensity, Inc. and we are offering 4,000,000 shares of our common stock. We anticipate that the initial public offering price will be between $16.00 and $18.00 per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "EXTN." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS EXTENSITY <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to 600,000 additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN BEAR, STEARNS & CO. INC. CHASE H&Q THE DATE OF THIS PROSPECTUS IS , 2000 THE OFFERING Common stock offered by Extensity.......................... 4,000,000 shares Common stock to be outstanding after this offering................ 22,800,455 shares Use of proceeds.................... For repayment of indebtedness and general corporate purposes, including working capital, expansion of our sales and marketing efforts and, potentially, for acquisition opportunities that may arise in the future. Proposed Nasdaq National Market Symbol............................. EXTN The number of shares to be outstanding upon completion of this offering is based on shares outstanding as of December 31, 1999. This number assumes the conversion into common stock of all of our preferred stock outstanding on that date and excludes: - 7,000,000 shares of common stock that will be reserved for issuance under our 1996 Stock Option Plan upon completion of this offering, of which 2,942,582 shares were subject to outstanding options; - 500,000 shares of common stock that will be reserved for issuance under our Employee Stock Purchase Plan 2000 upon completion of this offering; and - 183,888 shares subject to outstanding warrants to purchase preferred stock which will convert into warrants to purchase common stock upon completion of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1995(1) 1996 1997 1998 1999 ------- ------ ------- -------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Licenses......................................... $ -- $ -- $ -- $ 718 $ 3,750 Services and maintenance......................... -- -- -- 409 3,064 ------ ------ ------- -------- -------- Total revenues............................ -- -- -- 1,127 6,814 Gross profit (loss)................................ -- -- -- (517) 1,861 Loss from operations............................... (4) (854) (3,335) (11,060) (23,555) Net loss........................................... (1) (830) (3,228) (11,032) (23,389) Net loss attributable to common stockholders....... -- -- -- -- (24,889) Net loss per share attributable to common stockholders: Basic and diluted................................ $(0.01) $(3.79) $ (4.35) $ (8.25) $ (11.20) Weighted average shares.......................... 167 219 742 1,338 2,222 Pro forma net loss per share attributable to common stockholders (unaudited): Basic and diluted................................ $ (1.13) $ (1.76) Weighted average shares.......................... 9,778 14,160 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) ------- ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $24,285 $24,285 $85,825 Working capital............................................. 13,227 13,227 74,767 Total assets................................................ 31,661 31,661 93,201 Notes payable and capital lease obligations, noncurrent portion................................................... 1,285 1,285 1,285 Mandatorily redeemable convertible preferred stock.......... 49,648 -- -- Total stockholders' equity (deficit)........................ (35,061) 14,587 76,127 </TABLE> - ------------------------- (1) Period from inception (November 13, 1995) to December 31, 1995. (2) The pro forma column gives effect to the conversion of our preferred stock outstanding as of December 31, 1999 into common stock upon the closing of this offering. See Note 7 of Notes to Consolidated Financial Statements. (3) The pro forma as adjusted column also reflects the receipt of the net proceeds from the sale of 4,000,000 shares of common stock offered by us at an assumed initial public offering price of $17.00 per share and the application of the net proceeds from the offering, after deducting underwriting discounts and commissions and estimated offering expenses. DESCRIPTION OF GRAPHICS FOR BACK-INSIDE COVER At the top right-hand margin of the page appears the Extensity logo and to the right of the logo appears "Extensity." On the right margin below the Extensity logo and name appears the phrase in large print "Extensity at Work." Below and to the far left-hand margin of "Extensity at Work" appears a small graphic depiction of a human. Below the graphic depiction of the human appears the phrase "1. Plan Business Trip." Below this phrase appears a graphic depiction of a computer screen that contains the graphic of the Extensity Travel Plans user-interface. To the lower right of this graphic appears the phrase "2. Book Airline Tickets through Travel Service Partner." Below this phrase appears a graphic depiction of a computer screen that contains the graphic of the Extensity Travel Plans user-interface, which contains information regarding an itinerary of a flight from San Francisco to New York. To the lower right of this graphic appears the phrase "3. Order Supplies to Support Customer." Below this phrase appears a graphic depiction of a computer screen that contains the graphic of the Extensity Purchase Reqs user-interface. To the lower-left of this graphic appears a graphic depiction of a Palm VII hand-held computing device. Appearing on the screen of the Palm VII is the Extensity Expense Reports user-interface, which contains purchase information for a hypothetical transaction. To the right of this graphic appears the phrase "4. Enter Billable Time on Handheld Device." To the left of the Palm VII graphic is a graphic depiction of a computer screen that contains the graphic of the Extensity Expense Reports user-interface. Below this graphic appears the phrase "5. Complete Expense Report in Minutes and Get Paid in Days." To the upper left of this graphic appears a graphic depiction of a computer screen that contains a detailed report of the hypothetical trip as reported by Extensity Expense Reports. At the top of this graphic appears the phrase "6. Gain Management Insights from Reporting." The background of the entire graphic is a swirling set of eight lines. Below all of the graphics appears the table of contents. DESCRIPTION OF GRAPHICS FOR INSIDE-FRONT COVER At the top left-hand margin of the page appears the Extensity logo and to the right of the logo appears "Extensity." Below the Extensity name and logo appears the phrase in large print "Internet-Based Workforce Optimization Software." Below this phrase appear five bullet points in a vertical row. To the right of the first bullet point appears the phrase "Designed and Delivered Using the Internet." To the right of the second bullet point appears the phrase "Improving Employee Productivity and Satisfaction." To the right of the third bullet point appears the phrase "Enhancing Enterprise Operating Efficiency." To the right of the fourth bullet point appears the phrase "Increasing Control Over Internal Processes." To the right of the fifth bullet point appears the phrase "Universally Accessible via Networked and Mobile PCs and Handheld Devices." Below the five bullet points appears the graphic depiction of a very large oval that is set at a forty-five degree angle. The oval is separated into four sections, each a different shade. In the top-left section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of a one hundred dollar bill. In the upper-left hand portion of this section appears the phrase "Extensity Expense Reports Automates We were incorporated in Delaware as Celerity, Inc. on November 13, 1995, changed our name to At Large Software, Inc. on April 12, 1996 and changed our name to Extensity, Inc. on September 2, 1997. Our principal executive offices are located at 2200 Powell Street, Suite 400, Emeryville, California 94608. Our telephone number at that location is (510) 594-5700. Our website is located at www.extensity.com. The information contained on our website does not constitute part of this prospectus. Extensity is a registered trademark, and Extensity Expense Reports, Extensity Travel Plans, Extensity Timesheets, Extensity Purchase Reqs, and Extensity System Administration Tool are trademarks of Extensity. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. ------------------------ Unless otherwise indicated, all information in this prospectus assumes: - that the underwriters have not exercised their option to purchase additional shares; - conversion of all shares of preferred stock into shares of common stock upon completion of this offering; and - the filing of an amended and restated certificate of incorporation upon completion of this offering to increase our authorized common stock and decrease our authorized preferred stock. the Creation, Approval and Payment of Expense Reports While Enforcing Company Policy." In the top right-hand section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of an airplane. In the upper-right hand portion of this section appears the phrase "Extensity Travel Plans Automates the Planning, Approval, and Procurement Process for Corporate Travel Prior to Travel Expenses Being Incurred." In the lower right-hand section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of a wrist watch around another smaller square. In the lower-right hand portion of this section appears the phrase "Extensity Timesheets Automates the Reporting and Tracking of Billable Hours to Ensure Timely and Accurate Client Billing." In the lower left-hand section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of a computer screen, a computer mouse and a pencil. In the lower left-hand portion of this section appears the phrase "Extensity Purchase Reqs Automates and Optimizes the Requisitioning of Non-Production Goods and Services While Enforcing Company Procurement Policies." Extending from the right of the large sphere are four lines connecting to a half of a cloud which is located on the far right-hand margin of the page. Extending to, and over the cloud, and to the upper center of the page are four diagonal lines. DESCRIPTION OF GRAPHICS FOR BACK GATEFOLD On the inside back cover of the gatefold at the top left-hand margin of the page appears the Extensity logo and to the right of the logo appears "Extensity." Below the Extensity name and logo appears the phrase in large print "Extensity Network of Employee Desktops." Below this phrase appears the phrase "Thousands of Employees Across Multiple Organizations Leveraging Extensity's Integrated Applications." Below this phrase appears the graphic depiction of a very large oval that is set at a forty-five degree angle. The oval is separated into four sections, each a different shade. In the top-left section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of a one hundred dollar bill. In the upper-left hand portion of this section appears the phrase "Extensity Expense Reports Allows Remote Employees to Submit Expense Reports and Get Paid in Days." In the top right-hand section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of an airplane. In the upper-right hand portion of this section appears the phrase "Extensity Travel Plans Allows Business Managers to Enforce Travel Policy Through Software and to Deal with Exceptions Only." In the lower right-hand section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of a wrist watch around another smaller square. In the lower-right hand portion of this section appears the phrase "Extensity Timesheets Allows Consultants to Easily Enter Time Worked and Accelerates Client Bill-Back Cycle." In the lower left-hand section appears a graphic of one square intersected by another square. On the top of the squares appears the graphic depiction of a computer screen, a computer mouse and a pencil. In the lower left-hand portion of this section appears the phrase "Extensity Purchase Reqs Enables Procurement Managers to View Purchasing Reports and Gain Insights into Buying Patterns." In the center of the oval appears the phrase in large print "Extensity Workforce Optimization Applications Suite." Below this phrase appears three vertically stacked bullet points. To the right of the first bullet point appears the phrase "Consistent User Interface." To the right of the

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+ PROSPECTUS SUMMARY This summary highlights more detailed information and financial statements contained later in this prospectus. This summary does not contain all of the information that you should consider with respect to owning the shares or options. You should read the entire prospectus carefully, especially the risks of holding the shares discussed under "Risk Factors." KNOLOGY, INC. We were formed in September 1998. We own 100% of KNOLOGY Holdings, Inc. and 100% of several other companies previously owned by ITC Holding Company, Inc. KNOLOGY Holdings is our principal subsidiary. We currently offer our residential and business customers broadband communication services, including: - Video. We offer traditional cable television and digital cable television services. Digital cable uses advanced technology to deliver many more channels over the same amount of transmission capacity. - Telephone. We offer local and long distance telephone service. - Internet. We offer high-speed connections to the Internet using cable modems. Our customers have the choice of receiving these services individually or as part of a bundle of services. We provide these services using high-speed, high-capacity networks which are called broadband networks because they can handle large volumes of voice, video and data at high speeds. We presently have broadband networks in Montgomery, Alabama; Columbus, Georgia; Augusta, Georgia; Panama City, Florida; and Charleston, South Carolina. We also provide traditional analog and digital cable television services in Huntsville, Alabama, and these facilities are being upgraded to provide telephone and Internet services. Further, we provide local telephone services and broadband services throughout the Georgia/Alabama border area known as the valley. We also provide access to our networks and various network-related services to other telecommunications carriers. We refer to these services as broadband carrier services. Other local telephone companies use our broadband carrier services to provide local telephone service and long distance carriers use our broadband carrier services to deliver long distance telephone service. We are incorporated in the State of Delaware. Our principal executive offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833, and our telephone number is (706) 645-8553. We maintain a website at www.knology.com where general information about our business is available. Reference to this website shall not be deemed to incorporate the contents of our website into this prospectus. EXPLANATORY NOTE This registration statement contains a prospectus supplement which precedes the prospectus. The prospectus supplement is in the form of a letter to option distribution recipients and attachments to that letter which set forth material terms, including exercise prices, vesting terms, expiration dates and other information, relating to the option distribution covered by the registration statement. Since there are a large number of recipients of the option distribution, also included in the prospectus supplement is a chart containing all of the information that would be in each of the letters. KNOLOGY will be including in the individual letter to each recipient of the option distribution the material terms of the option being distributed to that recipient. THE DISTRIBUTION REASONS FOR THE DISTRIBUTION We have determined that we will need substantial capital in the near future to fund our planned upgrades and expansion, as discussed in more detail below under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." As described in that section, we intend to seek additional capital through private and public equity and debt financings. We determined that our access to capital in the private equity market and our ability to achieve a higher per share value would be enhanced if we no longer had a single stockholder, ITC Holding, holding 90% of our capital stock. ITC Holding is distributing the stock of KNOLOGY it holds to eliminate the large block of KNOLOGY stock while allowing ITC Holding stockholders to maintain directly the interest in KNOLOGY that they held indirectly before the distribution. ITC Holding is also distributing KNOLOGY options to ITC Holding option holders so they can maintain the economic value of their ITC Holding options, which otherwise would be diluted as a result of the distribution. See the section under the caption "The Distribution" for a fuller discussion of the background and reasons for the distribution. If you are an ITC Holding option holder, please review carefully the information under the caption "The Distribution -- Option Distribution" for a fuller description of the rationale for the option distribution and the terms of the option distribution. TERMS OF THE DISTRIBUTION In the distribution, ITC Holding is distributing to its stockholders and option holders all of the 43,211,531 shares of our Series A preferred stock and options to purchase 6,258,036 shares of our Series A preferred stock held by ITC Holding. The distribution is being made February 4, 2000. In the distribution, you will receive the following: - 1.09153 shares of our Series A preferred stock for every share of ITC Holding common stock that you own. - 4.36612 shares of our Series A preferred stock for every share of ITC Holding preferred stock that you own. - An option to purchase 1.09153 shares of our Series A preferred stock, for every option to purchase one share of common stock of ITC Holding that you own. The aggregate exercise price of the KNOLOGY options each holder will receive is 18.6704% of the exercise price of the holder's ITC Holding option. This percentage was determined by the ITC Holding board of directors as of the time of the distribution based upon the percentage of the value of ITC Holding attributable to KNOLOGY. The exercise price of each ITC Holding option will be decreased to 81.3296% of its original exercise price. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not seeking an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2000 PRELIMINARY PROSPECTUS SUPPLEMENT IDateJ Dear Shareholder: We are pleased to announce that ITC Holding Company, Inc. has completed the distribution of all of its shares of stock of KNOLOGY, Inc. In the distribution, you will receive 1.09153 shares of KNOLOGY Series A preferred stock for each share of ITC Holding stock you owned as of the record date of December 15, 1999. We will make a cash payment to you in lieu of distributing a fractional share of KNOLOGY stock. The cash payment will be determined by multiplying $4.75 by your fractional share percentage. The board of directors of KNOLOGY determined the price per share of KNOLOGY's Series A preferred stock to be $4.75. We will be sending your stock certificates and any fractional share payment to you within several days. You do not need to submit your ITC Holding stock certificates to us or take any other action in connection with the distribution. The distribution is discussed more fully in KNOLOGY's prospectus, dated February 3, 2000, a copy of which is enclosed. We urge you to read the prospectus in its entirety. The December 2, 1999 correspondence previously circulated to you should not be relied upon. We encourage you to review the more current information contained in the prospectus and this letter, which serves as a prospectus supplement. Please contact me at (706) 645-8107 if you have any questions regarding the distribution. Very Truly Yours, Bryan W. Adams Enclosures Only ITC Holding security holders of record as of December 15, 1999 are receiving securities in the distribution. Cash in the amount of $4.75 will be paid in lieu of fractional shares or options. Example: As an example, suppose before the distribution you hold 1,000 shares of ITC Holding common stock and you hold options to buy 100 shares of ITC Holding common stock for an aggregate exercise price of $500. ITC Holding has determined that KNOLOGY's value as a company for purposes of the distribution was 18.6704% of the value of ITC Holding. - Stock. In the distribution, you would receive 1,091 shares of KNOLOGY Series A preferred stock, determined by multiplying your 1,000 shares times the common stock distribution ratio of 1.09153. You would also receive $2.52 in cash, equal to 0.53 fractional shares of KNOLOGY Series A preferred stock times the cash value for fractional shares of $4.75 per share. The effect of the distribution is that you will hold directly as KNOLOGY stock the interest in KNOLOGY that you held indirectly through your ITC Holding stock prior to the distribution. - Options. In the distribution, you would receive options to purchase 109 shares of KNOLOGY Series A preferred stock, determined by multiplying your options to purchase 100 shares times the option distribution ratio of 1.09153. You would also receive $0.73 in cash, equal to options to purchase 0.153 fractional shares of KNOLOGY Series A preferred stock times the cash value for fractional options of $4.75 per share. The value of your ITC Holding option would have declined in the distribution because part of ITC Holding, worth 18.6704% of its value, would no longer belong to ITC Holding after the distribution. ITC Holding would therefore reduce the aggregate exercise price of your ITC Holding option by 18.6704%, to $406.65. The $93.35 difference would become the aggregate exercise price of your KNOLOGY option, since 18.6704% of the value of your old ITC Holding option is now represented by your KNOLOGY option. Since the option distribution ratio is the same as the stock distribution ratio, you would pay the same exercise price and you would own the same number of shares whether (1) you exercised your ITC Holding option immediately before the distribution and received stock in the distribution or (2) you exercised both your ITC Holding option and your KNOLOGY option immediately after the distribution. The effect of the distribution is that you will hold directly as a KNOLOGY option the interest in KNOLOGY that you held indirectly through your ITC Holding option prior to the distribution. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not seeking an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2000 PRELIMINARY PROSPECTUS SUPPLEMENT IDateJ Dear Optionee: We are pleased to announce that ITC Holding Company, Inc. has completed the distribution of all of its shares of stock of KNOLOGY, Inc. In connection with the distribution, each unexercised ITC Holding option you hold was effectively split into separately exercisable options to acquire shares of stock of ITC Holding and of KNOLOGY. You will receive 1.09153 KNOLOGY options for each unexercised ITC Holding option you held on the record date of December 15, 1999. Your KNOLOGY options are in addition to your ITC Holding options, which remain in effect, although the exercise price is adjusted as a result of the distribution of the KNOLOGY options. A cash payment will be made in lieu of issuing options for fractional shares of KNOLOGY. Your enclosed cash payment was determined by multiplying $4.75 by your fractional share percentage. The board of directors of KNOLOGY determined the price per share of KNOLOGY's stock underlying your options to be $4.75. The distribution and its effect on your options is discussed more fully in KNOLOGY's prospectus, dated February 3, 2000. We urge you to read the prospectus in its entirety. The December 2, 1999 correspondence previously circulated to you should not be relied upon. We encourage you to review the more current information contained in the prospectus and this letter, which serves as a prospectus supplement. Enclosed please find the following: - - An optionee statement from ITC Holding reflecting your pre-distribution options; - - An optionee statement from ITC Holding and an optionee statement from KNOLOGY reflecting your post-distribution options; - - A check representing payment for any fractional KNOLOGY option shares to which you are entitled; - - A copy of the KNOLOGY spin-off plan; and - - A copy of KNOLOGY's prospectus. The pre-distribution optionee statement reflects your option holdings in ITC Holding immediately prior to the distribution. The post-distribution optionee statements reflect your current option holdings as a result of the distribution, including both your options to acquire shares of stock of ITC Holding and your options to acquire shares of KNOLOGY. Please note that as discussed more fully in the prospectus, if you are not an employee of ITC Holding or a subsidiary of ITC Holding, such as ITC Service Company or InterCall, NO ACTION REQUIRED BY ITC HOLDING STOCKHOLDERS OR OPTION HOLDERS In this distribution: - You are not required to pay cash or any other consideration for the securities you receive. - You do not need to make any decisions or take any action to receive your shares or options. You do not need to surrender your ITC Holding stock or options. - There are no conditions to the completion of the distribution. No further board action is necessary and no stockholder vote is necessary. - There are no proceeds to us or to ITC Holding. - No recipients of the distribution or stockholders of KNOLOGY are entitled to appraisal rights in connection with the distribution. KNOLOGY STOCK AND OPTIONS DISTRIBUTED IN THE DISTRIBUTION CANNOT EASILY BE TRANSFERRED The securities that you receive in this distribution will not be traded on any exchange or listed on the NASDAQ market system. They are also subject to restrictions on transfer described below under the caption "Description of Capital Stock." THE DISTRIBUTION MAY HAVE INCOME TAX CONSEQUENCES TO YOU The following summarizes the material federal income tax consequences of the distribution. You should review this section carefully. Material Federal Income Tax Consequences of the Stock Distribution to ITC Holding Stockholders ITC Holding has received rulings from the IRS that the distribution of our stock to ITC Holding stockholders as described to the IRS would qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code. Based on these rulings, if you receive KNOLOGY stock in the distribution: - Upon the receipt of our stock in the distribution, you will not recognize any gain or loss, and no amount will be included in your income. - The total amount of the basis of our stock plus the basis of the ITC Holding stock held by you after the distribution will be the same as the basis of the ITC Holding stock held by you immediately before the distribution. - If you receive cash in lieu of a fractional share of our stock, you will be taxed as if you had received the fractional share and we redeemed it for the amount of cash. The gain or loss, based on the difference between the amount of cash and your basis in the stock, will be a capital gain or loss if you hold the fractional share interest as a capital asset. These IRS rulings are subject to factual representations made by ITC Holding to the IRS. If those factual representations and assumptions made by ITC Holding are or any ITC Holding option which is designated as an "incentive stock option" in your post-distribution optionee statement from ITC Holding will cease to be an incentive stock option three months after the distribution. Similarly, if you are not an employee of KNOLOGY or a subsidiary of KNOLOGY, such as KNOLOGY Holdings or Interstate Telephone Company, any KNOLOGY option which is designated as an "incentive stock option" in your post-distribution optionee statement from KNOLOGY will cease to be an incentive stock option three months after the effective date of the distribution. As discussed more fully in the prospectus, the vesting and forfeiture of your ITC Holding options and KNOLOGY options will be based on your service at the company where you are employed. If you terminate employment at your employer while you have unvested options, you will forfeit the unvested options for the stock of your employer and the other unvested replacement options. This will be the case even if you leave employment with one of the ITC Holding Companies, for example, and commence employment with KNOLOGY. In addition to forfeiting your unvested options, you will have three months from the date your employment ceases to exercise your vested options. Please retain this letter for your records as the combination of this letter and your ITC Holding Company stock option agreements serve as record of your option grants, including the amendment adjusting the exercise price of your ITC Holding options. Your ITC Holding options remain subject to the terms and conditions of the ITC Holding Company stock option plan, as amended and restated. Your KNOLOGY options are subject to the terms and conditions of the KNOLOGY spin-off plan. Although the KNOLOGY spin-off plan is similar to the ITC plan, there are some differences. A copy of the KNOLOGY spin-off Plan is enclosed with this letter. Please contact Chuck Edwards at (706) 645-8896 if you have any questions regarding the enclosed items. Very Truly Yours, Bryan W. Adams Enclosures become incorrect in any material respect, the reliability of the IRS rulings will be jeopardized. However, ITC Holding is not aware of any facts and circumstances that would cause those representations and assumptions to be untrue. If the distribution were not to constitute a tax-free spin-off, then the distribution could have adverse tax consequences to you. These potential adverse tax consequences are discussed in detail below under the caption "Material Federal Income Tax Consequences of the Distribution." Material Federal Income Tax Consequences of the Option Distribution to ITC Holding Option Holders The tax treatment of the option holders was not the subject of the IRS rulings. We have received an opinion from Arthur Andersen LLP, KNOLOGY's independent accountants, in connection with the proposed issuance of the KNOLOGY options. The tax opinion provides as follows: 1. What is the federal tax effect of the distribution of KNOLOGY stock options to ITC Holding employees who hold ITC Holding incentive stock options? - The distribution of KNOLOGY stock options to ITC Holding employees holding ITC Holding incentive stock options will not be a taxable event. - The KNOLOGY stock options distributed are more likely than not incentive stock options. In the case of incentive stock options that do not subsequently become nonqualified, there will be a taxable event at the time the stock underlying the options is sold based upon the difference between the fair market value of the stock at the date of sale and the exercise price. Alternative minimum tax may also apply when incentive stock options are exercised. - If the IRS were to recharacterize the KNOLOGY stock options as nonqualified options, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. - Even if the KNOLOGY stock options distributed are incentive stock options, they will become nonqualified options three months after the distribution. The conversion to a nonqualified stock option will not be a taxable event. With a nonqualified stock option, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. 2. What is the federal tax effect of the distribution of KNOLOGY stock options to KNOLOGY employees who hold ITC Holding incentive stock options? - The distribution of KNOLOGY stock options to Knology employees holding ITC Holding incentive stock options will not be a taxable event. - The KNOLOGY options distributed should be incentive stock options. In the case of incentive stock options that do not subsequently become nonqualified, there will be a taxable event at the time the stock underlying the options is sold OPTIONEE STATEMENT ITC HOLDING (PRE KNOLOGY SPIN-OFF) EXERCISABLE AS OF 1/25/2000 - -------------------------------------------------------------------------------- [NAME] <TABLE> <CAPTION> EXPIRATION GRANT OPTIONS OPTION OPTIONS DATE TYPE GRANTED PRICE OUTSTANDING OPTIONS VESTED - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> - --------------------------------------------------------------------------------------------- TOTALS </TABLE> based upon the difference between the fair market value of the stock at the date of sale and the exercise price. Alternative minimum tax may also apply when incentive stock options are exercised. - If the IRS were to recharacterize the KNOLOGY stock options as nonqualified options, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. 3. What is the federal tax effect of the distribution of the KNOLOGY stock options to nonemployees and employees of ITC Holding and KNOLOGY holding nonqualified stock options? - The distribution of KNOLOGY stock options to nonemployees and employees holding nonqualified stock options of ITC Holding will not be a taxable event. - The KNOLOGY stock options will be treated as nonqualified stock options. With a nonqualified stock option, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. 4. What is the federal tax effect of the adjustment in exercise price of ITC Holding incentive stock options for ITC Holding employees? - The adjustment of the exercise price of ITC Holding incentive stock options held by ITC Holding employees will not be treated as a taxable event. - The incentive stock options with the adjusted exercise prices that are held by ITC Holding employees after the distribution should remain incentive stock options. In the case of incentive stock options that do not subsequently become nonqualified, there will be a taxable event at the time the stock underlying the options is sold based upon the difference between the fair market value of the stock at the date of sale and the exercise price. Alternative minimum tax may also apply when incentive stock options are exercised. - If the IRS were to recharacterize the ITC Holding stock options as nonqualified options, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. 5. What is the federal tax effect of the adjustment in exercise price of ITC Holding incentive stock options for KNOLOGY employees? - The adjustment of the exercise price of ITC Holding incentive stock options held by KNOLOGY employees will not be a taxable event. - The ITC Holding incentive stock options with the adjusted exercise prices that are held by KNOLOGY employees after the distribution should be incentive stock options. In the case of incentive stock options that do not subsequently become nonqualified, there will be a taxable event at the time the stock underlying the options is sold based upon the difference between the fair market value of the stock at the date of sale and the exercise price. Alternative minimum tax may also apply when incentive stock options are exercised. OPTIONEE STATEMENT ITC HOLDING (POST KNOLOGY SPIN-OFF) EXERCISABLE AS OF 1/26/2000 - -------------------------------------------------------------------------------- [NAME] <TABLE> <CAPTION> EXPIRATION GRANT OPTIONS OPTION OPTIONS DATE TYPE GRANTED PRICE OUTSTANDING OPTIONS VESTED - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> - --------------------------------------------------------------------------------------------- TOTALS </TABLE> - If the IRS were to recharacterize the ITC Holding stock options as nonqualified stock options, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. - The ITC Holding incentive stock options with the adjusted exercise prices that are held by KNOLOGY employees after the distribution will become nonqualified stock options three months after the distribution. The conversion to a nonqualified stock option will not be a taxable event. With a nonqualified option, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. 6. What is the federal tax effect of the adjustment in exercise price of ITC Holding nonqualified stock options for nonemployees and employees of ITC Holding and KNOLOGY holding nonqualified stock options? - The adjustment of the exercise price of ITC Holding nonqualified stock options held by nonemployees and employees of ITC Holding and KNOLOGY will not be treated as a taxable event. - The stock options will continue to be treated as nonqualified stock options. With a nonqualified stock option, the holder will have taxable income at the date of exercise for the difference between the fair market value of the stock at the date of exercise and the exercise price. Based on the existing Internal Revenue Code and tax regulations, Arthur Andersen LLP has issued a "more likely than not" opinion on whether the options are incentive stock options in the first item above and a "should" opinion on whether the options are incentive stock options in the remaining items above. Arthur Andersen LLP is not able to issue a "will" opinion since the Internal Revenue Code, regulations, or guidance issued by the Internal Revenue Service (including revenue rulings and revenue procedures) are not identical to facts and circumstances pertaining to the transactions of ITC Holding and KNOLOGY. However, Arthur Andersen LLP is unaware of the IRS making an argument inconsistent with its opinion in the context of a transaction such as the distribution. In addition, since the Internal Revenue Code, regulations, or guidance issued by the Internal Revenue Service (including revenue rulings and revenue procedures) do not specify whether or not a particular regulation applies to the specifics of the distribution, and the IRS may interpret the regulation as applying to the distribution, Arthur Andersen is not able to provide a "should" opinion on whether the options are incentive stock options in the first item above. The potential tax consequences for holders of ITC options and the related risks associated with the distribution of options to purchase our stock are discussed in detail below under the caption "The Distribution -- Material Federal Income Tax Consequences of the Distribution -- Federal Income Tax Consequences of the Distribution to ITC Holding Option Holders." That section also contains a discussion of the tax treatment of incentive stock options and nonqualified stock options. OPTIONEE STATEMENT KNOLOGY SPIN-OFF EXERCISABLE AS OF 1/26/2000 - -------------------------------------------------------------------------------- [NAME] <TABLE> <CAPTION> EXPIRATION GRANT OPTIONS OPTION OPTIONS DATE TYPE GRANTED PRICE OUTSTANDING OPTIONS VESTED - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> - --------------------------------------------------------------------------------------------- TOTALS </TABLE> INTENDED SUBSEQUENT PRIVATE PLACEMENT Shortly after this distribution, we intend to make a private offering of shares of our Series B preferred stock. This offering is expected to be to a small group of institutional investors for approximately $100 million. Once issued, the Series B preferred stock would represent approximately 25% of our total outstanding shares on a fully diluted basis. Each share of Series B preferred stock is expected to be convertible initially into one share of our common stock. We have received firm commitments from some of the proposed institutional investors to purchase the Series B preferred shares at $4.75 per share, and we expect to sell the Series B preferred shares at this price. The terms of this private offering could change and it is possible that the offering will not be consummated. The private offering is contingent upon the completion of the distribution described by this prospectus. OPTIONEE STATEMENT KNOLOGY SPIN-OFF PLAN EXERCISABLE AS OF 1/26/2000 - -------------------------------------------------------------------------------- ALL ITC HOLDING COMPANY OPTIONEES COMBINED <TABLE> <CAPTION> EXPIRATION GRANT OPTIONS OPTION OPTIONS DATE TYPE* GRANTED PRICE OUTSTANDING OPTIONS VESTED - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 1/17/2001 ISO 327,458 $0.08 327,458 327,458 Current 1/17/2001 NQ 333,460 $0.08 333,460 333,460 Current 3/26/2002 NQ 21,830 $0.15 21,830 21,830 Current 3/27/2002 ISO 2,147 $0.05 2,147 2,147 Current 9/25/2002 ISO 109,152 $0.15 109,152 109,152 Current 9/25/2002 NQ 191,016 $0.15 191,016 191,016 Current 6/22/2003 ISO 2,574 $0.08 2,574 2,574 Current 9/15/2003 ISO 34,928 $0.27 34,928 34,928 Current 9/30/2003 ISO 2,574 $0.15 2,574 2,574 Current 12/14/2003 ISO 51,681 $0.16 51,681 51,681 Current 2/25/2004 ISO 198,198 $0.27 198,198 198,198 Current 2/25/2004 NQ 199,199 $0.27 199,199 199,199 Current 3/24/2004 ISO 7,739 $0.22 7,739 7,739 Current 3/28/2004 ISO 106,381 $0.27 106,381 106,381 Current 3/28/2004 NQ 27,288 $0.27 27,288 27,288 Current 4/28/2004 NQ 34,436 $0.22 34,436 34,436 Current 6/23/2004 ISO 2,233 $0.22 2,233 2,233 Current 9/30/2004 ISO 17,462 $0.34 17,462 17,462 Current 9/30/2004 NQ 56,976 $0.34 56,976 56,976 Current 11/1/2004 NQ 26,196 $0.34 26,196 26,196 Current 12/16/2004 ISO 8,139 $0.34 8,139 8,139 Current 12/16/2004 NQ 3,739 $0.34 3,739 3,739 Current 2/7/2005 ISO 101,369 $0.34 101,369 81,095 Current 20,274 on 2/7/2000 2/7/2005 NQ 124,861 $0.34 124,861 99,889 Current 24,972 on 2/7/2000 4/28/2005 ISO 39,748 $0.38 39,748 31,798 Current 7,950 on 4/28/2000 4/28/2005 NQ 2,183 $0.38 2,183 1,746 Current 437 on 4/28/2000 6/19/2005 ISO 436 $0.38 436 349 Current 87 on 6/19/2000 6/19/2005 NQ 13,098 $0.38 13,098 10,478 Current 2,620 on 6/19/2000 7/28/2005 ISO 4,973 $0.47 4,973 3,978 Current 995 on 7/28/2000 </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth our summary consolidated financial data. The summary financial data set forth below should be read in conjunction with the section of the prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", our financial statements and related notes, and other financial data included elsewhere in this prospectus. See note 1 to our financial statements regarding the reorganization. <TABLE> <CAPTION> NINE NINE YEAR YEAR YEAR MONTHS MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1998(A) 1998 1999 ------------ ------------ ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Operating Revenues........................ $17,527,208 $ 17,633,313 $ 45,132,522 $ 30,285,049 $ 48,824,228 Operating expenses: Cost of services........................ 2,991,412 3,121,108 12,739,540 9,010,401 18,573,719 Selling, operations and administrative........................ 8,331,795 9,498,461 37,323,345 24,256,479 35,760,116 Depreciation and amortization........... 3,022,056 2,781,800 17,326,895 9,013,477 29,526,358 ----------- ------------ ------------ ------------ ------------ Total operating expenses.......... 14,345,263 15,401,369 67,389,780 42,280,357 83,860,193 ----------- ------------ ------------ ------------ ------------ Operating income (loss)................... 3,181,945 2,231,944 (22,257,258) (11,995,308) (35,035,965) ----------- ------------ ------------ ------------ ------------ Other expense, net........................ (379,889) (2,048,506) (18,645,199) (12,389,198) (22,967,976) ----------- ------------ ------------ ------------ ------------ Income (loss) before minority interest, income tax (provision) benefit and cumulative effect of a change in accounting principle.................... 2,802,056 183,438 (40,902,457) (24,384,506) (58,003,941) Minority interest......................... -- -- 13,294,079 11,292,126 3,267,653 Income tax (provision) benefit............ (1,371,865) (1,010,779) 5,631,618 1,704,350 11,011,711 Cumulative effect of a change in accounting principle.................... -- -- (582,541) (582,541) -- ----------- ------------ ------------ ------------ ------------ Net income (loss)......................... 1,430,191 (827,341) (22,559,301) (11,970,571) (43,724,577) Subsidiary preferred stock dividends...... -- (4,193,276) (1,424,222) (63,907) -- ----------- ------------ ------------ ------------ ------------ Net income (loss) attributable to common stockholders............................ $ 1,430,191 $ (5,020,617) $(23,983,523) $(12,034,478) $(43,724,577) =========== ============ ============ ============ ============ PER SHARE DATA: Basic and diluted net income (loss) attributable to common stockholders..... $ 14,301.91 $ (50,206.17) $(239,835.23) $(120,344.78) $(437,245.77) Basic and diluted weighted average number of common shares outstanding............ 100 100 100 100 100 OTHER FINANCIAL DATA: Capital expenditures...................... $ 995,320 $ 1,727,079 $120,227,057 $ 80,913,266 $ 64,290,709 Cash provided by (used in) operating activities.............................. 4,770,730 3,680,116 23,035,488 9,515,039 (3,069,133) Cash (used in) provided by investing activities.............................. (197,362) (22,223,940) (34,586,803) (22,997,766) 1,021,793 Cash (used in) provided by financing activities.............................. (4,457,176) 18,726,407 16,083,187 15,176,704 18,088,543 EBITDA(b)................................. 5,640,550 2,509,854 8,564,129 8,475,265 (2,067,832) Ratio of earnings to fixed charges........ 3.57 1.03 -- -- -- Insufficient earnings to cover fixed charges................................. -- -- $ 27,608,378 $ 13,092,380 $ 54,736,288 </TABLE> <TABLE> <CAPTION> DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1996 1997 1998 1999 ------------ ------------ ------------ ------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital..................................... $ 2,977,835 $(1,240,180) $ 49,965,918 $ 12,646,729 Property and equipment, net......................... 11,374,950 11,260,846 211,885,668 258,655,902 Total assets........................................ 22,883,276 30,196,492 374,680,811 363,667,403 Long-term debt, including accrued interest.......... -- -- 276,165,900 321,627,291 Total liabilities................................... 7,235,555 6,656,317 314,414,049 350,418,909 Minority interest................................... -- -- 3,267,653 -- Retained earnings (accumulated deficit)............. 9,598,225 3,181,179 (20,802,344) (64,526,921) Total stockholders' equity.......................... 15,647,721 23,540,175 54,512,149 10,761,534 </TABLE> - --------------- (a) See note 9 to our financial statements, Cable Alabama acquisition, for further information regarding presentation. (b) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. While EBITDA should not be construed as a substitute for operating income (loss) as a measure of performance or as a better measure of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is a measure commonly used in our industry and is included herein because we believe EBITDA provides relevant and useful information to our investors. Since the elements of EBITDA are determined using the accrual basis of accounting and EBITDA excludes the effects of capital and financing related costs, investors should use it to analyze and compare companies on the basis of operating performance. We utilize and have disclosed EBITDA to provide additional information with respect to our ability to meet future debt service, capital expenditures and working capital requirements; to incur additional indebtedness; and to fund continuing growth. EBITDA may not necessarily be calculated comparably with similarly titled measures for other companies. Additionally, we do not currently believe that there are any legal or functional requirements that limit management's discretionary use of funds depicted by EBITDA. <TABLE> <CAPTION> EXPIRATION GRANT OPTIONS OPTION OPTIONS DATE TYPE* GRANTED PRICE OUTSTANDING OPTIONS VESTED - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 7/28/2005 NQ 31,978 $0.47 31,978 25,582 Current 6,396 on 7/28/2000 10/27/2005 ISO 5,866 $0.47 5,866 4,693 Current 1,173 on 10/27/2000 1/24/2006 ISO 9,602 $0.47 9,602 7,682 Current 1,920 on 1/24/2001 1/24/2006 NQ 492,632 $0.47 492,632 394,106 Current 98,526 on 1/24/2001 3/19/2006 ISO 35,234 $0.51 35,234 21,140 Current 7,047 on 3/19/2000 7,047 on 3/19/2001 3/20/2006 ISO 128,002 $0.47 128,002 76,801 Current 25,600 on 3/19/2000 25,601 on 3/19/2001 3/20/2006 NQ 107,975 $0.47 107,975 64,785 Current 21,595 on 3/20/2000 21,595 on 3/20/2001 5/1/2006 ISO 21,521 $0.47 21,521 12,913 Current 4,304 on 5/1/2000 4,304 on 5/1/2001 5/1/2006 NQ 15,281 $0.47 15,281 9,169 Current 3,056 on 5/1/2000 3,056 on 5/1/2001 5/20/2006 ISO 69,857 $0.47 69,857 41,914 Current 13,971 on 5/20/2000 13,972 on 5/20/2001 8/21/2006 NQ 170,532 $0.57 170,532 102,319 Current 34,106 on 8/21/2000 34,107 on 8/21/2001 10/30/2006 ISO 24,183 $0.58 24,183 14,510 Current 4,837 on 10/30/2000 4,836 on 10/30/2001 10/30/2006 NQ 8,246 $0.58 8,246 4,948 Current 1,649 on 10/30/2000 1,649 on 10/30/2001 1/29/2007 ISO 37,674 $0.60 37,674 15,070 Current 7,535 on 1/29/2000 7,535 on 1/29/2001 7,534 on 1/29/2002 1/29/2007 NQ 315,614 $0.60 315,614 126,246 Current 63,123 on 1/29/2000 63,123 on 1/29/2001 63,122 on 1/29/2002 3/19/2007 ISO 12,495 $0.66 12,495 4,998 Current 2,499 on 3/19/2000 2,499 on 3/19/2001 2,499 on 3/19/2002 </TABLE>

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+ SUMMARY This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that is important to you. For a more complete understanding of this exchange offer, we encourage you to read this entire prospectus carefully. Our fiscal year ends on the Saturday closest to December 31. Unless the context indicates otherwise, whenever we refer in this prospectus to a particular fiscal year, we mean the fiscal year ending in that particular calendar year. When we refer to "pro forma" financial results, we mean the financial results of Charles River and its subsidiaries on a consolidated basis as if the Transactions (which we define on page 2) had occurred at the beginning of the relevant time period. CHARLES RIVER LABORATORIES, INC. Overview We are a global market leader in the commercial production and supply of animal research models, meaning whole, living animals bred in a clean environment specifically for the purpose of research. Most of our animal research models are rats and mice for use in the discovery, development and testing of new pharmaceuticals. Because we expanded our core capabilities in research models, we are currently a leading supplier of related biomedical products and services in several specialized niche markets. We have a broad customer base which consists primarily of: o large pharmaceutical companies, including the ten largest global pharmaceutical companies based on 1998 revenues o biotechnology, animal health, medical device and diagnostics companies o hospitals o academic institutions o government agencies On a pro forma basis, research models accounted for 62%, and biomedical products and services accounted for 38%, of net sales for the nine-month period ended September 25, 1999. Over the same time period, we reported pro forma net sales of $177.1 million and pro forma Adjusted EBITDA, which means EBITDA, as defined, adjusted for non-recurring, non-cash and cash items, as appropriate, of $45.4 million. Our principal executive offices are located at 251 Ballardvale Street, Wilmington, MA 01887 and our telephone number is (978) 658-6000. Research Models. We have a leading position in the global market for research models, which primarily consists of rats and mice bred for the specific purpose of research. The use of research models is often a critical part of scientific discovery in the life sciences and is required by FDA guidelines as well as foreign regulatory agencies for new drug approval processes. Biomedical Products and Services. Our principal focus in our biomedical products and services division is meeting the research needs of large pharmaceutical companies as well as biotechnology, animal health, medical device and diagnostics companies. We are a leading supplier of endotoxin testing kits that detect fever producing toxins in injectable drugs and devices and are one of only two FDA validated in vitro alternatives to an animal test. These kits are used to test materials for the presence of particular by-products of bacteria known as endotoxins, which if present and introduced to the bloodstream can cause serious illness or even death. We manufacture these EXPLANATORY NOTE This Registration Statement covers the registration of an aggregate principal amount of $150,000,000 of 13 1/2% series B senior subordinated notes due 2009 of Charles River Laboratories, Inc. ("Charles River") (the "new notes") that may be exchanged (the "exchange offer") for equal principal amounts of Charles River's outstanding 13 1/2% series A senior subordinated notes due 2009 (the "old notes"). This Registration Statement also covers the registration of the new notes for resale by Donaldson, Lufkin & Jenrette Securities Corporation in market-making transactions. The complete prospectus relating to the exchange offer (the "exchange offer prospectus") follows immediately after this Explanatory Note. Following the exchange offer prospectus are pages relating solely to such market-making transactions (the "market-making prospectus"), including alternate front and back cover pages, an alternate "Risk Factors--No public trading market for the new notes exist" section, an alternate "Use of Proceeds" section and an alternate "Plan of Distribution" section. In addition, the market-making prospectus will include references merely to "notes" instead of to "old notes" and "new notes" and will not include the following captions (or the information set forth under such captions) in the exchange offer prospectus: "Summary--The Exchange Offer," "Summary--Consequences of Exchanging Old Notes in the Exchange Offer," "The Exchange Offer" and "Material United States Tax Consequences of the Exchange Offer." All other sections of the exchange offer prospectus will be included in the market-making prospectus. The market-making prospectus may also be used by DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., and DLJ ESC II L.P. to comply with their prospectus delivery requirements under the Securities Act in connection with any resale transactions. kits which are based on extracts from the blood of horseshoe crabs, which visibly clots in the presence of endotoxin, thereby acting as a test for the presence of endotoxin. We are one of the world's largest producers of a kind of fertile chicken eggs, which are free of most viruses, bacteria and other harmful agents. We refer to such eggs as "SPF eggs." SPF eggs are principally used to produce poultry vaccines. Competitive Strengths We have a number of competitive strengths, including: o having long-standing relationships with an extensive customer base o being a critical component of pharmaceutical research o having a leading market position o having a global presence o our experienced and motivated management team Business Strategy Our business strategy combines the following elements: o increase sales in research models o expand biomedical products and services, which includes: -- capitalizing on outsourcing trends within the pharmaceutical companies. Outsourcing trends mean the increasing tendencies of companies to contract out to others functions that they previously performed internally -- building upon our existing capabilities -- increasing our global sales o undertake strategic acquisitions and alliances The Recapitalization On September 29, 1999, affiliates of DLJ Merchant Banking Partners II, L.P., management and other investors acquired us while subsidiaries of Bausch & Lomb Incorporated retained a portion of their equity investment in us, for total consideration of $456.2 million. As a result, DLJ Merchant Banking Partners II, L.P. and some of its affiliates, whom we refer to collectively as the "DLJMB Funds", indirectly own 71.9% and subsidiaries of Bausch & Lomb Incorporated own 12.5% of Charles River Laboratories Holdings, Inc. We are a wholly owned subsidiary of Charles River Laboratories Holdings, Inc., which does not have any material operations or assets other than its ownership of all of our capital stock. See page 22 for more information on the financing of the recapitalization. The Sierra Acquisition Concurrently with the recapitalization described above, we acquired SBI Holdings, Inc. ("Sierra") for an initial total purchase price of $24.0 million, including approximately $18.0 million in cash paid to the former shareholders. We also assumed debt of approximately $6.0 million, which we immediately retired. See page 23 for more information on the funding of the acquisition of Sierra. Sierra is a pre-clinical biomedical services company with expertise in drug safety and effectiveness studies using research models. We believe that the acquisition of Sierra will contribute to our growing presence in the pre-clinical testing services business. Sierra submits data from the pre-clinical stage to the applicable regulatory agency for review in order for a drug to obtain approval to advance to the human testing stage, commonly known as clinical studies. THE EXCHANGE OFFER Securities Offered..................... We are offering up to $150,000,000 aggregate principal amount of 131/2% series B senior subordinated notes due 2009, which have been registered under the Securities Act. The terms of the new notes are identical in all material respects to the terms of the old notes, except that the new notes will not be guaranteed by any subsidiaries. We merged the subsidiaries which guaranteed the old notes into Charles River Laboratories, Inc. We merged the subsidiaries which guaranteed the old notes into Charles River. We are not offering to exchange the warrants that were issued with the old notes in this exchange offer. We are registering the warrants and the common stock into which the warrants are exercisable on a separate "shelf" registration statement. The Exchange Offer..................... We are offering to issue the new notes in exchange for a like principal amount of your old notes. We are offering to issue the new notes to satisfy our obligations in the registration rights agreement entered into when we sold the old notes in transactions under Rule 144A and Regulation S of the Securities Act. For procedures for tendering, see "The Exchange Offer." Expiration Date, Tenders, Withdrawal... The exchange offer will expire at 5:00 p.m. New York City time on March 13, 2000 unless we extend the offer. If you decide to exchange your old notes for new notes, you must acknowledge that you are not engaging in, and do not intend to engage in, a distribution of the new notes. If you decide to tender your old notes in the exchange offer, you may withdraw them at any time prior to March 13, 2000. If we decide for any reason not to accept any old notes for exchange, we will return your old notes to you without expense promptly after the exchange offer expires. Federal Income Tax Consequences........ Your exchange of old notes for new notes in the exchange offer will not result in any income, gain or loss to you for Federal income tax purposes. See "Certain Federal Income Tax Consequences of the Exchange Offer." Use of Proceeds........................ We will not receive any proceeds from the issuance of the new notes in the exchange offer. Exchange Agent......................... State Street Bank and Trust Company is the exchange agent for the exchange offer. See page 110 for information on how to contact the exchange agent. Accounting Treatment................... We intend to account for the exchange offer based on the historical basis of accounting for the old notes. As a result, we will report the new notes at the same carrying value as the old notes on the date of the exchange. Accordingly, we will not recognize any gain or loss related to this exchange. CONSEQUENCES OF EXCHANGING OLD NOTES IN THE EXCHANGE OFFER Based on interpretations by the SEC's staff in no-action letters issued to third parties, we believe that you may offer for resale, resell or otherwise transfer the new notes issued in exchange for old notes in the exchange offer without registering the new notes under the Securities Act or delivering a prospectus so long as each of the following applies to you: o you are not one of our "affiliates", which is defined in Rule 405 of the Securities Act o you acquire the new notes in the ordinary course of your business o either you are a broker-dealer or you do not have any arrangement with any person to participate in the distribution of such new notes Unless you are a broker-dealer, you must acknowledge both that: o you are not engaged in, and do not intend to engage in, a distribution of the new notes o you do not have any arrangement or understanding to participate in a distribution of the new notes If you are an affiliate of Charles River, or you are engaged in, intend to engage in or have any arrangement or understanding about, the distribution of new notes you acquire in the exchange offer, you (1) should not rely on our interpretations of the position of the SEC's staff and (2) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If you are a broker-dealer and receive new notes for your own account in the exchange offer: o you must acknowledge that you will deliver a prospectus in connection with any resale of such new notes. The letter of transmittal states that by acknowledging and delivering a prospectus, you will not be admitting that you are an "underwriter" within the meaning of the Securities Act o you may use this prospectus, as it may be amended or supplemented from time to time, in connection with the resale of new notes received in exchange for old notes you acquired as a result of market-making or other trading activities For a period of 90 days after the expiration of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. You may only offer or sell the new notes in jurisdictions where we registered or qualified the new notes for sale, or if you comply with an available exemption from registration or qualification. Subject to the registration rights agreement, we will register or qualify the new notes for offer or sale under the securities laws of any jurisdictions that you reasonably request in writing. Unless you make such a request, we currently do not intend to register or qualify the sale of the new notes in any jurisdiction. If you do not comply with the legal requirements, you could incur liability under the Securities Act, and we will not indemnify you in such circumstances. SUMMARY DESCRIPTION OF THE NOTES Maturity Date.......................... October 1, 2009. Interest Rate and Payment Dates........ Interest on the notes will accrue at the rate of 13.5% per year, payable semi-annually in cash in arrears on October 1 and April 1 of each year, commencing April 1, 2000. The interest rate is subject to increase to 14% per year on August 15, 2000 in the event we do not meet a specified ratio as of June 30, 2000. Optional Redemption.................... On or after October 1, 2004 we may redeem some or all of the notes at any time at the redemption prices described in the section "Description of Notes" under the heading "Optional Redemption." Prior to October 1, 2002, we may redeem up to 35% of the notes with the proceeds of a public equity offering at the redemption price listed in the section "Description of Notes" under the heading "Optional Redemption." Mandatory Repurchase Offer............. If we sell particular assets or experience specific kinds of changes in control of our company, we must offer to repurchase the notes at the prices listed in the section "Description of Notes" under the heading "Repurchase at the Option of Holders." See "Risk Factors--We may be unable to purchase the notes upon a change of control." Ranking................................ The notes will be senior subordinated debt. The notes will rank: o junior to all of our existing and future senior debt and secured debt, including any borrowings under our new credit facility o equally with any of our future senior subordinated debt o senior to any of our future subordinated debt o effectively junior to all of the liabilities of our subsidiaries At September 25, 1999, on a pro forma basis, after giving effect to the Transactions, the notes were contractually subordinated to $163.3 million of our senior debt and effectively subordinated to $5.2 million of liabilities. Restrictive Covenants.................. The indenture governing the notes contains covenants that limit, among other things, our ability, and the ability of some of our subsidiaries, to: o borrow money o create liens o pay dividends on stock or repurchase stock o make some investments o engage in transactions with affiliates o sell some assets or merge with or into other companies For more details, see the section "Description of Notes" under the heading "Certain Covenants." Use of Proceeds........................ We will not receive any proceeds from the exchange of new notes for old notes. SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The table below presents summary historical and unaudited pro forma consolidated financial data and other data for Charles River. We derived the summary historical consolidated financial data for the fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998 from our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. We derived the summary unaudited financial data as of September 25, 1999 and for the nine months ended September 26, 1998 and September 25, 1999 from our unaudited consolidated financial statements and the notes to those statements. In the opinion of management, our unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations for these periods. We derived the summary unaudited pro forma consolidated financial data, which assume our recapitalization and the Sierra acquisition had been completed as of such dates, from the Unaudited Pro Forma Condensed Consolidated Financial Data appearing elsewhere in this prospectus. We believe that the summary unaudited pro forma consolidated financial data do not what our results may be if our recapitalization and the Sierra acquisition were completed as of such dates. In addition, they are not a projection of our future results of operations or financial position. You should read the information contained in this table in conjunction with "Use of Proceeds," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Consolidated Financial Data" and our consolidated financial statements and the notes thereto contained elsewhere in this prospectus. <TABLE> Pro Forma ------------------------- Fiscal Year(1) Nine Months Ended Nine Months ---------------------------- --------------------------- Ended September 26, September 25, Fiscal Year September 25, 1996 1997 1998 1998 1999 Ended 1998 1999 -------- -------- -------- ------------- ------------- ----------- ------------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Net sales related to products...................$146,477 $156,800 $169,377 $128,478 $139,269 $185,969 $155,303 Net sales related to services................... 9,127 13,913 23,924 17,041 21,827 23,924 21,827 ------- ------- ------- ------- ------- ------- ------- Total net sales................................. 155,604 170,713 193,301 145,519 161,096 209,893 177,130 Cost of products sold........................... 91,600 102,980 107,146 80,067 84,557 116,551 94,146 Cost of services provided....................... 6,177 8,480 15,401 10,974 12,673 15,401 12,673 Selling, general and administrative expenses.... 28,327 30,451 34,142 25,202 29,414 39,052 34,778 Amortization of goodwill and other intangibles.. 610 834 1,287 1,036 1,114 3,354 2,553 Restructuring charges........................... 4,748 5,892 -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Operating income................................ 24,142 22,076 35,325 28,240 33,338 35,535 32,980 Other Data: EBITDA, as defined(2)........................... $33,670 $31,779 $46,220 $36,172 $42,039 $49,146 $43,660 Adjusted EBITDA(2).............................. 39,167 38,528 47,234 37,012 43,378 50,642 45,450 Adjusted EBITDA margin.......................... 25.2% 22.6% 24.4% 25.4% 26.9% 24.1% 25.7% Depreciation and amortization................... $9,528 $9,703 $10,895 $7,932 $8,701 $13,611 $10,680 Capital expenditures............................ 11,572 11,872 11,909 5,834 7,426 13,307 8,398 Cash interest expense(3).................................................................................. 35,013 28,330 Cash flows from operating activities(4)......... $20,545 $23,684 $36,699 $23,486 $19,552 Cash flows from investing activities(4).........$(11,678) $(12,306) $(22,349) $(14,267) $(4,751) Cash flows from financing activities(4)......... $(4,068) $(12,939) $(8,018) $(2,412) $(34,554) Selected Ratios: Ratio of earnings to fixed charges(5)........... 18.8x 16.5x 25.8x 26.1x 33.7x 1.0x 1.2x Ratio of Adjusted EBITDA to cash interest expense........................................................ 1.4x 1.6x Ratio of total pro forma debt to Adjusted EBITDA...................................................................... 6.8x </TABLE> As of September 25, 1999 ---------------------------- Historical Pro Forma ---------- --------- (dollars in thousands) Balance Sheet Data: Cash and cash equivalents............. $3,457 $3,678 Working capital....................... 20,596 32,001 Total assets.......................... 210,371 332,198 Total debt(6)......................... 1,033 311,128 Total stockholder's equity............ 148,965 (30,357) - ---------- (1) Our fiscal year consists of twelve months ending on the Saturday closest to December 31. (2) EBITDA, as defined, represents operating income plus depreciation and amortization. EBITDA, as defined, is presented because it is a widely accepted financial indicator used by some investors and analysts to analyze and compare companies on the basis of operating performance. Adjusted EBITDA, which represents EBITDA, as defined, adjusted for non-recurring, non-cash and cash items, as appropriate, is presented below because we believe it is a meaningful indicator of Charles River's operating performance and it is the measure by which some of the covenants under the new credit facility are computed. EBITDA, as defined, and Adjusted EBITDA are not intended to represent cash flows for the period, nor are they presented as an alternative to operating income or as an indicator of operating performance. They should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP in the United States and are not indicative of operating income or cash flow from operations as determined under GAAP. Our method of computation may or may not be comparable to other similarly titled measures of other companies. The following table shows a reconciliation of EBITDA, as defined, to Adjusted EBITDA: <TABLE> Pro Forma ---------------------------- Fiscal Year Nine Months Ended -------------------------- ----------------------------- Nine Months Ended September 26, September 25, Fiscal Year September 25, 1996 1997 1998 1998 1999 Ended 1998 1999 ------ ------ ------ ------------- ------------- ----------- ------------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> EBITDA, as defined..................... $33,670 $31,779 $46,220 $36,172 $42,039 $49,146 $43,660 Restructuring and other charges........ 4,748 5,892 -- -- 400 -- 400 Dividends received from equity investments......................... 725 773 681 681 815 681 815 Charles River non-cash compensation(a)..................... 24 84 333 159 124 333 124 Sierra non-cash compensation(a)........ -- -- -- -- -- 262 -- Non-recurring transaction expenses(b).. -- -- -- -- -- 220 451 ------ ------ ------ ------ ------ Adjusted EBITDA........................ $39,167 $38,528 $47,234 $37,012 $43,378 $50,642 $45,450 ====== ====== ====== ====== ====== ====== </TABLE> - ------------------- (a) Amount represents non-cash compensation expense recorded by Charles River and Sierra as a result of options under their respective option plans being issued at below fair market value. (b) Represents expenses incurred by Sierra related to its acquisition of HTI Bio-Services, Inc., and to its acquisition by Charles River; these amounts are considered non-recurring. (3) Cash interest expense represents total interest expense less amortization of deferred financing costs and other non-cash interest charges. (4) Cash flows information is not presented with respect to the unaudited pro forma data because a statement of cash flows is not required by Article 11 of SEC Regulation S-X. (5) For purposes of calculating the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, minority interests and earnings from equity investments less minority interests plus earnings from equity investments plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness, amortization of deferred financing costs and one-third of rental expense from operating leases that we believe is a reasonable approximation of the interest component of rental expense. (6) Total debt includes all debt and capital lease obligations, including current portions.

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+ PROSPECTUS SUMMARY This summary contains an overview of the information from this prospectus, but does not contain all information that may be important to you. This prospectus includes specific terms of the offering, information about our business and financial data. We encourage you to read this prospectus, including the "Risk Factors" section beginning on page 11, in its entirety before making an investment decision. We have provided definitions for some of the natural gas and oil industry terms used in this prospectus in the "Glossary of Natural Gas and Oil Terms" on page 64 of this prospectus. OVERVIEW OF VISION ENERGY Vision Energy, Inc. is an independent energy company engaged in the exploration, development and production of natural gas and oil from properties located primarily in East and South Texas, Louisiana and California. We rely extensively on the evaluation and interpretation of 3D seismic data from our own proprietary 3D seismic database for our natural gas and oil exploration and development activities. From our inception in 1993 through December 31, 1999, we participated in the drilling of 208 exploratory wells on prospects generated or evaluated by our technical staff utilizing our proprietary 3D seismic database. Of these exploratory wells, 124 have been completed as discoveries, which has resulted in an overall success rate of 60% versus an industry average of approximately 33%. During that period, we also participated in 92 development wells with an overall success rate of 88% versus an industry average of approximately 84%. From our inception in 1993 through September 30, 1999, we participated in the acquisition of over 2,100 square miles of 3D seismic data at a total net cost to us of approximately $48.0 million. Over 75% of this data was commissioned by us and is proprietary. Our 3D seismic database covers over 95% of the well locations that we intend to drill through the end of 2000. We have a technical staff consisting of five geologists and four geophysicists with an average of 20 years of experience. Our technical staff assists the operators of our working interests during the evaluation and well planning phase by interpreting and applying our 3D seismic data to increase the probability of drilling a successful well. As of September 30, 1999, our proved reserves totaled 60.2 Bcf of natural gas and 4,594 MBbls of oil and natural gas liquids, for a total of 87.8 Bcfe. Approximately 42% of these reserves, on an Mcfe basis, were proved developed reserves. The PV-10 of our net proved reserves as of September 30, 1999 was $110.6 million. As of September 30, 1999, we owned interests in approximately 353,000 gross acres (109,000 net). The reserve-to-production ratio for our reserves at September 30, 1999, using trailing 12 months' production from that date, was 12 years. For the nine months ended September 30, 1999, our average daily production was approximately 20.0 MMcfe per day. The reserve-to-production ratio and average daily production exclude amounts related to property sales that occurred in July 1999. OUR STRATEGY We intend to expand our reserve base, cash flow and net income and to generate an attractive return on invested capital. We believe that the combination of our strengths and the following elements in our business strategy will help us achieve these objectives: -- Focus on Exploration. As of December 31, 1999, we had an inventory of over 125 exploratory prospects. In 2000, we expect to spend $31.9 million in our exploration and development activities, including $19.2 million to drill 40 wells with our industry partners. -- Extensive Use of 3D Seismic Data. We intend to utilize 3D seismic evaluation for all future exploratory wells in which we participate. Although 3D seismic surveys are expensive to perform and interpret, we believe that these surveys, when coupled with our interpretation expertise, are cost-effective by reducing the number of unsuccessful exploratory wells we drill. -- Maximize Return on Capital. We seek to prioritize our exploration prospects by drilling wells that have the highest risk-adjusted present value first and to mitigate drilling and production risks by using 3D seismic analysis. We also seek to maximize the value of our proved reserves by evaluating asset sale opportunities that will result in high rates of return for our projects. -- Maintain Financial Flexibility. As of the closing of this offering, we expect to have $15.0 million in cash provided by the capital contribution from Seitel, available borrowings of the full amount of our proposed credit facility and less than $100,000 of outstanding indebtedness. We believe this conservative capital structure should enable us to take advantage of value creation opportunities as they arise. SIGNIFICANT EXPLORATION DISCOVERIES Our interests in our most significant exploration discoveries as of September 30, 1999 are summarized in the table below. Please also read "Business -- Reserves" for a more detailed discussion of our natural gas and oil reserves. This table includes amounts related to our interests in the 11 wells in the North Gillis project that we sold in July 1999 for $13.2 million. The capital expenditures disclosed in the table are for evaluated properties only, and the amounts for the North Gillis project are as of July 1999. <TABLE> <CAPTION> CUMULATIVE WELLS --------------------------------- REMAINING DRILLED RESERVES PRODUCTION CAPEX CASH FLOW PV-10 FINDING COST (GROSS/NET) (BCFE) (BCFE) ($MM) ($MM) ($MM) ($/MCFE) ----------- -------- ---------- -------- --------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> North Gillis......... 11/2 19.2 0.6 $5.1 $1.1 n/a $0.26 S. Texas Vicksburg... 11/4.5 17.5 0.9 5.9 2.3 $28.0 0.32 E. Midland........... 3/1 28.8 1.6 8.7 3.5 32.8 0.29 </TABLE> RELATIONSHIP WITH SEITEL Seitel, Inc., a leading seismic data library company, formed a subsidiary, DDD Energy, Inc., in 1993 to capitalize on its seismic expertise through direct investments in natural gas and oil properties. At the closing of the offering, we will acquire all of the stock of DDD Energy from Seitel and will continue to operate the business of DDD Energy. After the offering, Seitel will retain approximately 10% of our outstanding common stock, or approximately 4% of our outstanding common stock if the underwriters exercise their over-allotment option in full.

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+ PROSPECTUS SUMMARY YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS, INCLUDING THE MORE DETAILED INFORMATION IN OUR FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. IN THIS PROSPECTUS, IPRINT.COM, WE, US AND OUR REFER TO IPRINT.COM, INC. AND NOT TO THE UNDERWRITERS. IPRINT.COM, INC. iPrint.com is an online provider of print and private-labeled print services focused on the business market. Our online print shops and services offer a one-stop shop for printing, allowing customers to easily design and order thousands of customized printed products as wide-ranging as business cards, office stationery, business checks and forms, personalized company post-it notes, logo coffee cups, promotional t-shirts and photo mouse pads. By automating or enhancing the print order process and electronically connecting our online printing services to carefully selected commercial print vendors, we believe, based on our experience in the printing industry, that we significantly reduce the costs and inefficiencies associated with the traditional printing process. Our online print services are also designed to be much more convenient and cost-effective than traditional buying alternatives provided through traditional print channels. We were incorporated in August 1996 and began offering online services in January 1997. We have a history of significant losses. We incurred net losses of $700,000 in 1997, $2.3 million in 1998 and $13.4 million in 1999. As of December 31, 1999, we had an accumulated deficit of $15.9 million. We anticipate incurring significant losses and negative operating cash flow into the foreseeable future. Our officers, directors and principal stockholders will control approximately 69.7% of our outstanding common stock upon completion of this offering, assuming no exercise of the underwriters' over-allotment option. Printing can be a significant area of expenditure for small businesses. According to CAP Ventures, sales in the United States printing industry totaled $292 billion in 1998, of which $58 billion was derived from commercial printing operations. The traditional process of purchasing printing can be time consuming and error-prone. Businesses, particularly self-employed individuals and small businesses, often lack the financial resources to create economies of scale when purchasing printed products. Organizations and individuals have begun to take advantage of the Internet to address these inefficiencies and to increase convenience, broaden product selection and improve pricing. Based on information provided by International Data Corporation, worldwide commerce over the Internet conducted by businesses, including government and education organizations, is expected to increase from approximately $35 billion in 1998 to $1.1 trillion in 2003. Our online print services provide our customers with the following benefits: - convenience; - simplified design and ordering process; - streamlined fulfillment process; - significant cost savings; - broad range of services and professionally printed products; and - comprehensive customer service. We simplify the design and ordering process in many ways, including replacing the manual steps and handwritten forms used by traditional print shops. We believe this allows us to significantly reduce reprint-due-to-error rates and the associated print wastage of our commercial print vendors. At the same time we lower costs and improve capacity utilization for our commercial print vendors since we can electronically route orders to commercial print vendors that have idle capacity. We believe that these efficiencies, together with our lower overhead costs due to our online nature and automation, allow us to be more cost-effective than traditional printing alternatives. There are disadvantages relating to online print services, including not meeting face-to-face with a company service representative, needing a computer that is connected to the Internet, and requiring a credit card or purchase order to make purchases. In addition to providing customers with online print services directly through the iPrint.com website, we work with a variety of online organizations, large commercial printers and office supply chains to deliver printing services through our co-label, private-label and marketing relationships. Our co-labeled printing business involves marketing arrangements that promote the iPrint.com brand and our co-labeled party's brand. Our private-labeled printing business entails licensing our print shop technology to large commercial printers, office supply chains and others to provide their customers with online print services. These private-labeled websites do not mention or promote the iPrint.com brand and customers are not aware that we provide these private-labeled services. We have marketing relationships with over 4,000 third parties who provide links from their websites to the iPrint.com website. These links bear only the iPrint.com brand. Our co-label, private-label and marketing relationships allow us to efficiently leverage our technology and effectively expand our reach across a range of customer segments. We also offer printing services in response to unique, project-oriented customer requests that are not addressed through our offerings in our self-service print shops. We refer to these printing services as our specialized print services. We promote these specialized services at our iPrint.com and related websites. As recently as six months ago, we believed that relatively more rapid growth in our private-labeled services would cause revenues from private-labeled services to represent a substantial portion of our revenue in two or three years. However, as our business continues to grow and change, new opportunities have emerged, notably in our specialized print services. As a result, we believe the percentage of our revenue coming from private-labeled relationships will grow but is less likely to become a significant portion of revenue. Our objective is to be the leading online provider of print and private-labeled print services. As part of our strategy, we intend to: - target the business market by aggressively introducing new printing services and promotions; - build our brand recognition by promoting iPrint.com through a mixture of online and traditional advertising and public relations; - build our customer base and stimulate repeat usage by exposing our existing and potential customers to products and services that most closely meet their needs; - license our technology and services to expand distribution to organizations requiring printed products and services; and - leverage and extend our technology platform and improve the efficiency of our system. The market for print services is very competitive, and we face competition from both online and traditional print shops and print brokers. Our strategy and our future success are also subject to risks and uncertainties, including the following: - our promotional and advertising efforts may fail to generate new and repeat paying customers; - we may not be successful in managing rapid change and future growth of our business; and - we may not succeed in developing relationships with sufficient outside print vendors, and these vendors may fail to fulfill our customers' orders. Our principal offices are located at 1450 Oddstad Drive, Redwood City, California 94063. Our telephone number is (650) 298-8500. Our website address is www.iPrint.com. The information on our website does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by iPrint.com................. 4,500,000 shares Common stock to be outstanding..................... 28,906,748 shares Use of proceeds.................................... For working capital, repayment of debt and capital expenditures. See "Use of Proceeds" on page 18. Dividend policy.................................... We intend to retain all future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. See "Dividend Policy" on page 19. Proposed Nasdaq National Market symbol............. IPRT </TABLE> The number of shares of our common stock outstanding after the offering is based on shares outstanding as of December 31, 1999 and does not include: - 1,593,348 shares of common stock issuable upon exercise of outstanding stock options under our equity incentive plans as of December 31, 1999 at a weighted average exercise price of $1.06; - 2,520,485 shares of common stock reserved and available for issuance under our equity incentive plans as of December 31, 1999; and - warrants to purchase an aggregate of 70,500 shares of common stock at a weighted average exercise price of $0.85. iPrint is a registered trademark of iPrint.com. This prospectus contains other trade names, trademarks and service marks of iPrint.com and of other companies. ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES: - NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, - OUR REINCORPORATION INTO DELAWARE, AND - THE CONVERSION OF ALL OF OUR REDEEMABLE CONVERTIBLE PREFERRED STOCK ON A ONE-FOR-ONE BASIS INTO SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ 168 $ 566 $ 3,256 Cost of sales............................................... 85 331 2,265 ------- -------- -------- Gross profit................................................ 83 235 991 ------- -------- -------- Operating expenses: Research and development.................................. 351 901 3,544 Sales and marketing....................................... 181 970 8,132 General and administrative................................ 249 710 2,402 Amortization of deferred compensation..................... -- -- 668 ------- -------- -------- Total operating expenses................................ 781 2,581 14,746 ------- -------- -------- Loss from operations........................................ (698) (2,346) (13,755) Other income (expense), net................................. (1) 75 323 ------- -------- -------- Net loss.................................................... $ (699) $ (2,271) $(13,432) ======= ======== ======== Basic and diluted net loss per share........................ $ (0.11) $ (0.38) $ (1.78) ======= ======== ======== Shares used in computation of basic and diluted net loss per share..................................................... 7,001 7,007 7,265 ======= ======== ======== Pro forma basic and diluted net loss per share (unaudited)............................................... $ (0.72) ======== Shares used to compute pro forma basic and diluted net loss per share (unaudited)..................................... 17,990 ======== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $15,080 $15,080 $51,445 Working capital............................................. 13,075 13,075 49,440 Total assets................................................ 18,363 18,363 54,728 Long-term obligations, net of current portion............... 119 119 119 Redeemable convertible preferred stock...................... 30,793 -- -- Accumulated deficit......................................... (15,887) (15,887) (15,887) Total stockholders' equity (deficit)........................ (15,701) 15,092 51,457 </TABLE> The pro forma data give effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into common stock upon the closing of this offering. The pro forma as adjusted data give effect to the foregoing and to the sale of the 4,500,000 shares of common stock that we are offering under this prospectus at an assumed initial public offering price of $9.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses. See "Capitalization" on page 20.

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+ PROSPECTUS SUMMARY The following summary highlights information that we present more fully elsewhere in this prospectus. You should read this entire prospectus carefully. DIGITALTHINK, INC. We provide online learning courses and services, which are designed, developed, deployed and delivered on an end-to-end basis. Our outsourced, Web-based courses enable customers to deliver learning to any participant who has access to the Internet using a standard Web browser. Our e-learning offerings are designed to enable our customers to deliver knowledge to a broad set of constituencies and provide customers the ability to monitor, track and measure student participation, performance and knowledge acquisition. Businesses purchase course registrations and offer those courses to participants, including their employees, distributors, suppliers and customers, a group which we refer to as the "extended enterprise." We have over 200 customers and over 180 online courses at December 31, 1999. Our e-learning products and services help customers meet their strategic business objectives by addressing their specific education requirements and delivering targeted, relevant information to increase the productivity of their employees, improve the effectiveness of their sales channels and enhance the knowledge and satisfaction of their customers. We initially focused on delivering information technology courses and have extended this focus to develop courses for customers in the technology, financial services, healthcare and telecommunications industries. Our current catalog of fully developed courses consists primarily of technology-oriented topics. We plan to expand the catalog to include courses on other subject matters. Our experience indicates that senior business executives recognize that a principal source of competitive advantage in today's knowledge-based economy is the depth and consistency of employee, distributor, supplier and customer knowledge. We believe businesses that successfully drive knowledge to this extended enterprise can maximize productivity and sustain a competitive advantage. Recognizing the need to establish, maintain and extend this advantage, businesses are spending significant amounts each year on learning. According to the Department of Education, in 1997 businesses spent approximately $55 billion primarily on in-person, instructor-led training. We believe e-learning will become a growing part of this market as e-learning is demonstrated to be more effective than, and becomes a more accepted alternative to, instructor-led training. Based on the experiences of our customers, instructor-led programs can be costly, ineffective, difficult to deploy to a dispersed set of participants and often provide no reliable way to track participants' progress or the effectiveness of learning programs. We host e-learning courses and services that are designed to deliver the knowledge necessary to compete in today's dynamic marketplace. Our approach to e-learning combines powerful delivery technologies, customized content, dedicated tutors and tools to track and report on course registrations and measure student participation and performance. In addition to hosting, we centrally manage all software and content. Our e-learning platform significantly reduces our customers' learning infrastructure costs and enables us to rapidly customize and update our courses. As more businesses use online learning courses, the online corporate learning market is projected to grow from $550 million in 1998 to more than $11.4 billion in 2003, according to International Data Corporation. Our Web-based technology can scale to deliver online content to thousands of concurrent participants who can access courses from anywhere, at anytime through a standard Web browser. This enables our customers to simultaneously educate large, geographically dispersed groups on new initiatives, products or processes. Our innovative instructional design encourages participants to interact with tutors and peers through e-mail and the Internet using chat rooms and discussion boards. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY................... 3 RISK FACTORS......................... 7 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS................. 18 USE OF PROCEEDS...................... 18 DIVIDEND POLICY...................... 18 CAPITALIZATION....................... 19 DILUTION............................. 20 SELECTED FINANCIAL DATA.............. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 22 BUSINESS............................. 32 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> MANAGEMENT........................... 45 TRANSACTIONS WITH RELATED PARTIES............................ 54 PRINCIPAL STOCKHOLDERS............... 56 DESCRIPTION OF CAPITAL STOCK......... 58 SHARES ELIGIBLE FOR FUTURE SALE...... 62 UNDERWRITING......................... 64 NOTICE TO CANADIAN RESIDENTS......... 67 LEGAL MATTERS........................ 68 EXPERTS.............................. 68 ADDITIONAL INFORMATION............... 68 INDEX TO FINANCIAL STATEMENTS........ F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. We refer to our e-learning offering as a "solution" because we manage all aspects of e-learning on an end-to-end basis. We offer instructional and Web-design expertise. We also offer the technology necessary to deploy, deliver, track and monitor the learning process. In addition we provide access to a community of mentors and tutors that provide prompt responses to course participants. Our customers rely on this comprehensive solution to address and resolve the challenges of deploying e-learning. Our solution consists of previously developed catalog courses on a variety of topics and custom-designed courses built to address the specific needs of our customers. Our agreements generally permit us to use the content we develop for one customer in other courses. We intend to leverage our expertise in course design and delivery to establish the most effective e-learning courses and services for our customers as they expand their learning initiatives. Key elements of our strategy include: - enhancing our e-learning courses, services and delivery software; - developing long-term strategic relationships with our customers; - introducing new courses and leveraging our existing courses across multiple customers and industries; - expanding our sales network of learning resellers, consulting companies, co-developers partners and Internet portals; and - delivering our e-learning solutions in strategically targeted international markets. We generate revenues from participants registering for catalog or customized e-learning courses. We begin recognizing these Delivered Learning fees when a participant registers for a course. These fees are recognized ratably over the term of the course, which is typically six months. We also derive revenues from contracts that require us to develop custom-tailored e-learning solutions. Typically, these Learning Solution service revenues are generated from implementation services, course content development, instructional plan design and release of the course for access by participants. Learning Solution service revenues are recognized as earned on a percentage of completion basis. We will encounter various risks and uncertainties in connection with the implementation of our strategy. These include uncertainties regarding acceptance of e-learning, uncertainties associated with our plans to develop and acquire new course offerings and uncertainties associated with attracting and retaining skilled employees. In addition, we have an accumulated deficit of $34.1 million at December 31, 1999 and anticipate incurring losses, which may be substantial, in the foreseeable future. We also operate in a highly competitive industry with relatively low barriers to entry. We are located at 1098 Harrison Street, San Francisco, California 94103, and our telephone number is (415) 625-4000. Our corporate Web site is located at www.digitalthink.com. Statements and information contained on our Web site are not part of this prospectus. We were incorporated in California in April 1996 and reincorporated in Delaware in December 1999. ------------------ DigitalThink, the Internet Learning Solution, Smart Companies Get It and the DigitalThink logo are trademarks and service marks of ours. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. THE OFFERING Common stock offered in this offering........................... 4,400,000 shares Common stock offered in a private placement to be completed immediately following this offering......................... 1,157,982 shares, at an issue price of $12.09 per share based on an assumed initial public offering price of $13.00 per share Common stock to be outstanding after this offering and the private placement........................ 32,932,771 shares Use of proceeds.................... General corporate purposes, including working capital. Proposed Nasdaq National Market symbol............................. DTHK The total number of outstanding shares of our common stock above is based on: - 4,560,199 shares of our common stock outstanding as of December 31, 1999; and - automatic conversion of all outstanding shares of preferred stock upon completion of this offering into 22,814,590 additional shares of common stock. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM YEAR ENDED NINE MONTHS ENDED APRIL 22, 1996 MARCH 31, DECEMBER 31, (INCEPTION) TO ----------------- ---------------------- MARCH 31, 1997 1998 1999 1998 1999 -------------- ------- ------- ----------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Delivered Learning fees....................... $ 5 $ 148 $ 1,034 $ 685 $ 3,056 Learning Solution services.................... 20 52 813 472 3,432 ------ ------- ------- ------- -------- Total revenues........................... 25 200 1,847 1,157 6,488 ------ ------- ------- ------- -------- Total costs and expenses.......................... 945 3,855 7,764 5,010 19,773 ------ ------- ------- ------- -------- Loss from operations.............................. (920) (3,655) (5,917) (3,853) (13,285) Net loss.......................................... $ (888) $(3,469) $(5,751) $(3,779) $(12,936) ====== ======= ======= ======= ======== Basic and diluted loss per common share........... $(0.29) $ (1.27) $ (2.26) $ (1.46) $ (4.32) ====== ======= ======= ======= ======== Shares used in computing loss per share........... 4,010 4,036 4,095 4,088 4,280 ====== ======= ======= ======= ======== Pro forma basic and diluted loss per common share........................................... $ (0.56) $ (0.39) $ (0.77) ======= ======= ======== Shares used in computing pro forma loss per share........................................... 16,687 15,240 23,930 ======= ======= ======== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- -------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 23,344 $ 23,344 $ 75,840 Working capital............................................. 21,215 21,215 73,711 Total assets................................................ 31,545 31,545 84,041 Redeemable convertible preferred stock...................... 56,214 -- -- Accumulated deficit......................................... (34,075) (34,075) (34,075) Total stockholders' equity (deficit)........................ (31,852) 24,362 76,858 </TABLE> See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma balance sheet data reflects the conversion of all outstanding shares of preferred stock into shares of common stock upon the completion of this offering. The pro forma as adjusted amounts above give effect to the sale of the 4,400,000 shares of common stock in this offering at an assumed initial offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The pro forma as adjusted amounts do not give effect to the sale of 1,157,982 shares in the private placement at an assumed price of $12.09 per share, based on an assumed initial offering price of $13.00 per share. The above information excludes: - 4,017,729 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999 at a weighted exercise price of $1.01 per share; - 1,797,072 shares of common stock available for future grant at December 31, 1999 under our 1996 stock plan; and - 200,000 additional shares of common stock available for issuance under our 2000 employee stock purchase plan immediately following this offering. Unless otherwise specifically stated, information throughout this prospectus: - assumes no exercise of the underwriters' over-allotment option; and - assumes the filing of our amended and restated certificate of incorporation upon completion of this offering.

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+ PROSPECTUS SUMMARY This summary highlights information that we believe is especially important concerning our business and this offering of notes. It does not contain all of the information that may be important to your investment decision. You should read the entire prospectus, including "Risk Factors" and our financial statements and related notes, before deciding to invest in our notes. ALAMOSA GENERAL Alamosa is a provider of wireless personal communications services, commonly referred to as PCS, in the southwestern and midwestern United States. We are a network partner of Sprint PCS, the personal communications services group of Sprint Corporation. Sprint PCS, directly and through affiliates such as us, provides wireless services in more than 4,000 cities and communities across the country. We have the exclusive right to provide digital personal communications services under the Sprint and Sprint PCS brand names in a territory comprising approximately 8.4 million residents. These residents are primarily located in smaller cities and in markets with above average growth rates in Texas, New Mexico, Arizona, Colorado and Wisconsin. We are a development stage company with very limited operations, very limited revenues, significant losses, substantial future capital requirements and an expectation of continued significant losses. We launched Sprint PCS service in Laredo in June 1999, and have since commenced service in ten additional markets: Albuquerque, Santa Fe, El Paso, Las Cruces, Lubbock, Amarillo, Midland, Odessa, Abilene and San Angelo. Our systems cover approximately 2.7 million residents out of approximately 3.9 million total residents in those markets. We expect to cover a total of approximately 4.1 million residents by the end of 2000 and 5.5 million residents by the end of 2001, at which point we expect to have completed our build-out obligations to Sprint PCS and expect to have covered approximately 65% of the resident population in our territory. The number of residents covered by our systems does not represent the number of Sprint PCS subscribers that we expect to be based in our territory. As of December 31, 1999, approximately 31,850 Sprint PCS subscribers were based in our territory. We were formed in July 1998, as a Texas limited liability company. Prior to the closing of this offering, we will reorganize into a Delaware holding company structure. Alamosa PCS Holdings, Inc., the issuer of the notes, is a holding company for our operating subsidiaries. See "The Reorganization." Our principal executive office is located at 4403 Brownfield Highway, Lubbock, Texas 79407. Our telephone number is (806) 722-1100. STRATEGIC RELATIONSHIP WITH SPRINT PCS We believe that our strategic relationship with Sprint PCS provides significant competitive advantages. Sprint PCS is a national provider of wireless services and products. Sprint PCS's subscriber base has more than tripled in size since the end of June 1998, making Sprint PCS one of the fastest growing wireless service providers in the United States. Under our affiliation agreements with Sprint PCS, we have the exclusive right to provide wireless services under the Sprint and Sprint PCS brand names in our territory. Sprint PCS handles our billing and collections and pays us 92% of "collected revenues" from subscribers based in our territory and retains the remaining 8%, as more fully described in "Our Affiliation Agreements with Sprint PCS -- The Management Agreement -- Service Pricing, Roaming and Fees." We also receive other revenues, including Sprint PCS roaming revenues for each minute that Sprint PCS customers based outside our territory use our portion of the Sprint PCS network and 100% of revenues from handset sales. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000 PROSPECTUS $ [ALAMOSA LOGO] ALAMOSA PCS HOLDINGS, INC. % SENIOR DISCOUNT NOTES DUE 2010 ------------------ We are offering $ aggregate principal amount at maturity of our % Senior Discount Notes due 2010. We are also currently offering 10,714,000 shares of our common stock in a separate offering. The issue price of the notes will be $ per $ principal amount at maturity, which represents a yield to maturity of %, calculated from . Interest on the notes will be payable semi-annually on and beginning , 2005. The notes will be unsecured senior obligations and will rank equally with all of our existing and future senior debt. The subsidiaries of Alamosa PCS Holdings, Inc. own substantially all of our operating assets. All of those subsidiaries will guarantee the notes on a senior subordinated basis. The guarantees will be subordinate to all of the subsidiaries' designated senior debt. We have made application to list the notes on the American Stock Exchange. ------------------ INVESTING IN THESE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER NOTE TOTAL -------- ------------ <S> <C> <C> Principal amount at maturity of the notes % $ Price to investors % $ Underwriting discount % $ Proceeds to Alamosa PCS Holdings, Inc. (before expenses) % $ </TABLE> Original issue discount on the notes will accrete from until the date of delivery. The underwriters are offering the notes subject to various conditions. The underwriters expect to deliver the notes to purchasers on or about , 2000. SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS , 2000 We believe that our affiliation with Sprint PCS allows us to establish high quality, branded wireless services more quickly, at a lower cost and with lower initial capital requirements than would otherwise be possible. For example, we benefit from Sprint PCS's: - Marketing. We market products and services through Sprint PCS's existing relationships with major national retailers under the highly recognizable Sprint and Sprint PCS brand names. - National Network. Customers in our territory can immediately access Sprint PCS's growing network in 280 major metropolitan areas across the country. - Advanced Technology. We believe that the technology used by Sprint PCS provides advantages in capacity and voice-quality, as well as access to advanced features such as wireless Internet access. - Handset and Equipment Availability and Pricing. Sprint PCS's purchasing leverage allows us to acquire handsets and network equipment more quickly and at a lower cost than we could without our affiliation with Sprint PCS. ATTRACTIVE TERRITORY We believe that our territory is attractive for several reasons, including: - High Growth Markets. The overall population growth rate in our territory has been approximately 42% above the national average. - Fewer Competitors. We expect to face fewer competitors in our markets than is generally the case for wireless service providers operating in more urban areas. - Opportunity for Sprint PCS Roaming Revenue. We anticipate that we will have significant roaming revenue from Sprint PCS subscribers based outside our territory who use our portion of the Sprint PCS network. ADEQUATE FUNDING TO COMPLETE OUR NETWORK Starting in June 1999, we have launched Sprint PCS service in eleven markets. We anticipate that the proceeds of our initial public offering of common stock, when combined with the committed level of debt financing from Nortel Networks, Inc., will be adequate to fund future required capital expenditures, working capital requirements, operating losses and other cash needs of our business. Further, we believe that this level of financing is adequate to achieve the objective in our business plan of covering approximately 65% of the resident population in our territory by the end of 2001 and to exceed the build-out requirements contained in our affiliation agreements with Sprint PCS. However, we may need additional capital or debt financing due to greater than expected operating losses, the addition of new markets to our territory or unanticipated increases in the capital required to build-out our portion of the Sprint PCS network. [Pictures of the inside of three of our retail store locations, the Alamosa logo and two wireless handsets] [Fold-out page showing the Alamosa logo and a map of United States showing areas where Alamosa PCS, a Sprint PCS affiliate, has the right to provide wireless services and will derive its revenues in yellow and areas where Sprint PCS and other Sprint PCS affiliates have the right to provide wireless services in red.] Sprint PCS customers can use their phones in 280 major metropolitan areas and connecting travel corridors throughout the United States. THE OFFERING Senior Discount Notes...... $ million aggregate principal amount at stated maturity of % senior discount notes due 2010. We will issue the senior discount notes at a price to investors that will yield gross proceeds to us at issuance of approximately $156.0 million. Issuer..................... Alamosa PCS Holdings, Inc. Issue Price................ % Maturity Date.............. , 2010 Accretion.................. Accretion means adjustment of the price of a note to reflect the difference between the price of a note bought at an original issue discount and the stated amount of maturity of the note. The aggregate accreted value of the senior discount notes will increase from approximately $156.0 million at issuance at a rate of %, compounded semi-annually, to a final accreted value equal to their aggregate principal amount of $ million at , 2005. Interest Rate.............. Prior to , 2005, no cash interest will accrue on the senior discount notes. The senior discount notes will accrue interest at the rate of % per annum, payable semi-annually in cash in arrears on and of each year, commencing , 2005. Subsidiary Guarantees...... The senior discount notes will be guaranteed on a senior subordinated basis by our current subsidiaries and all of our future domestic restricted subsidiaries. See "Description of Notes -- Subsidiary Guarantees." Ranking.................... The senior discount notes will be: - senior unsecured obligations of Alamosa PCS Holdings, Inc.; - equal in right of payment to all of the existing and future senior debt of Alamosa PCS Holdings, Inc.; and - senior in right of payment to all of the existing and future subordinated debt of Alamosa PCS Holdings, Inc. The guarantees will be unsecured obligations of the guarantors and will be: - subordinated in right of payment to each guarantor's obligations under the Nortel financing and other credit facilities with banks or institutional lenders, referred to as designated senior debt; - equal in right of payment to all existing and future senior subordinated debt of each guarantor; and - senior in right of payment to all existing and future subordinated debt of each guarantor. Our guarantors generate all of our operating income, and we are dependent on them to meet our obligations under the notes. See "Description of Notes -- Ranking." TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 8 This Prospectus Contains Forward-Looking Statements......... 21 Ratio of Earnings to Fixed Charges.......................... 22 Use of Proceeds............................................. 22 Capitalization.............................................. 23 Selected Financial Data..................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Our Affiliation Agreements with Sprint PCS.................. 56 Management.................................................. 65 Principal Stockholders...................................... 77 Certain Relationships and Related Transactions.............. 80 The Reorganization.......................................... 83 Regulation of the Wireless Telecommunications Industry...... 84 Description of Other Indebtedness........................... 89 Description of Notes........................................ 96 United States Federal Tax Consequences...................... 138 Underwriting................................................ 142 Legal Matters............................................... 143 Experts..................................................... 143 Where You Can Find Additional Information................... 143 Index to Financial Statements............................... F-1 </TABLE> Optional Redemption........ During the first 36 months after this offering, we may use the net proceeds from an equity offering to redeem up to 35% of the accreted value of the senior discount notes originally issued at a redemption price of % of the accreted value as of the date of redemption, provided that at least 65% of the accreted value of the senior discount notes originally issued remains outstanding immediately after the redemption. See "Description of Notes -- Optional Redemption." On or after , 2005, we may redeem all or part of the senior discount notes at redemption prices set forth under "Description of Notes -- Optional Redemption," together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.......... If we experience a change of control, we will be required to make an offer to repurchase your senior discount notes at a price equal to 101% of the accreted value, if before , 2005, or 101% of the principal amount at maturity thereafter, as applicable, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders Upon a Change of Control." Restrictive Covenants...... The indenture governing the senior discount notes will contain covenants that, among other things and subject to important exceptions, will limit our ability and the ability of our subsidiaries and certain of our future subsidiaries to: - incur additional debt or issue preferred stock; - pay dividends, redeem capital stock or make other restricted payments or investments; - create liens on assets; - merge, consolidate or dispose of assets; - enter into transactions with affiliates; and - change lines of business. See "Description of Notes -- Certain Covenants." Original Issue Discount.... The accretion of the senior discount notes from their issue price to their principal amount at maturity will produce taxable ordinary interest income in the amount of the accretion for holders of the senior discount notes during the accretion period. The Internal Revenue Code calls this original issue discount. Thus, although interest will not be payable on the senior discount notes prior to , 2005, U.S. holders will be required to include original issue discount amounts in gross income for U.S. federal income tax purposes over the term of the senior discount notes in advance of receipt of cash payments to which such income is attributable. See "United States Federal Tax Consequences." Listing.................... We have made application to list the notes on the American Stock Exchange. Trustee.................... Norwest Bank Minnesota, N.A. Use of Proceeds............ We will use a portion of the proceeds of this offering of our senior discount notes to prepay $75.0 million of indebtedness outstanding under the Nortel credit facility. We may decide to use the remaining proceeds to: - accelerate coverage within our existing territory; - build-out additional areas within our existing territory; - expand our existing territory; - pursue additional telecommunications business opportunities or acquire other telecommunications businesses or assets; or - cover general corporate purposes. THE COMMON STOCK OFFERING We are also offering common stock in a separate initial public offering pursuant to a separate prospectus. This prospectus relates only to the offering of notes and not to the offering of common stock. SUMMARY FINANCIAL AND OPERATING DATA The financial data presented below under the captions "Statement of Operations Data," "Per Share Data," "Other Data" and "Balance Sheet Data" for, and as of the end of, the period from inception to December 31, 1998, the nine-month period ended September 30, 1999 and the period from inception to September 30, 1999 are derived from the audited financial statements of Alamosa PCS LLC, the predecessor to Alamosa PCS Holdings, Inc. These financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. It is important that you also read "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for the periods ended December 31, 1998 and September 30, 1999, the related notes and the independent auditors' report. The summary unaudited financial data presented below as of and for the period from inception to September 30, 1998 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of financial position and results of operations. Operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1999. <TABLE> <CAPTION> FOR THE PERIOD JULY 16, FOR THE PERIOD JULY 16, FOR THE NINE-MONTH FOR THE PERIOD JULY 16, 1998 (INCEPTION) 1998 (INCEPTION) PERIOD ENDED 1998 (INCEPTION) THROUGH DECEMBER 31, THROUGH SEPTEMBER 30, SEPTEMBER 30, THROUGH SEPTEMBER 30, 1998 1998 1999 1999 ----------------------- ----------------------- ------------------ ----------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA, SUBSCRIBER DATA AND RATIO OF EARNINGS TO FIXED CHARGES) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ 2,000 $ 2,000 Cost of sales........... -- -- 1,614 1,614 Total operating expenses............. 958 401 17,634 18,592 Operating loss.......... (958) (401) (17,247) (18,206) Net loss................ (924) (400) (17,688) (18,612) PER SHARE DATA: Basic and diluted net loss per share of common stock(1)(2)... $(0.02) $(0.01) $ (0.36) $ (0.38) Pro forma net loss per share of common stock(1)(2).......... (0.02) (0.01) (0.36) (0.38) OTHER DATA: EBITDA(3)............... (956) (401) (16,311) (17,267) Adjusted EBITDA(3)...... (956) (401) (9,489) (10,445) Ratio of earnings to fixed charges(4)..... -- -- -- -- Number of subscribers... -- -- 9,850 9,850 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 AS OF ------------------------ DECEMBER 31, 1998 ACTUAL AS ADJUSTED(5) ----------------- ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Cash and cash equivalents........................... $13,529 $ 7,454 $237,587 Construction in progress............................ 1,979 28,940 28,940 Property and equipment, net......................... 114 36,930 36,930 Total assets........................................ 15,674 88,412 323,585 Total debt.......................................... 752(6) 60,885(7) 157,207 Equity.............................................. 14,076 13,210 152,061 </TABLE> - --------------- (1) For the period ended September 30, 1999, diluted weighted average shares outstanding exclude the common shares issuable on exercise of stock options because inclusion would have been antidilutive. ]The presentation of the pro forma net loss per share of common stock gives effect to adjustments for federal and state income taxes as if Alamosa had been taxed as a C Corporation for the periods presented. (2) Reflects the reorganization as if it had occurred upon inception of Alamosa PCS, LLC. (3) Included in Other Data are EBITDA and Adjusted EBITDA amounts. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA represents earnings before interest, income taxes, depreciation and amortization and equity participation compensation expense. EBITDA and Adjusted EBITDA are used by management and certain investors as indicators of a company's historical ability to service debt. Management believes that increases in EBITDA and Adjusted EBITDA are indicators of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA and Adjusted EBITDA are not intended to represent cash flows for the period, nor have they been presented as alternatives to either operating income, as determined by generally accepted accounting principles, as indicators of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and are thus susceptible to varying calculations. EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. (4) For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as earnings or loss before income taxes and extraordinary items and fixed charges. Fixed charges are the sum of (1) interest costs, (2) amortization of deferred financing costs, and (3) one-third of operating lease rental expense (deemed to be interest). Earnings were inadequate to cover fixed charges by 923,822 and 18,341,790 for the period from July 16, 1998 (Inception) to December 31, 1998 and the nine-month period ended September 30, 1999. (5) As adjusted Balance Sheet Data reflects (a) the sale in the common stock offering of 10,714,000 shares of common stock at an initial offering price of $14.00 per share, the midpoint of the range on the cover of the common stock prospectus, less underwriting discounts and commissions and estimated offering expenses of $11.1 million, (b) the issuance of an aggregate principal amount at maturity of $ million in senior discount notes with estimated gross proceeds of $156.0 million, less underwriting discounts and commissions and estimated offering expenses of $5.0 million and (c) the prepayment of an aggregate of $75.0 million of indebtedness under the Nortel facility, consisting of the prepayment of $59.7 million outstanding on September 30, 1999 and cash equal to $15.3 million designated to prepay borrowings under the Nortel facility incurred after September 30, 1999. (6) Reflects capital lease obligations of $728,219 and other notes payable of $23,637. (7) Reflects indebtedness incurred under the Nortel facility of $59,678,288, other notes payable of $353,988 and capital lease obligations of $853,965.

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements and related notes, before you decide whether to invest in our common stock. OUR COMPANY NeoPoint is a leading provider of advanced SmartPhones and intelligent mobile portal services for users of wireless devices. Our SmartPhones integrate high-quality voice capabilities with e-mail, Internet access and personal digital assistant, or PDA, functionality into a single wireless device. Our myAladdin.com SmartService is a wireless Internet portal designed to provide intelligent information and customized content on a non-branded basis to wireless carriers and other consumer-oriented businesses. Our SmartPhones are among the first products to capitalize on the convergence of wireless voice and data applications. We design our SmartPhones, together with our myAladdin.com SmartService, to enable our customers to offer compelling services that create additional revenue opportunities and build brand recognition. We believe that our products and services allow our customers to attract and retain subscribers and differentiate themselves from their competitors. Greater sophistication among subscribers has led to increased awareness of alternative price and service offerings. As a result, subscribers have an increasing tendency to switch from one wireless carrier to another in search of new products and better or less expensive services. To meet these challenges, wireless carriers are seeking new product and service offerings to attract and retain subscribers as well as differentiate themselves from their competitors. Due to a broad combination of factors, including the growth of the Internet and the mobile wireless communication industry, a convergence of mobile voice and data applications has begun. The emergence of multi-purpose wireless devices, combined with the expansion of carrier networks' data capabilities and the development of Wireless Application Protocol, or WAP, has led to a large market opportunity to provide Internet-based products and services that are interoperable. In the past, wireless devices focused on meeting a primary need of users, such as PDA functionality, e-mail and two-way paging capabilities, or voice applications. We believe voice capability will continue to drive demand for wireless devices. In addition, the large and growing installed base of mobile phones provides a large market of consumers accustomed to upgrading their mobile phones as technology improves. Accordingly, we believe that the mobile phone is the most compelling platform for delivering advanced wireless data functionalities. OUR SOLUTION SmartPhones. We believe that our SmartPhones are the first commercial products to integrate Internet access, PDA functionality and data transmission capability into a traditional wireless handset without sacrificing ease-of-use, convenience, appearance, functionality or cost. Our SmartPhones: . provide high-quality digital wireless voice capabilities; . offer a wide range of data capabilities, such as Internet browser and e-mail applications; . incorporate PDA functionalities, including contact information, task list and appointment calendar and personal computer synchronization; . dial or perform other functions using voice commands; and . feature an 11 line x 24 character display that is significantly larger than a traditional cellular telephone display. myAladdin.com SmartService. We believe that our myAladdin.com SmartService is the first wireless Internet portal that has the intelligence necessary to allow wireless carriers and other consumer-oriented businesses to provide compelling, convenient and useful services to their customers. We intend to deliver personalized, localized and timely content that improves upon customer personalization services currently in use. We begin with customer- indicated preferences, which allow individuals to identify those services they want to receive and when they want to receive them. We then add location intelligence that uses global positioning system, or GPS, or other location technologies to provide information and services based on the user's current location. Most importantly, we use intelligent personalization, which is an accumulation of the end user's request patterns learned over a period of time, resulting in real-time customization of information and services. Because this learned personalization increases over time and cannot be easily recreated, we believe that our myAladdin.com SmartService will make the consumer less likely to change service providers. Our myAladdin.com SmartService will be offered to wireless carriers and other consumer-oriented businesses, such as banks and brokerage firms. We intend to provide both content and enabling technology that will allow our customers to deploy branded and customized content and applications over the Internet to their customers with wireless capabilities. We believe that wireless carriers and other consumer-oriented businesses are searching for the type of customer "stickiness" that our myAladdin.com SmartService can create. Our strategy is to become a leading supplier of SmartPhones to wireless carriers and other customers worldwide. We also intend to develop and expand our myAladdin.com SmartService for sale to wireless carriers and other consumer-oriented businesses for use as part of their own wireless Internet portal strategies. Key elements of this strategy include accelerating innovations related to our SmartPhones, expanding and enhancing our myAladdin.com SmartService, developing and leveraging the NeoPoint brand and extending our strategic alliances and relationships. CORPORATE INFORMATION We were incorporated in California in June 1997 and will be reincorporated in Delaware prior to the consummation of this offering. Our principal executive offices are located at 4225 Executive Square, Suite 600, La Jolla, CA 92037, our telephone number is (858) 458-2800 and our website is located at www.neopoint.com. Information in our website is not a part of this prospectus. THE OFFERING <TABLE> <C> <S> Common stock offered........... shares Common stock to be outstanding after the offering............ shares Use of proceeds................ For working capital and other general corporate purposes, including research and development expenditures, sales and marketing expenditures and potential acquisitions or investments. See "Use of Proceeds." Risk factors................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding whether to invest in shares of our common stock. Proposed Nasdaq National Market symbol........................ NEOI </TABLE> The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of December 31, 1999 and excludes: . 4,855,048 shares of common stock issuable upon exercise of options outstanding at December 31, 1999 under our 1998 stock option plan, with a weighted average exercise price of $0.24 per share; and . 379,693 shares of common stock issuable upon exercise of warrants, with an exercise price of $2.50 per share and 379,693 shares of common stock issuable upon exercise of additional warrants, with an exercise price of $4.00 per share. SUMMARY FINANCIAL DATA (in thousands, except share and per share data) The following summary financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus. The statement of operations data for the period from June 27, 1997 (inception) through December 31, 1997 and the fiscal year ended December 31, 1998 are derived from, and are qualified by reference to, our audited financial statements included elsewhere in this prospectus. The statement of operations data for the nine-month periods ended September 30, 1998 and 1999 are derived from, and are qualified by reference to, our unaudited financial statements included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM JUNE 27, 1997 (INCEPTION) NINE MONTHS ENDED THROUGH YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------- 1997 1998 1998 1999 ------------- ------------ ------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues(1)............... $ -- $ 651 $ 232 $ 23,619 Operating Expenses: Cost of revenues............ -- 426 169 18,831 Marketing and selling....... 24 657 347 3,642 Research and development.... 148 3,544 2,404 6,232 General and administrative.. 792 2,966 1,757 2,658 Amortization of deferred stock compensation and other stock-based awards... -- 655 392 7,956 ----- --------- ------- ---------- Total operating expenses...... 964 8,248 5,069 39,319 ----- --------- ------- ---------- Loss from operations.......... (964) (7,597) (4,837) (15,700) Interest income, net.......... 6 55 23 172 ----- --------- ------- ---------- Net loss...................... (958) (7,542) (4,814) (15,528) Imputed beneficial conversion dividends on preferred stock........................ -- -- -- (7,755) ----- --------- ------- ---------- Net loss applicable to common stockholders................. $(958) $ (7,542) $(4,814) $ (23,283) ===== ========= ======= ========== Basic and diluted net loss per common share(2).............. n/a $ (8.34) $ (6.58) $ (12.95) ===== ========= ======= ========== Weighted average shares used in computation(2)............ -- 904,667 731,149 1,797,654 ===== ========= ======= ========== Pro forma basic and diluted net loss per common share(3)..................... $ (1.76) $ (1.25) ========= ========== Weighted average shares used in pro forma computation(3).. 4,275,862 12,374,124 ========= ========== </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) ----------- ------------ -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities........................... $13,352 $61,952 Working capital....................... 6,626 55,226 Total assets.......................... 35,994 84,594 Capital lease obligations, net of current portion...................... 101 101 Total stockholders' equity............ 11,715 60,315 </TABLE> - -------- (1) The amount recorded for the nine months ended September 30, 1999 reflects a reduction of $2.4 million related to the amortization of a deferred sales discount recorded in connection with the issuance of warrants to Sprint PCS. See Note 6 to our financial statements. (2) See Note 2 to our financial statements for a description of the computation of basic and diluted net loss per common share on a regular and pro forma basis, including a summary of the computation of weighted average shares. (3) Gives pro forma effect to: i) the issuance of 3,775,000 shares of Series C preferred stock and warrants to purchase 1,500,000 shares of Series C preferred stock in December 1999 for aggregate proceeds of $30.2 million; ii) the issuance of additional warrants to purchase 1,350,000 shares of Series C preferred stock in October and December 1999; iii) the exercise of these warrants, that will expire if not exercised prior to the closing of this offering, to purchase an aggregate of 2,850,000 shares of Series C preferred stock for aggregate proceeds of $18.4 million; and iv) the conversion of all outstanding shares of preferred stock, including the shares of preferred stock received upon exercise of these warrants, into an aggregate of 18,991,668 shares of common stock. (4) As adjusted to reflect the sale of shares of common stock in this offering, at an assumed offering price of $ per share after deducting the estimated underwriting discount and estimated offering expenses, and our receipt and application of the net proceeds.

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+ PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. CollegeClub.com, Inc. We are an integrated communications, education and media Internet company that operates the leading online destination targeting college students. We offer both students and educators proprietary Web-based communication, education, commerce and community tools as well as engaging content that enhance and simplify the college experience. We derive revenue primarily from the sale of sponsorships, advertising and other promotional services and also generate fees from our various commerce relationships. We have registered over 2 million members and, during January 2000, our Web site generated approximately 227 million page views according to PC Data. During the same period, Media Metrix rated our Web site as the stickiest site on the Internet for users ages 18 through 24 as measured by minutes per user per month. We have established a centralized hub that acts as an intermediary between students and key elements of the college experience, such as: - Other students. Our proprietary technology allows students to instantly identify other students based on specific search criteria such as major, school, location, interests and hobbies. After identifying students based upon these profiles, users can then choose to communicate directly with them using our proprietary instant messenger or universal integrated e-mail and voicemail system, which can be accessed either through the Internet or telephonically. We also provide other communications tools that allow students to share their college experience with each other. - Campus bookstores. Through our exclusive relationship with the National Association of College Stores, our proprietary turn-key commerce infrastructure enables campus bookstores at over 100 universities such as Cornell and Princeton to sell books, school supplies and apparel over the Internet. - Lenders and financial aid offices. Through our eStudentLoan.com division we provide students centralized access to various student loan providers including Bank of America and The Student Loan Corporation, an affiliate of Citibank. We also provide financial aid offices at various universities with access to software and Web-based technology that enables them to more effectively manage the financial aid process. - Faculty and administrators. We provide professors, administrators and students with Web-based access to class-specific information and course management tools currently used throughout a number of campuses such as Stanford and Harvard. We also offer student-generated lecture notes for over 6,900 classes on campuses throughout the country. In the United States, there are over 15.5 million students attending approximately 4,000 colleges and universities. Increasingly, college students are using the Internet to enhance the college experience, simplify the academic process and buy and sell goods and services. Jupiter Communications estimated that Internet penetration among college students was 90% in 1999. In 1998, Jupiter Communications also estimated that college student total spending power was approximately $120 billion and that college students made online purchases totaling $429 million. Jupiter projects online purchases by college students to grow to $2.5 billion by 2002. From a marketing perspective, college students have traditionally been challenging to reach due to their active and mobile lifestyles and their unpredictable consumption of conventional media. We believe that the Internet is an effective mechanism for accessing college students. Our goal is to be the leader in online communication, education and commerce for students, educators and alumni. To achieve this strategy we intend to: - extend our anytime, anywhere, anyone communications platform; - increase the number of educational tools and services we offer our users; - expand our unique online commerce program; - enhance our offerings through strategic alliances and acquisitions; - expand internationally; and - expand into related markets such as the high school and alumni markets. Consistent with our objective of developing strategic relationships, we have entered into several key alliances that allow us to expand the products and services we offer our users. Specifically, we have a relationship with Sony Corporation of America to provide us with proprietary content and advice regarding the development of the broadband market as well as to assist in potential international expansion. Similarly, we have entered into strategic alliances with Ericsson to extend our proprietary tools to wireless consumer devices and with NBC to promote us within their online and broadcast networks. Sony and NBC are equity investors in CollegeClub.com. We launched our Web site in December 1995, establishing one of the first online communities for college students. We were incorporated in California as Public Online Communications Corporation in July 1996, and reincorporated in Delaware as CollegeClub.com, Inc. in September 1999. Our principal executive office is located at 1010 Second Avenue, Suite 700, San Diego, CA 92101, and our telephone number is (619) 237-7000. Our primary Web site is located at WWW.COLLEGECLUB.COM. The information contained in our Web sites does not constitute a part of this prospectus. We have submitted or are in the process of submitting registration applications for the following service marks: "CollegeClub (SM)," "CollegeClub.com (SM)," "HighSchoolClub (SM)," "HighSchoolClub.com (SM)" "The world is our campus (SM)" and "it's all U. (SM)." All other trademarks and service marks that we refer to in the prospectus are the property of their respective owners. The Offering <TABLE> <S> <C> Common stock offered by CollegeClub.com.................... shares Common stock to be outstanding after this offering......... shares Use of proceeds............................................ To fund the continued growth and expansion of our business, brand and technology infrastructure, as well as for working capital and other general corporate purposes. We may also use a portion of the proceeds for strategic alliances and acquisitions. Please see "Use of Proceeds." Proposed Nasdaq National Market Symbol..................... "CLBS" </TABLE> The number of shares of our common stock that will be outstanding after this offering is based on the shares outstanding on December 31, 1999, assumes the conversion into common stock of 22,667,215 shares of preferred stock outstanding as of such date, includes the issuance of 5,819,978 shares in connection with our recent acquisition of Versity.com and the issuance of 970,874 shares of our Series C-2 preferred stock to NBC in connection with a recent strategic relationship and the conversion of these shares into common stock upon completion of this offering. The number of shares to be outstanding after this offering excludes: - 784,422 shares of our common stock issuable upon the exercise of options issued in connection with our acquisition of Versity.com; - up to 3,449,384 additional shares of our common stock that may be issued in connection with our acquisition of Versity.com; - up to 464,910 additional shares of our common stock issuable upon the exercise of options that may be issued in connection with our acquisition of Versity.com; - 11,722,070 shares of our common stock issuable upon exercise of options outstanding at December 31, 1999 with a weighted average exercise price of $0.74 per share; - 55,435 shares of our common and preferred stock issued on March 27, 2000 under letter agreements with existing stockholders; - 2,538,448 shares of our common and preferred stock issuable upon the exercise of warrants outstanding at December 31, 1999 with a weighted average exercise price of $1.50 per share; - 1,880,503 shares of our common stock available for issuance under our stock option plans as of December 31, 1999, which amount was increased by an aggregate of 12,000,000 shares in January, February and April 2000 subject to stockholder approval; and - 500,000 shares of our common stock issuable under our employee stock purchase plan approved by our board of directors in February 2000 subject to stockholder approval. For a description of our stock option plans, please see "Management--Benefit Plans." From January 1, 2000 through April 3, 2000, we have granted additional options to purchase an aggregate of 3,958,667 shares of our common stock with a weighted average exercise price of $2.00 per share under our stock option plans. Unless otherwise indicated, this prospectus assumes: - that the underwriters' over-allotment option is not exercised; - conversion of all outstanding shares of preferred stock into shares of common stock on a one-for-one basis upon completion of this offering; and - the filing of an amended and restated certificate of incorporation upon completion of this offering to increase our authorized common stock and decrease our authorized preferred stock. Summary Financial Data The following summary financial information is derived from our financial statements included elsewhere in this prospectus. You should read the following summary financial information in conjunction with those financial statements and the related notes. The unaudited pro forma statement of operations data for the year ended December 31, 1999 reflects our acquisitions of Collegestudent.com, Campus24 and Versity.com as if these combinations had occurred on January 1, 1999. The unaudited pro forma balance sheet data as of December 31, 1999 reflects our recent acquisition of Versity.com as if it had been completed as of December 31, 1999, the issuance of 970,874 shares of our Series C-2 preferred stock in connection with our March 27, 2000 strategic relationship with NBC as if it had been completed as of December 31, 1999 and assumes the conversion of all of our outstanding shares of preferred stock into shares of common stock upon completion of this offering. The unaudited pro forma as adjusted balance sheet data listed below reflects the sale of shares of common stock included in this offering at an assumed initial public offering price of $ per share after deducting underwriting discounts and commissions, estimated offering expenses payable by us and the application of proceeds from this offering. Please see "Use of Proceeds" and "Capitalization" for a discussion about how we intend to use the proceeds from this offering and about our capitalization. <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------ Pro Forma 1995 1996 1997 1998 1999 1999 --------- -------- --------- -------- -------- --------- (in thousands, except per share data) unaudited unaudited <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenue................................. $ 1 $ 196 $ 802 $ 332 $ 2,913 $ 4,079 Costs and expenses: Operating expenses.......................... 436 2,255 2,985 2,561 22,996 32,198 Depreciation and amortization............... 1 145 354 344 1,498 15,916 Stock-based compensation.................... -- -- 1,545 1,156 4,151 4,794 ------- ------- -------- ------- -------- -------- Total expenses............................ 437 2,400 4,884 4,061 28,645 52,908 ------- ------- -------- ------- -------- -------- Loss from operations.......................... (436) (2,204) (4,082) (3,729) (25,732) (48,829) Other income (expense), net................... 7 (29) (130) (94) (33) (116) ------- ------- -------- ------- -------- -------- Net loss...................................... $ (429) $(2,233) $ (4,212) $(3,823) $(25,765) $(48,945) ======= ======= ======== ======= ======== ======== Net loss per share: Basic and diluted........................... $ (0.03) $ (0.15) $ (0.27) $ (0.24) $ (1.57) $ (1.00) ======= ======= ======== ======= ======== ======== Shares used in per share calculations: Basic and diluted........................... 15,000 15,009 15,372 16,035 16,388 49,035 ======= ======= ======== ======= ======== ======== </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ---------------------------------- Pro Forma As Actual Pro Forma Adjusted -------- --------- ----------- (in thousands) unaudited <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents................................... $ 29,740 $36,290 Working capital............................................. 24,669 30,868 Total assets................................................ 56,432 91,610 Total liabilities........................................... 7,837 8,301 Convertible preferred stock................................. 61,363 -- Total stockholders' equity (deficit)........................ (12,768) 83,309 </TABLE>

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+ Prospectus Summary This summary highlights some of the more detailed information appearing elsewhere in this prospectus. Southern Financial Bancorp, Inc. Southern Financial Bancorp, Inc., a Virginia corporation, is headquartered in Warrenton, Virginia. We own Southern Financial Bank, a Virginia-chartered commercial bank. We conduct virtually all of our business through Southern Financial Bank. Southern Financial Bank dates to 1986, when Georgia S. Derrico formed Southern Financial Federal Savings Bank, a Warrenton, Virginia-based thrift. In December 1995, we converted the thrift to a commercial bank. Both Ms. Derrico, our Chairman and chief executive officer, and her husband, R. Roderick Porter, our President and chief operating officer, were former senior officers with Chemical Bank in New York. Five of our current top officers had extensive senior banking experience together at Chemical Bank in the 1970's and 80's before the merger of Chemical and Manufacturers Hanover Corporation and Chemical's subsequent merger with Chase Manhattan Corp. Over our fourteen year existence, we have become the second largest independent bank with offices exclusively in northern Virginia. On October 1, 1999 we acquired a bank based in Vienna, Virginia that had $128.1 million in total assets and four banking offices. At December 31, 1999, we had $406.2 million in assets, $234.1 million in loans, and $28.9 million in equity. Our market area is a semi-circle of Virginia counties immediately south and west of Washington, D.C. Please refer to the map on the inside front cover of this prospectus. Our market area includes a large concentration of telecommunications and internet firms, as well as government and defense industry contractors, primarily in Fairfax County. Fairfax County's population exceeds 900,000 and rapid population and economic growth has spread west to Loudoun and Fauquier Counties and south to Stafford, Spotsylvania and Prince William Counties. Our customers include individuals and small and medium sized businesses. However, we specialize in loans and other banking services to small and medium sized businesses. We actively lend to businesses through Small Business Administration programs. The Small Business Administration is a U.S. Government agency that finances the expansion of small businesses in cooperation with banks and other lenders. The great majority of our income is interest on loans and investments. We are having this offering because the redeemable capital securities will be treated as capital for bank regulatory purposes. This means that we will be able to grow our total assets faster than our anticipated retained earnings would permit. The cash proceeds from this offering are not needed for our operations or liquidity. Except for increasing our regulatory capital, we do not obtain any business advantage by creating Southern Financial Capital Trust and selling the junior subordinated debit securities to it. If we sold our junior subordinated debt securities directly to the public, we would not be able to include any of the proceeds in our tier 1 regulatory capital. In contrast, if we interpose Southern Financial Capital Trust as the purchaser of the junior subordinated debt securities, we can include all of the proceeds from the sale of redeemable capital securities in our regulatory capital. Most of these proceeds will qualify as tier 1 regulatory capital. There is no economic distinction that explains the differing treatment. We are a legal entity separate and distinct from Southern Financial Bank. Our right, and thus your right, to receive any of the assets of Southern Financial Bank is subject to the claims of creditors of Southern Financial Bank. Our principal source of revenues is dividends from Southern Financial Bank. Because we own a bank, Southern Financial Bank, we are known as a bank holding company. As a bank holding company, we are registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. Our executive offices and mailing address are 37 E. Main Street, Warrenton, VA 20186 and our telephone number is (540) 349-3900. This is also the address and telephone number for Southern Financial Capital Trust. Southern Financial Capital Trust I We formed Southern Financial Capital Trust under Delaware law on December 28, 1999. We and the trustees of Southern Financial Capital Trust will sign an agreement, which will contain the terms and conditions for Southern Financial Capital Trust to issue and sell its redeemable capital securities, as well as its common securities. This agreement is called the amended and restated declaration of trust and it also governs the duties of the trustees. Southern Financial Capital Trust exists solely to: o sell the redeemable capital securities and the common securities; o use the money it receives from the sale of the redeemable capital securities and common securities to purchase our junior subordinated debt securities, which will be the only assets of Southern Financial Capital Trust; and o engage in other activities that are related to these purposes. We will purchase all of the common securities of Southern Financial Capital Trust. The common securities will entitle us to receive 3% of Southern Financial Capital Trust's cash distributions. The redeemable capital securities will entitle you and the other owners to the remaining 97% of Southern Financial Capital Trust's cash distributions. If we default on the junior subordinated debt securities, we will not receive cash distributions on the common securities until you have received your cash distributions on the redeemable capital securities. Southern Financial Capital Trust has a term of approximately 40 years, but may be dissolved earlier if the redeemable capital securities are paid off. We have appointed the following trustees to conduct Southern Financial Capital Trust's business and affairs: o Wilmington Trust Company is the property trustee and the Delaware trustee; o Two individuals who are employees and officers of Southern Financial Bancorp, Inc., Georgia S. Derrico and R. Roderick Porter are the administrative trustees; As the sole holder of the common securities, we can replace or remove any of the trustees, unless we default on the junior subordinated debt securities. A default, for example, would include failing to make required payments on the junior subordinated debt securities. If we default and do not cure our default, the property trustee and the Delaware trustee can only be replaced and removed by the holders of at least a majority of the redeemable capital securities. As owner of all of Southern Financial Capital Trust's common securities, only we can remove or replace the administrative trustees. Southern Financial Capital Trust has no separate financial statements. The statements would not be meaningful to you because Southern Financial Capital Trust has no independent operations. It exists solely for the reasons summarized above. <TABLE> <CAPTION> The Offering <S> <C> Securities offered Southern Financial Capital Trust is offering for sale 1,200,000 redeemable capital securities. Southern Financial Capital Trust has the right to increase the number of redeemable capital securities offered for sale to 1,380,000. Offering price The offering price is $10.00 for each redeemable capital security. No interest on escrowed You will not receive interest on any funds you funds deposit before this offering closes. Quarterly distributions You will be entitled to receive cash distributions are payable to you on the of $______ per year on each capital security. redeemable capital Distributions will be payable quarterly on the securities 15th of January, April, July and October of each year, beginning on _____ 15, 2000. Your first cash distribution will be less than the regular quarterly amount because you are buying your redeemable capital securities after _________15, 2000. We have the option to defer We have the right to defer interest payments on interest payments the junior subordinated debt securities for up to 20 consecutive quarters. If we pay all deferred interest at the end of an interest deferral period, we can begin a new interest deferral period at any time. No interest deferral period may last beyond ______ 15, 2030. We may not defer interest payments if we have defaulted on the junior subordinated debt securities. However, electing to defer interest payments, by itself, is not a default. If we defer interest payments, If we defer interest payments on the junior cash distributions to you will subordinated debt securities, Southern Financial be deferred Capital Trust also will defer cash distributions on your redeemable capital securities. During any period when cash distributions are deferred, your right to receive cash distributions will accumulate. You also will accumulate the right to receive additional distributions at ____% per year, compounded quarterly, on any deferred distributions. You will have taxable income You will be required to pay income taxes on even if we defer cash deferred distributions even if you are a cash distributions basis taxpayer. Our obligations are We are unconditionally obligated to pay unconditional distributions and all other amounts on the redeemable capital securities. However, this does not mean that we may not exercise our right, as described above, to defer interest payments on the junior subordinated debt securities. Ranking of redeemable If we default, payments to you on the redeemable capital securities capital securities will be made before any payments to us on the common securities. This does not give you any significant protection, however, because the common securities only are entitled to three percent of the distributions by Southern Financial Capital Trust. As long as we are not in default, payments on the redeemable capital securities and common securities will be made proportionately. The junior subordinated debt The junior subordinated debt securities will be securities are unsecured and unsecured and subordinate to all our senior debt. subordinate to all our senior This means that there will be no collateral for debt our obligations to you. It also means that if we default, all of our senior debt will be paid before you are paid. Although we currently have no senior debt, any debts we incur in the future are likely to be senior debt. There is no limit on the amount of senior debt that we may incur. We will guarantee that you will receive cash distributions if Southern Financial Capital Trust has the funds available to pay you. Our guarantee also will be unsecured and subordinate to all senior debt. In addition, the junior subordinated debt securities and the guarantee will be subordinate to all existing and future liabilities of our subsidiaries, including Southern Financial Bank's deposit liabilities. The junior subordinated debt We have fully, irrevocably and unconditionally securities are scheduled to guaranteed on a subordinated basis that Southern mature on _________ 15, Financial Capital Trust will pay you $10.00 per 2030 redeemable capital security, plus accrued distributions, when the junior subordinated debt securities are paid-off at or before maturity. The stated maturity of the junior subordinated debt securities is _______ 15, 2030. We can pay-off the junior We have the right at any time on or after _____15, subordinated debt securities 2005 to pay-off the junior subordinated debt any time after _______ 15, securities. We also have the right at any time 2005 before _____ 15, 2005 to pay-off the junior subordinated debt securities if any of three things happen. We can pay-off the junior subordinated debt securities before_____ 15, 2005 if tax law changes prevent us from deducting interest payments or if changes in banking regulations prevent us from counting Southern Financial Capital Trust's assets as capital. A change in the Investment Company Act of 1940 that requires Southern Financial Capital Trust to register under that law also would permit us to pay-off the junior subordinated debt securities before______ 15, 2005. We must pay a premium to Southern Financial Capital Trust if we pay-off the junior subordinated debt securities before_____ 15, 2015. As a holder of redeemable capital securities, you will receive your share of any premium we pay to Southern Financial Capital Trust. Limited Voting Rights on the You will have no voting rights on the redeemable Redeemable Capital Securities capital securities, except in limited circumstances. No Rating We do not expect the redeemable capital securities to be rated by any rating service. None of the other securities that we issue are so rated. ERISA Considerations Please carefully consider the information set forth in "ERISA Considerations", which begins on page __. Use of Proceeds Southern Financial Capital Trust will use all of the proceeds from the sale of the common securities and redeemable capital securities to purchase the junior subordinated debt securities from us. We intend to use the net proceeds from the sale of the junior subordinated debt securities for general corporate purposes, including making advances to Southern Financial Bank to support its continued growth. Pending any such application, we may invest the net proceeds in interest-bearing assets. Proposed Nasdaq National We have applied to have the redeemable capital Market Symbol securities approved for quotation on the Nasdaq National Market Symbol under the symbol "SFFBP". Risk Factors An investment in the redeemable capital securities involves a number of risks. Some of these risks relate to the redeemable capital securities and other risks relate to us. We urge you to carefully consider the information contained in "Risk Factors" set forth on page __ of this prospectus, as well as the other information contained in this prospectus, before you buy any redeemable capital securities. </TABLE>

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+ SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. Our Company Driveway is an easy to use online information management service that allows our members to store, manage and share their personal and business information from a single virtual location on the Web. We believe these functions are important to Internet users who seek new forms of communications to facilitate both the types of content and the ability to remotely access that content from multiple disparate devices. We believe our market has characteristics and benefits similar to the growth and adoption of the Web-based email market, which is indicative of the current potential market for online information management. Because we target Internet users who possess a high degree of integration between their personal and business Internet use and frequently participate in ecommerce, we attempt to aggregate an attractive member base to drive multiple streams of revenue for Driveway and our strategic partners. In the last twelve months, more than 3 million members have registered for our Driveway services. We have achieved this growth and begun to expand our online information management solutions across the Web primarily through our strategic partnerships with the following: <TABLE> <S> <C> <C> Backup Buddy Lycos MSN Juno Online Services Lycos Europe Phoenix Technologies LookSmart McAfee.com USA.NET Microsoft </TABLE> The Internet has moved beyond simple text-based files and formats and has expanded to incorporate rich audio and video content and applications. This expanding quantity of information, increasingly in rich text or media format, and the desire to access the Internet from different locations and devices are some of the factors driving the need for an online information management solution. In addition, to remain competitive, we believe Web sites are constantly seeking ways to add functionality to their current offerings, add new visitors, increase the frequency and duration of visits, and increase revenue opportunities. We also believe that users are increasingly seeking an online information management solution that allows them to privately and securely access both personal and business information at any time, from any location. Furthermore, we believe business-to-business web sites can also benefit from integrating online information management services into their offerings. Driveway allows any Internet user to securely and easily store, manage and share personal and business information from a single virtual location because it is designed to be completely device and platform agnostic. In addition, because members can specify a particular folder to which another individual has access, privacy concerns involving storing personal and business information in the same account are minimized. Our intuitive user interface and our integration into our strategic partners' Web sites and applications allows users to easily manage and organize activities from multiple Web sites through their Driveway account. For example, Driveway can be integrated into our users' desktops through our recent strategic partnership with Microsoft, which provides for the inclusion of a Driveway icon on the Windows desktop. This integration will allow a member to easily drag and drop files between folders in Windows Explorer and their Driveway account and to save to their Driveway account from within a Microsoft application. In addition, we actively enter into partnerships with highly trafficked Web sites in an effort to increase their value to their users by adding functionality, increasing stickiness and aiding in the generation of incremental revenue opportunities and customer acquisition. We intend to be the leading provider of online information management services with the largest base of registered members and active users. We plan to achieve this membership growth, build our Driveway brand and grow our revenues through the following: . capitalize on our growing member base to drive multiple revenue streams; . target and expand strategic partnerships with highly trafficked Web sites with attractive user demographics; . enable our strategic partners to create and manage new and enhanced applications that utilize our Driveway services; . work in conjunction with strategic partners to enable multiple mobile devices to utilize our Driveway services; . private label our Driveway services to business-to-business Web sites; and . pursue international expansion through localized Driveway services. We incorporated in Washington on October 8, 1993 and changed our name to Driveway on November 2, 1999. We reincorporated in Delaware on February 17, 1998. Our executive office is located at 380 Brannan Street, San Francisco, California 94107. Our telephone number at that location is (415) 908-4200 and our Internet address is www.driveway.com. Information contained on our Web site does not constitute part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by Driveway Corporation...... shares Common stock to be outstanding after this offering.......................................... shares Use of proceeds................................... We intend to use the net proceeds of this offering for general corporate purposes, including investments in marketing, promotion and technology. Proposed Nasdaq National Market symbol............ DWAY </TABLE> The shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of March 13, 2000, and excludes: . options to purchase 3,729,601 shares outstanding; . 1,188,623 shares available for grant; and . 22,532 shares issuable upon the exercise of warrants, at a weighted average exercise price of $64.98 per share. Except as otherwise noted, all information in this prospectus: . assumes the exercise of warrants to purchase 835,030 shares at a weighted average exercise price of $1.36 per share; . reflects the conversion of all outstanding shares of our preferred stock into shares of our common stock at the completion of this offering; and . assumes no exercise of the underwriters' over-allotment option. Summary Financial Data The following table presents our summary financial data. The pro forma net loss per share data below gives effect to the conversion of each outstanding share of preferred stock into one share of common stock upon the completion of this offering. The summary financial data below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements included elsewhere in this prospectus. <TABLE> <CAPTION> Year Ended December 31, ----------------------- 1997 1998 1999 ------ ------ ------- (dollars in thousands, except per share data) <S> <C> <C> <C> Statement of Operations Data: Revenue............................................. $ 7 $ 187 $ 264 Cost of revenue..................................... 276 1,179 2,155 Operating expenses.................................. 5,459 4,262 13,321 Loss from operations................................ (5,728) (5,254) (15,212) Net loss............................................ (5,627) (5,776) (17,219) Basic and diluted loss per common share............. (8.78) Pro forma basic and diluted net loss per common share (unaudited).................................. (1.00) </TABLE> <TABLE> <CAPTION> December 31, 1999 -------------------- Pro Forma Actual as Adjusted ------- ----------- (dollars in thousands) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................ $24,747 Working capital.......................................... 22,590 Total assets............................................. 29,558 Long-term obligations, less current portion.............. 406 Total stockholder's equity (deficit)..................... (4,433) </TABLE>

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+ PROSPECTUS SUMMARY The following is only a summary. You should carefully read the more detailed information contained in this prospectus, including the consolidated financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors". OUR COMPANY We are a provider of broadband communications and Internet services to small- and medium-sized businesses in Tier II and Tier III markets, which encompass cities with populations less than 1.5 million. Our Internet access services, which are packaged with Web hosting and e-mail, and our high-speed real private networking services are provided primarily using digital subscriber line, or DSL, technology. DSL is a data transmission technology enabling the transmission of digital signals over ordinary copper phone lines at speeds of up to 2.3 megabits per second instead of a maximum of 64 kilobits per second achieved sending analog signals over copper phone lines. Broadband communication generally means the ability to transmit data at speeds higher than 64 kilobits per second. We have deployed a proprietary asynchronous transfer mode, or ATM, and Internet protocol backbone network to link all of our central offices and markets. This network allows us to lower our Internet access costs, control the speed and quality of our broadband services and provides us with a superior platform for the delivery of additional enhanced services. We generally have been among the first competitive broadband communications providers to small- and medium-sized businesses in the markets we enter, creating an early mover advantage and allowing us to establish strong relationships with our target customers and network professionals. In each of our markets, we have a locally based direct sales team that builds strong customer relationships. We also ensure a high standard of service quality by providing our own customer premise equipment installation and customer care services. We place, or collocate, our equipment in central offices of traditional telephone companies that serve a high density of our target customers, which allows us to serve more potential customers within a market and to provide a more attractive service offering to businesses with multiple locations or telecommuters. We began deploying our network in the Southeast, and we are expanding into other Tier II and Tier III markets in the Midwest in 2000. As of February 29, 2000, we were offering our services in 28 markets, representing 126 cities. We expect to deploy our network and roll out our services to a total of 57 markets by year-end 2000. As of February 29, 2000, we had sold 2,935 high-speed access lines to customers, of which 1,106 were installed in the customer's business. Of the 2,935 lines sold, 675 lines were sold as part of our real private network service and 144 of these lines were installed in the customer's business. Our real private network service called Fireline RPN permits a customer to transmit data securely between fixed locations on our network without the data ever reaching or traveling over the public Internet. As of February 29, 2000, we had collocated our network equipment in 144 central offices and expect to be in more than 500 central office locations by the end of 2000. When this stage of our network build-out is completed, our network will extend to cities with approximately 1.2 million small- and medium-sized businesses. We have a limited operating history. We began offering our services in September 1998 and only began rapidly deploying our network in January 2000. Since our formation, we have incurred losses and experienced negative operating cash flow. We anticipate that we will continue to incur significant losses and negative operating cash flow for the foreseeable future. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY................... 2 RISK FACTORS......................... 8 NOTE REGARDING FORWARD-LOOKING STATEMENTS......................... 18 USE OF PROCEEDS...................... 19 DIVIDEND POLICY...................... 19 CAPITALIZATION....................... 20 DILUTION............................. 21 SELECTED CONSOLIDATED FINANCIAL DATA............................... 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 24 BUSINESS............................. 30 MANAGEMENT........................... 48 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 56 PRINCIPAL STOCKHOLDERS............... 59 DESCRIPTION OF CAPITAL STOCK......... 61 SHARES ELIGIBLE FOR FUTURE SALE...... 65 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS..................... 67 UNDERWRITING......................... 70 NOTICE TO CANADIAN RESIDENTS......... 73 LEGAL MATTERS........................ 74 EXPERTS.............................. 74 WHERE YOU CAN FIND MORE INFORMATION........................ 74 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. Lucent provides us up to $109.0 million in vendor financing for equipment, installs the equipment for us in central offices we target and provides us up to $2.0 million in funding for cooperative advertising. OUR SOLUTION Carrier-Class Network with ATM Backbone. We have deployed a dedicated, high-speed local access network to provide broadband communications and Internet services using DSL and other high bandwidth technologies. By deploying a dedicated network rather than a shared network, we are able to manage the quality of our services and the capacity of the network and provide more secure data transmission. Local Sales, Installation and Customer Service Presence. We offer potential customers turnkey broadband communications and Internet access solutions by providing them with a local point of contact for sales, installation and customer service. Our salespeople's local knowledge allows them to target appropriate services to each business. We believe that having a local team that is knowledgeable about our services and our customers' needs provides significant value to our customers and builds customer loyalty. Dense Market Coverage. As of February 29, 2000, we offered services in 28 markets and we anticipate providing service to 57 total markets in 2000. We typically collocate our equipment in central offices that have a minimum of 800 businesses within a three mile radius or that have less than 800 businesses within a three mile radius but are located in high growth business areas. Our dense market coverage allows us to serve more potential customers and cost-effectively compete with the local telephone company. Attractive Suite of Services. We offer a wide range of broadband communications and Internet services designed to meet the needs of both small- and medium-sized businesses. We offer continuously connected Internet access, primarily utilizing DSL technology, with connectivity speeds ranging from 128 kilobits per second to 2.3 megabits per second. In addition to Internet services, we offer private networking services designed for businesses with several locations within a market or within multiple markets, or for telecommuters within our service area. Our broad service offering allows our sales force to upgrade customers as their needs evolve. OUR STRATEGY Our goal is to become a leading provider of broadband communications and Internet services to small- and medium-sized businesses in the United States. In order to achieve our goal, we will: - capitalize on our local sales presence to improve customer loyalty and reduce customer turnover; - focus on small- and medium-sized businesses; - develop new core markets with the goal of creating a nationwide footprint; - continue to penetrate existing markets; - leverage our unique ATM and Internet protocol network architecture to offer a broader suite of cost-effective, secure and high-quality services; - offer more enhanced services to attract and retain customers; and - enhance our brand identity. We were originally organized on March 7, 1997 as a Tennessee limited liability company. On September 28, 1998, we converted from a Tennessee limited liability company to a corporation by merging the limited liability company into BlueStar Properties, Inc., a Tennessee corporation. On June 22, 1999, we reincorporated in Delaware by merging the Tennessee corporation into BlueStar Properties, Inc., a newly formed Delaware corporation. On January 28, 2000, we changed our name to BlueStar Communications Group, Inc. We also have four wholly-owned subsidiaries, three of which are incorporated in Tennessee and one in Virginia. Our principal executive offices are located at 414 Union Street, Suite 900, Nashville, Tennessee 37219. Our telephone number is (615) 255-2100. We maintain a Website at www.bluestar.net. Information contained in our Website does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by BlueStar........... 14,000,000 shares Common stock to be outstanding after this offering................................. 85,389,222 shares Use of proceeds............................ We intend to use the net proceeds to continue deploying our network, and for working capital, operating expenses and other general corporate purposes. Proposed Nasdaq National Market symbol..... BLST </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of February 29, 2000, and assumes the conversion of all of our preferred stock into common stock. This number assumes no exercise of the underwriters' over-allotment option and excludes: - 7,545,000 shares of common stock issuable upon exercise of options outstanding as of February 29, 2000 with a weighted average exercise price of $0.30 per share; - 720,000 shares subject to outstanding warrants at a weighted-average exercise price of $0.275; and - 1,131,370 additional shares of common stock reserved under our option plan as of December 31, 1999. This offering is for 14,000,000 shares. The underwriters have a 30-day option to purchase up to 2,100,000 additional shares from us to cover over-allotments. Some of the disclosures in this prospectus would be different if the underwriters exercise the over-allotment option. Unless we state otherwise, the information in this prospectus assumes that the underwriters will not exercise the over-allotment option. Except where we state otherwise, the information we present in this prospectus: - reflects a 3-for-1 split of our common stock and preferred stock effected as of October 29, 1999; - reflects a 2-for-1 split of our common stock to be effected prior to this offering; - excludes 720,000 shares subject to outstanding warrants at a weighted-average exercise price of $0.275; and - reflects the conversion of all outstanding shares of preferred stock into 45,375,292 shares of common stock upon the closing of this offering. Unless otherwise stated, all references in this prospectus to "we," "us," "our" and "BlueStar" include BlueStar Communications Group, Inc., our wholly-owned subsidiaries, and our predecessors BlueStar Properties, Inc., a Tennessee corporation, and BlueStar Communications, LLC., a Tennessee limited liability company. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following tables summarize our financial data. For a more detailed explanation of our financial condition and operating results, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations", and our consolidated financial statements and the notes to those statements included in this prospectus. Unaudited pro forma net loss per share and weighted average shares have been calculated assuming the conversion of all outstanding preferred stock into common stock as if the shares had converted immediately upon their issuance. EBITDA consists of net loss excluding net interest, taxes, depreciation and amortization. We have presented data related to EBITDA because it is a measure of performance commonly used in the telecommunications industry to enhance an understanding of operating results. We believe that EBITDA may be used by investors as supplemental information to evaluate a company's financial performance, including its ability to incur and/or service debt. However, EBITDA may be needed to make other payments prior to servicing debt. Negative EBITDA implies that a company is not currently generating sufficient income to fund its operations or service its debt. Our calculation of EBITDA may not be comparable to that of other companies. EBITDA is not a measure of performance under generally accepted accounting principles and should not be used as a substitute for net income, net cash provided by operating activities or other operating or cash flow statement data prepared in accordance with generally accepted accounting principles. EBITDA and cash flows from operating activities reflected in the statement of cash flows differ significantly. Cash from operating activities is net of interest and taxes paid and is a more comprehensive determination of periodic income on a cash (rather than accrual) basis, exclusive of non-cash items of income and expenses such as depreciation and amortization. In contrast, EBITDA is derived from accrual basis income and is not reduced by cash invested in working capital. Consequently, EBITDA is not affected by the timing of receivable collections or when accrued expenses are paid. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------- 1998 1999 ----------- ------------ <S> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................................................... $ 12,101 $ 771,109 Loss from operations........................................ $ (718,096) $(19,346,582) Net loss.................................................... $ (717,629) $(18,804,868) Net loss per share: Basic and diluted......................................... $ (0.04) $ (1.05) =========== ============ Weighted average shares................................... 20,308,020 17,906,332 =========== ============ Pro forma net loss per share: Per share amount.......................................... $ (0.52) ============ Weighted average shares................................... 36,218,507 ============ OTHER DATA: EBITDA...................................................... $ (689,694) $(19,082,610) Net cash used in operating activities....................... (496,606) (12,842,434) Net cash used in investing activities....................... (89,556) (12,023,658) Net cash provided by financing activities................... 1,087,773 37,266,188 </TABLE> The following table contains a summary of our balance sheet: - on an actual basis as of December 31, 1999; - on a pro forma basis to give effect to the issuance of 2,165,603 shares of Series C preferred stock, the repurchase of 3,569,870 shares of common stock by us related to the resignation of one of our officers at a purchase price of $0.025 per share and the exercise of options to purchase 6,158,000 shares of our common stock at a weighted average exercise price of $0.13 per share of which we received $122,665 in cash proceeds and made $705,570 in loans to employees for the remaining exercise price after December 31, 1999; and - on a pro forma as adjusted basis to give effect to this offering, including conversion of the existing Series A, Series B and Series C preferred stock into 45,375,292 shares of our common stock upon completion of this offering. <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------------ PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------------ ------------ ------------ <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents....................... $ 12,901,707 $ 46,921,878 $208,671,878 Working capital, excluding cash and cash equivalents................................... (7,294,784) (7,294,284) (7,294,284) Total assets.................................... 26,506,367 60,526,538 222,276,538 Redeemable convertible preferred stock.......... 37,016,697 71,001,665 -- Total stockholders' (deficit) equity............ (18,882,097) (18,846,894) 213,904,771 </TABLE>

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+ PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION ABOUT CHANGEPOINT AND THE COMMON SHARES BEING SOLD IN THIS OFFERING AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. CHANGEPOINT CORPORATION We provide Web-based software and an Internet infrastructure, myChangepoint.com, which enable our customers to effectively manage the entire information technology, or IT, services delivery process. Our comprehensive solution automates and streamlines the business processes of IT services organizations and facilitates business transactions and collaboration among buyers and suppliers of IT services over the Internet. Our software is designed for and marketed to both professional services organizations and corporate IT departments. In addition, we recently introduced myChangepoint.com, which extends the benefits of our software by enabling IT services organizations to manage the interactions with their customers and partners over the Internet. We will begin to derive initial revenues from myChangepoint.com beginning in the fourth quarter of fiscal 2000. To date, over 130 professional services organizations and corporate IT departments have purchased our software, including Baltimore Gas & Electric, BellSouth, Ciber, Dell, Emerald Solutions, Greenwich Technologies, Guardian Life Insurance, Interwoven, Macromedia, QAD and StorageTek. Faced with shorter deadlines, higher customer expectations, increased complexity of IT projects and an ongoing shortage of skilled IT professionals, IT services organizations are increasingly relying on a network of IT services firms and independent professionals to provide additional capacity, specialized skills and regional expertise. We believe that, due to the high level of collaboration and interdependence among professional services organizations, corporate IT departments and independent IT professionals, the efficient management of IT services delivery, including the management of resources, projects and knowledge, has become one of the most significant problems facing the IT services industry. Many companies are beginning to use the Internet to more closely collaborate with their customers and partners and streamline their operations. However, to date, the business processes of professional services organizations and corporate IT departments as well as the interactions among IT services organizations have been largely unautomated and inefficient. This often results in the misallocation and underutilization of resources, bottlenecks and delays in the delivery of services and, ultimately, lost revenues. We believe that competitive pressures to complete complex IT initiatives rapidly have created a significant demand for solutions that manage the delivery of IT services and facilitate business transactions and collaboration among buyers and suppliers of IT services over the Internet. Our Web-based software and myChangepoint.com are designed to improve and streamline the delivery of IT services across the services supply chain. Specifically, we designed our solution to: - efficiently manage the core business processes of IT services organizations, including the management of new IT engagements and ongoing projects, the allocation of resources, the sharing of information and knowledge, invoicing and customer support; - facilitate collaboration over the Internet between IT services organizations and their customers and partners by allowing them to coordinate the management of resources and projects, as well as capture associated time and expense billing information; and - effectively source, procure and manage external IT services professionals over the Internet according to their availability and specific skill sets. We believe our solution offers the following benefits to professional services organizations: - INCREASED REVENUES. Our solution enables professional services organizations to increase revenues through improved management of new business opportunities, more efficient services delivery and more accurate financial management. - HIGHER UTILIZATION AND RETENTION RATES. Our resource management capabilities allow our customers to accurately monitor the availability, skills and desired assignments of their IT services professionals to maximize the utilization of their staff and improve employee retention. - IMPROVED CUSTOMER SATISFACTION. Through better allocation of resources and improved ability to leverage the knowledge within their organizations and across the IT services supply chain, professional services organizations are able to rapidly respond to changing customer demands and improve the delivery of IT services, resulting in higher customer satisfaction. We believe our solution offers the following benefits to corporate IT departments: - INCREASED SPEED OF TECHNOLOGY DELIVERY. By improving the coordination of the IT services delivery process throughout the IT services supply chain, our solution decreases overall delivery times and increases the likelihood of success for IT projects. - IMPROVED PRODUCTIVITY AND QUALITY OF WORK. The efficiencies gained by using our solution enable corporate IT departments to maximize productivity and improve the quality of work. - ALIGNING IT RESOURCES WITH BUSINESS OBJECTIVES. Through improved monitoring of ongoing and pending IT projects, our customers can effectively and strategically deploy scarce IT services personnel to better meet their business objectives and priorities. We sell our software primarily through our direct sales force located in the United States, Canada, and the United Kingdom. Our objective is to be the leading provider of Web-based solutions for managing the delivery of IT services. Key elements of our strategy include maintaining leadership in providing Web-based solutions to the IT services industry, establishing myChangepoint.com as the leading Internet infrastructure for IT services, targeting large IT services organizations, continuing to expand our direct and indirect sales channels and expanding internationally. In addition, we will seek to leverage the network effect created as our customers introduce our solution to their partners and customers by using myChangepoint.com to collaborate and manage their interactions with them. THE OFFERING <TABLE> <S> <C> Common shares offered.............................. 5,000,000 shares Common shares to be outstanding after the offering..................................... 24,055,566 shares Use of proceeds.................................... To fund sales and marketing activities, research and development expenditures, working capital and other general corporate purposes. Proposed Nasdaq National Market symbol............. CPNT </TABLE> Unless otherwise indicated, all information in this prospectus: - assumes the underwriters have not exercised the option granted by us to purchase up to 750,000 additional common shares in this offering; - gives effect to the termination of the redemption feature relating to 3,252,382 of our common shares, which will occur prior to the closing of this offering; - gives effect to the conversion on a one-for-one basis of all outstanding Class A redeemable convertible preferred shares, which were purchased at an average price per share of $1.65, into an aggregate of 5,983,962 common shares, which will occur prior to the closing of this offering; and - gives effect to the conversion on a one-for-one basis of all outstanding Class B redeemable convertible preferred shares, which were purchased at an average price per share of $9.00, into an aggregate of 2,873,696 common shares, which will occur prior to the closing of this offering. The number of common shares to be outstanding after the offering is based on the number of shares outstanding as of July 31, 2000. The number of shares to be outstanding excludes: - 2,649,326 common shares issuable upon exercise of options outstanding at July 31, 2000, with a weighted average exercise price of $6.36 per share; and - 1,398,575 common shares reserved for future issuance under our stock option plans as of July 31, 2000. PRESENTATION OF FINANCIAL INFORMATION Our financial statements are reported in U.S. dollars and have been prepared in accordance with generally accepted accounting principles in the United States. We express all dollar amounts in this prospectus in U.S. dollars, except where otherwise indicated. References to "$" are to U.S. dollars and references to "Cdn$" are to Canadian dollars. This prospectus contains a translation of some Canadian dollar amounts into U.S. dollars at specified exchange rates solely for your convenience. See "Exchange Rate Information." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The pro forma information below gives effect to the: - issuance of 2,873,696 Class B redeemable convertible preferred shares for net proceeds of $24.8 million on May 26, 2000; - termination of the redemption feature relating to 3,252,382 of our common shares, which will occur prior to the closing of this offering; - conversion of all outstanding Class A redeemable convertible preferred shares into common shares, which will occur prior to the closing of this offering, as if the conversion occurred at the beginning of the period or the date of issuance, where later; and - conversion of all outstanding Class B redeemable convertible preferred shares into common shares, which will occur prior to the closing of this offering, as if the conversion occurred April 30, 2000. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED JULY 31, APRIL 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Products..................................... $ 1,008 $ 1,821 $ 3,974 $ 2,777 $ 5,541 Services..................................... 1,922 1,986 1,963 1,399 2,036 ------- ------- ------- ------- ------- Total revenues............................. 2,930 3,807 5,937 4,176 7,577 Gross profit................................... 1,280 2,507 4,580 3,239 5,866 Loss from operations........................... (1,300) (1,421) (664) (594) (7,551) Net loss....................................... (1,117) (1,347) (384) (540) (7,360) Pro forma basic and diluted net loss per share........................................ $ (0.03) $ (0.47) Pro forma shares used in computation, pro forma basic and diluted.................. 12,041 15,632 </TABLE> The pro forma as adjusted column of the table below also gives effect to the sale in this offering of 5,000,000 common shares at an assumed initial public offering price of $9.00 per common share and after deducting estimated underwriting commissions and estimated offering expenses. <TABLE> <CAPTION> AS OF APRIL 30, 2000 --------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED --------- --------- --------- <S> <C> <C> <C> BALANCE SHEETS DATA: Cash and cash equivalents and short-term investments........ $ 1,204 $26,021 $66,871 Working capital............................................. 2,579 27,396 68,246 Total assets................................................ 7,882 32,699 73,549 Long-term liabilities....................................... 157 157 157 Class A redeemable convertible preferred shares............. 71,808 -- -- Common shares eligible for redemption....................... 39,029 -- -- Shareholders' equity (deficiency)........................... (106,760) 28,894 69,744 </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the consolidated financial statements and notes thereto, before making your investment decision. OUR BUSINESS We are an application service provider focused on delivering reliable, secure, easy-to-use and cost-effective data storage and document management solutions to small and medium-sized businesses and individual computer users. Our SkyDesk services, which include @Backup and SkyFiler, enable users to protect, store, access and share their data. @Backup is an online data protection and storage service available on an annual subscription basis. We offer @Backup directly through our web site and indirectly through our marketing relationships with companies such as Advanced Digital Information Corporation, Dell, Earthlink, Gateway, Hewlett-Packard and Intuit (Quicken, QuickBooks and TurboTax). SkyFiler is a service we expect to introduce in the first half of 2000 that is being designed to enable workgroups to share and collaborate on documents stored at our data centers. OUR MARKET OPPORTUNITY In today's information-based economy, the protection and management of data is becoming increasingly important to businesses and individual computer users. Many businesses seek to use their electronic data to gain a competitive advantage by enabling their employees and business partners to access their data from multiple locations. To address this objective, companies with significant resources generally use network-based solutions that require the implementation of complex document management software, specialized network servers and dedicated storage devices. These solutions are not viable consumer solutions and are not cost-effective for small and medium-sized businesses because they can be capital intensive and require technical personnel. Many small and medium-sized businesses and individual computer users rely on hard-drives, diskettes and removable storage devices to protect and manage their electronic data. Although relatively inexpensive, these traditional solutions are often unreliable, difficult to manage, have limited remote access capabilities and lack the ability to grow to meet future demands. Further, because most data storage and document management solutions do not address the need to share and collaborate on files, many businesses are forced to rely on email. Although email provides an efficient means of communication, it is not secure and does not offer advanced document management capabilities, such as version control and change tracking. Many businesses faced with the shortcomings of traditional solutions to technology infrastructure challenges are outsourcing technology functions to application service providers. Application service providers enable businesses to gain access to the latest technologies without increasing expenditures for technical personnel and equipment. We believe a significant market opportunity exists for application service providers offering Internet-based data storage and management services that allow small and medium-sized businesses and individual computer users to protect, store, access and share their critical information at any time and from any location. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION -- MARCH 10, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [SKYDESK LOGO] THE B2B INTERNET STORAGE SERVICES PROVIDER SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- SKYDESK, INC.: - We are an application service provider focused on delivering reliable, secure, easy-to-use and cost-effective data storage and document management solutions to small and medium-sized businesses and individual computer users. - SkyDesk, Inc. 3550 General Atomics Court San Diego, California 92121 (858) 455-3500 PROPOSED SYMBOL & MARKET: - DESK/Nasdaq National Market THE OFFERING: - We are offering shares of our common stock. - The underwriters have an option to purchase an additional shares from us to cover over-allotments. - This is our initial public offering, and no public market currently exists for our shares. - We anticipate that the initial public offering price will be between $ and $ per share. - We plan to use the proceeds from this offering for sales and marketing, research and development, infrastructure and support improvements, potential acquisitions and general corporate purposes. - Closing: , 2000. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- Per Share Total - ----------------------------------------------------------------------------------------- <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds to SkyDesk, Inc.: - ----------------------------------------------------------------------------------------- </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC. DLJDIRECT INC. OUR SOLUTIONS Our @Backup solution is an Internet-based service that enables users to securely and efficiently protect their data by storing it at our networked data centers. Users register at our web site, install the @Backup software on their computers and select the time of day the backup will occur and the files to be protected. Once installed, our software automatically initiates the backup process each day, scans the user's computer for new and changed files and then compresses, encrypts and transmits the new or changed files via the Internet to our data centers. Users can retrieve their data at any time over the Internet or by ordering it from us on a compact disc. We are currently designing SkyFiler to be an Internet-based document management system that will enable workgroups to share and collaborate on documents stored at our data centers. We expect the initial version of SkyFiler will include features such as version control, change and comment tracking, revision notification and access control. We have designed our services to be secure by encrypting data prior to transmission, maintaining the data in encrypted form at our data centers and returning it to the user in encrypted form. Our systems are reliable because we have designed them with multiple redundancies. Our services are easy to use because they have a simple Windows-based interface and run automatically each day with minimal user effort. Our services are cost-effective because users can implement them without any hardware, additional software or technical personnel. In addition, we have designed our systems to scale to accommodate millions of simultaneous users. OUR STRATEGY Our objective is to become the leading provider of Internet-based data protection, storage and management services to small and medium-sized businesses and individual computer users. To achieve this objective, we intend to: - strengthen our co-marketing programs with existing marketing partners and develop new relationships with other industry-leading companies; - increase awareness of the SkyDesk brands to position ourselves as a leading provider of online data storage and management solutions; - introduce new services and enhancements based on our proprietary technology to address the evolving needs of small and medium-sized businesses and individual computer users; - continue to invest in developing new technologies and services; - establish new, state-of-the-art data centers that will enhance the security and reliability of our solutions; and - pursue strategic acquisitions to broaden our offerings, expand our technology platform and capitalize on consolidation opportunities in our market. [COLOR ARTWORK AND GRAPHICS TO FOLLOW] OUR MARKETING PARTNERS We have developed marketing relationships with software publishers, computer manufacturers, Internet service providers and infrastructure vendors. We currently have relationships with: <TABLE> <S> <C> Advanced Digital Information Corporation Gateway, Inc. American Power Conversion Corporation Hewlett-Packard Company Compaq Computer Corporation Intuit (Quicken, QuickBooks and TurboTax) Dell Computer Corporation NorthPoint Communications Group, Inc. Earthlink, Inc. Toshiba Corporation Excite, Inc. </TABLE> ------------------------------ We incorporated in California in July 1995, and reincorporated in Delaware in March 2000. Our principal executive offices are located at 3550 General Atomics Court, San Diego, California 92121. Our telephone number at that location is (858) 455-3500. Information contained on our web sites, www.skydesk.com and www.backup.com, does not constitute part of this prospectus. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> Prospectus Summary................... 1 Risk Factors......................... 6 Forward-Looking Statements........... 19 Use of Proceeds...................... 20 Dividend Policy...................... 20 Capitalization....................... 21 Dilution............................. 23 Selected Consolidated Financial Data............................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 26 Business............................. 33 </TABLE> <TABLE> <CAPTION> PAGE <S> <C> Management........................... 45 Relationships and Related Transactions....................... 56 Principal Stockholders............... 58 Description of Capital Stock......... 60 Shares Eligible for Future Sale...... 64 Underwriting......................... 67 Legal Matters........................ 69 Experts.............................. 70 Where You Can Find More Information.. 70 Index to Consolidated Financial Statements......................... F-1 </TABLE> ------------------------------ We own or have rights to trademarks and trade names that we use in conjunction with the sale of our services. We have obtained federal registration of our @Backup trademark, and have trademark applications pending for SkyDesk, SkyFiler and SmartClone. This prospectus also contains trademarks and trade names of other companies. THE OFFERING Common stock offered by us.......... shares Common stock outstanding after this offering............................ shares Use of proceeds..................... Sales and marketing, research and development, infrastructure and support improvements, potential acquisitions and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............................. DESK This table is based on shares outstanding as of December 31, 1999, and excludes the following: - 3,654,331 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $0.20 per share; - 2,292,405 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.56 per share; - 1,050,000 shares of common stock which may become issuable upon exercise of a warrant subject to performance milestones; and - 156,990 shares of common stock available for future issuance under our various stock plans. In addition, our board of directors authorized 1,500,000 shares of common stock for issuance under our existing stock plan and approximately 2,800,000 shares of common stock for issuance under our stock plans to become effective upon completion of this offering. Except as otherwise indicated, all information in this prospectus is based on the following assumptions: - the conversion of each outstanding share of preferred stock into one share of common stock upon completion of this offering; - no exercise of the underwriters' overallotment option; and - amendments to our certificate of incorporation and bylaws to be effective upon completion of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table sets forth summary consolidated financial data for our company. You should read this information together with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> FROM INCEPTION (JULY 1995) TO YEARS ENDED DECEMBER 31, DECEMBER 31, -------------------------------------- 1995 1996 1997 1998 (UNAUDITED) 1999 <S> <C> <C> <C> <C> <C> Net revenues...................................... $ -- $ -- $ 63 $ 333 $ 567 Operating expenses: Cost of services................................ -- -- 647 641 879 Selling and marketing........................... 13 130 1,862 2,823 5,273 Research and development........................ 4 450 689 1,159 1,352 General and administrative...................... 11 357 503 928 1,561 Amortization of deferred stock-based compensation.................................. -- 8 44 106 2,448 ---- ----- ------- ------- ---------- Total operating expenses...................... 28 945 3,745 5,657 11,513 ---- ----- ------- ------- ---------- Loss from operations.............................. (28) (945) (3,682) (5,324) (10,946) Interest income (expense), net.................... 1 61 60 116 (236) ---- ----- ------- ------- ---------- Net loss.......................................... $(27) $(884) $(3,622) $(5,208) $ (11,182) ==== ===== ======= ======= ========== Adjustment for accretion of redeemable convertible preferred stock................................. $ -- $ -- $ -- $ (136) $ (469) Loss applicable to common stockholders............ $(27) $(884) $(3,622) $(5,344) $ (11,651) ==== ===== ======= ======= ========== Pro forma net loss per share...................... $ (0.45) ========== Shares used in computing pro forma net loss per share(a)........................................ 25,191,405 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ PRO FORMA ACTUAL AS ADJUSTED <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $16,095 $ Working capital............................................. 11,242 Total assets................................................ 23,150 Deferred revenue............................................ 442 442 Long-term obligations, net of current portion............... 2,222 2,222 Total stockholders' equity (deficit)........................ (17,672) </TABLE> The Pro Forma As Adjusted column in the Consolidated Balance Sheet Data reflects: - the conversion of all or our outstanding preferred stock into common stock upon completion of this offering; and - our sale of shares of common stock at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses that we will pay. - ------------------------------ (a) See Note 2 of "Notes to Consolidated Financial Statements" for an explanation of the pro forma per share information.

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+ PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus, including "Risk Factors" and the consolidated financial statements and the related notes, before deciding to invest in our common stock. OUR COMPANY NOVO is a leading professional services firm that architects and transforms businesses to better compete in the digital economy. We offer our clients innovative and integrated e-Business solutions that combine strategy, technology, design and marketing services. Our e-Business solutions reflect our belief that the Internet creates opportunities for businesses to more personally and effectively serve their constituents, which include their customers, suppliers, strategic partners, employees and stockholders. These solutions are designed to foster long-term, personalized relationships between our clients and their constituents. We refer to this personalized market dynamic as "Economies of One(SM)." We deliver our e-Business solutions using a methodology called "Rapid Customer Value Deployment(SM)." This multi-disciplinary, collaborative approach is designed to ensure that every facet of an engagement is aligned with our client's overall e-Business objectives. Our methodology is marked by distinct yet interdependent service offerings that are capable of taking an e-Business solution from conception through development and deployment. These four service offerings are: - Business Strategy -- Our strategy teams work in partnership with our clients to identify opportunities and plan the operations necessary to achieve their e-Business objectives. - Technology Application Development and Systems Integration -- Our technology teams build and integrate new and existing hardware and software with our clients' third-party applications, legacy systems and business processes. - Digital Design and User Experience -- Our award-winning design teams create the components that shape the user experience in support of our clients' e-Business objectives. - Marketing Services -- Our marketing teams evaluate and develop programs designed to acquire and retain customers, increase communication between our clients and their constituents, and build and extend brands. We focus on developing large-scale, long-term strategic relationships with our clients. Our clients include a select group of Global 1000 and dot.com companies, such as 3Com, Avery Dennison, Continental Airlines, E*Trade, General Motors, Gloss.com, Motorola, Procter & Gamble and Toyota. We deliver our services from offices in San Francisco, New York, Los Angeles and Detroit, and we had approximately 190 full-time employees as of February 29, 2000. OUR MARKET OPPORTUNITY We believe the Internet is creating a new market dynamic. Customers now have greater opportunities to customize the products and services they purchase due to their increased access to timely information and their ability to respond immediately and directly. In our view, customer satisfaction and loyalty have become, and will continue to be, a key component to the success of a business. As a result, the market for Internet services providers is expanding as businesses seek to build and enhance their relationships with their constituents. International Data Corporation, or IDC, estimates that the worldwide market for Internet services will grow from $12.9 billion in 1999 to over $78.6 billion by 2003, representing a compound annual growth rate of over 57%. We believe that companies seeking to build businesses on the Internet are best served by professional services firms that provide an integrated, multidisciplinary approach and that establish accountability in their engagements through specific business metrics designed to measure the success of the initiative. OUR APPROACH We consider ourselves "Relationship Architects for e-Business(SM)," meaning that we create and enhance personalized relationships by designing and implementing complete e-Business solutions. These relationships seek to build a competitive advantage for our clients. Our integrated approach focuses on generating customer value while addressing the time-to-market challenges common to implementing e-Business solutions. We utilize our methodology, Rapid Customer Value Deployment, to efficiently serve our clients. We differentiate ourselves through what we believe is a unique approach to client accountability. We seek to include in our client arrangements a predetermined set of metrics that permits our clients to measure results against their business objectives. We proactively seek incentive compensation from our clients tied to achieving those objectives. We afford our employees an opportunity to participate in this incentive compensation. In this way, we align the interests of our company and our individual employees with those of our clients. We are selective in accepting client engagements. We seek opportunities that will lead to long-term relationships with clients who intend to capture the competitive advantages provided by our integrated approach and solutions. OUR STRATEGY Our goal is to build and enhance our position as a leading provider of e-Business solutions. Our strategy to achieve this goal is as follows: - create and expand long-term relationships; - strengthen NOVO brand; - attract and retain highly qualified professionals; - leverage and develop strategic alliances and relationships; and - enhance skill sets and expand geographic presence. OUR HISTORY We were incorporated in California in 1994 and reincorporated in Delaware in March 2000 as Novo Group, Inc. Our corporate headquarters and business address is 222 Sutter Street, 6th Floor, San Francisco, California 94108, and our telephone number is (415) 646-7000. Our website is www.novocorp.com. The information on our website does not constitute part of this prospectus. THE OFFERING Common stock offered by NOVO........ shares Common stock to be outstanding after the offering........................ shares(1) Use of Proceeds..................... For working capital and general corporate purposes, including marketing expenses and the expansion of our operations. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............................. NOVO ------------------ (1) The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and does not include the following: - 1,600,000 shares of common stock reserved under our 1998 Novo Series B Common Stock Incentive Plan, of which 1,360,929 shares are subject to outstanding options at a weighted average exercise price of $1.36 per share and 121,441 shares are reserved for future option grants; - 4,100,000 shares of common stock reserved for issuance under our 1999 Novo Series A Common Stock Incentive Plan, of which 4,093,819 shares are subject to outstanding options at a weighted average exercise price of $2.25 per share; and - 21,062 shares of common stock are reserved for future option grants. See "Management -- Employee Benefit Plans." SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information as of December 31, 1999 and for the years ended December 31, 1998 and 1997 are calculated from our audited consolidated statements included in this prospectus. You should read the following data with the more detailed information contained in "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to the consolidated financial statements, each included in this prospectus. <TABLE> <CAPTION> FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------ PRO FORMA 1997 1998 1999 1999(1)(2) ------- ------- ------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................................... $ 3,835 $ 4,416 $13,735 $21,230 Gross profit........................................... 861 1,725 7,307 11,413 Loss from operations................................... (1,899) (635) (3,214) (9,713) Net loss............................................... $(2,070) $ (703) $(1,840) (8,382) ======= ======= ======= ======= Basic and diluted net loss per share................... $ (0.31) $ (0.07) $ (0.11) $ (0.32) ======= ======= ======= ======= Basic and diluted weighted average shares outstanding.......................................... 6,590 10,196 16,985 25,962 Pro forma basic and diluted net loss per share (unaudited)(3)....................................... $ (0.10) $ (0.31) ======= ======= Pro forma basic and diluted weighted average shares outstanding (unaudited).............................. 18,169 27,146 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,866 Working capital............................................. 10,157 Total assets................................................ 46,821 Total liabilities........................................... 8,044 Total stockholders' equity.................................. 38,777 </TABLE> - --------------- (1) Reflects the acquisition of Blue Marble ACG, Ltd., including the amortization of goodwill and other intangible assets, as if the acquisition had occurred on January 1, 1999. (2) Pro Forma basic and diluted net loss per share is computed using the weighted average number of common shares outstanding, including common shares issued in connection with the acquisition, as if these shares were outstanding from January 1, 1999. (3) Includes conversion of all outstanding shares of Series A preferred stock on a one-for-one basis. (4) Adjusted to reflect the sale of shares of common stock offered in this offering at an assumed offering price of $ per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by us and the application of our net proceeds from the offering. See "Capitalization."

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding ChemConnect and the financial statements and the notes to the financial statements appearing elsewhere in this prospectus. OUR BUSINESS ChemConnect is a leading business-to-business, global marketplace that brings together buyers and sellers of chemical products online, enabling them to transact business over the Internet. The ChemConnect marketplace facilitates transactions in all major categories of chemical products, including petrochemicals, industrial chemicals, plastics and polymers, pharmaceutical inputs, fine and specialty chemicals, industrial gases and agrochemicals. Our marketplace includes the World Chemical Exchange, a neutral, secure, real-time and interactive trading exchange, and Corporate Trading Rooms, in which our Charter and Corporate Members select other members to participate in private negotiating sessions. We also offer complementary third-party services, such as industry-specific content, product quality testing and information services. By the end of 2000, we intend to provide additional services, including logistics, financial services and wireless capabilities. As of March 24, 2000, we had over 4,000 member companies, including affiliated entities, from over 100 countries representing regional and global chemical producers and purchasers, brokers, traders and distributors worldwide. Approximately 1,780 of our members have actually bid for or offered to sell chemical products on our marketplace as of March 24, 2000. We also have 33 Charter Members who have each made an equity investment in us and named us a preferred third-party exchange for the purchase or sale of selected chemical products. Our Charter Members, who will hold approximately % of our shares after the completion of this offering, include: <TABLE> <S> <C> Abbott Laboratories Marubeni (through Marubeni America Air Liquide Participations Corporation) BASF Corporation Mitsubishi (through Mitsubishi International Bayer AG Corporation) Borealis A/S Mitsui (through Mitsui & Co. (U.S.A.), Inc.) BP Amoco (through BP International, Ltd) NOVA Chemicals Celanese Americas Corporation Occidental Chemical Corporation CK Witco Corporation Owens Corning The Dow Chemical Company PPG Industries DSM N.V. Praxair, Inc. Eastman Chemical Company Reichhold, Inc. Enichem S.p.A. (through ENA North Repsol YPF America Corp.) Rohm and Haas Company GE Plastics, a division of the General SABIC (through Sabic Americas, Inc.) Electric Company (through the General Solutia, Inc. Electric Equity Investments, Inc.) Sterling Chemicals, Inc. The Geon Company Sumitomo (through Sumitomo Corporation of Huntsman Corporation America) Hyundai Corporation Westlake Chemical Corporation Imperial Chemical Industries PLC </TABLE> OUR MARKET OPPORTUNITY According to Forrester Research, Internet-based business-to-business e-commerce in the United States is expected to grow from $109 billion in 1999 to $2.7 trillion in 2004. This projected growth is expected to be fueled by businesses that recognize the Internet as an effective medium to increase revenues, lower transaction costs, improve productivity and communicate more effectively with business partners. We believe that the $1.6 trillion global chemicals industry exhibits the following characteristics and will therefore benefit significantly from an Internet-based, business-to-business e-commerce solution: - a global, fragmented marketplace; - a complex supply chain with inefficient purchasing and selling processes; - a lack of readily available market and pricing information; - a lack of spot market liquidity; and - large product selections with standard, easily definable product characteristics. OUR STRATEGY Our objective is to be the leading online marketplace for buyers and sellers of chemical products and services. To achieve this objective, we intend to capitalize on our brand and base of Charter Members to continue to build our membership and create product liquidity. With this focus on building membership, we intend to create a network effect in which the value of our marketplace increases with the addition of each new member. We also intend to work jointly with our Charter Members to build consensus on enhancements to our marketplace and to establish standards for conducting chemicals industry e-commerce. We believe we must continue to expand the depth and scope of value-added services that we offer to our members and we must continue to expand internationally from our current base of offices in San Francisco, Houston, Philadelphia, London, Rotterdam and Singapore. OTHER INFORMATION For the year ended December 31, 1999, we had revenues of $127,000 and a net loss of $14.7 million. Our total accumulated deficit as of December 31, 1999 was $14.7 million. We were incorporated in Georgia in May 1996, and we reincorporated in Delaware in December 1998. Our corporate offices are located at 44 Montgomery Street, Suite 250, San Francisco, CA 94104. Our telephone number at that location is (415) 364-3300. Information contained on our website does not constitute a part of this prospectus. THE OFFERING Shares offered.......................... shares Shares to be outstanding after the offering................................ shares Use of proceeds......................... For general corporate purposes, principally working capital, funding our operating losses and potential acquisition of complementary businesses. Proposed Nasdaq National Market symbol.................................. "CMCT" The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, and does not include the following: - - 9,046,485 shares of Series D preferred stock and 5,475,129 shares of common stock issued in February and March 2000; - - 1,098,875 shares of common stock issuable upon exercise of stock options outstanding at a weighted average exercise price of $0.30 per share as of December 31, 1999; - - 415,225 shares of common stock available for future grant or issuance under our stock plan as of December 31, 1999; - - 500,000 shares of common stock reserved for issuance under our Director Option Plan; - - 750,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan; - - 2,500,000 shares of common stock reserved for issuance under our Equity Incentive Plan; and - - 1,562,490 shares of common stock reserved for issuance under outstanding warrants at a weighted average exercise price of $0.35 per share. Unless otherwise noted, all information in this prospectus: - - assumes no exercise of the underwriters' over-allotment option; and - - reflects the conversion of each outstanding share of our preferred stock into shares of common stock automatically upon the closing of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table is a summary of our statement of operations. The pro forma share amounts in the statement of operations data reflect the assumed conversion of our preferred stock into common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." See Notes 2 and 8 of Notes to Financial Statements for an explanation of the determination of the number of weighted average shares used in computing per share data. We were incorporated in May 1996. Through September 1999, we primarily operated a web site that was structured as an information exchange which facilitated the matching of buyers and sellers of chemicals around the world. Our revenues from inception through October 1999 were not significant. We launched the World Chemical Exchange in July 1999 and enhanced this service by establishing our Corporate Trading Rooms in November 1999. In October 1999 we began to charge for services on our web site. <TABLE> <CAPTION> MAY 28, 1996 (INCEPTION) TO YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------------------- 1996 1997 1998 1999 -------------- ---------- -------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues........................... $ 10 $ 31 $ 34 $ 127 Cost of revenues................... 1 2 3 516 Total operating expenses........... 30 39 501 14,895 Operating loss..................... (21) (10) (470) (15,284) Net loss........................... (21) (10) (465) (14,743) ========== ========== ======== =========== Net loss per share -- basic and diluted.......................... $ (0.02) $ (0.01) $ (0.48) $ (19.83) ========== ========== ======== =========== Weighted average shares used to compute net loss per share -- basic and diluted................ 1,000,000 1,000,000 966,094 743,511 ========== ========== ======== =========== Pro forma net loss per share -- basic and diluted (unaudited)...................... $ (1.05) =========== Weighted average shares used to compute pro forma net loss per share -- basic and diluted (unaudited)...................... 14,020,974 =========== </TABLE> The following table is a summary of our balance sheet as of December 31, 1999. The "Pro Forma" column gives effect to the conversion of all outstanding preferred stock into shares of common stock upon the closing of this offering. The "Pro Forma As Adjusted" column reflects the "Pro Forma" data as well as the receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share after deducting the underwriting discount and estimated offering expenses. See "Use of Proceeds" and "Capitalization."

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company, the common stock being sold in this offering and our financial statements and notes to those statements appearing elsewhere in this prospectus. Our Company We develop, market and support a leading software platform for Internet billing and customer management. Our solution enables companies to utilize the Internet to transform the traditional paper-based bill and statement delivery process into the foundation of an online customer account management strategy. Companies use our solution to establish interactive, online relationships with their customers, improve customer care and loyalty, increase revenue generation opportunities, and reduce costs associated with customer care and account management. Our customers include financial service providers such as American Express and GE Capital, utilities such as Boston Edison and Southern California Edison, communications service providers such as Sprint, UUNET and Telstra, retail companies such as Target, and billing service providers such as CheckFree, Moore and Lason. Our Market Opportunity Killen & Associates, a market research company, estimates that there are approximately 150,000 issuers of bills and statements worldwide and that these companies issue more than 60 billion recurring bills, statements and other commerce-related documents on an annual basis. Killen estimates that the percentage of recurring bills that are presented on the Internet will grow from 5% in 1999 to over 70% by 2005. In addition, Killen estimates that worldwide expenditures on Internet billing software and services will grow from approximately $4 billion in 2000 to $15 billion by 2005. Our Solution The benefits of our solution accrue both to companies using our software and to their customers. Companies that deploy our solution can: . establish interactive, online relationships with customers; . improve customer care and loyalty by offering self-care capabilities as well as bill and statement analysis and archiving; . increase revenue generation opportunities through highly personalized marketing, messaging and other content; . reduce costs for customer care and the delivery and processing of bills and statements; and . enable maximum flexibility for the distribution of customer account information and online bill payment. Benefits to consumer and business end-users accessing account information through our solution include the ability to: . gain anywhere, anytime access to bills and statements via Internet browsers, secure e-mail, and a variety of wireless Internet-access devices; and . reduce the time, cost and inconvenience associated with reviewing, processing, analyzing and archiving paper-based bills and statements. Our open, standards-based solution is highly scalable, easy to deploy and manage, and leverages existing investments in enterprise billing and customer management infrastructure. We also offer a variety of services that complement our products. Our professional services personnel provide rapid and cost- effective implementations of our products that are tailored to the particular needs and existing systems of our customers. Our Strategy Our strategy is to become the platform of choice for companies in financial services, telecommunications, utilities and other customer account-based industries seeking to leverage the Internet to enhance the value of customer relationships, create personalized marketing opportunities and save costs. Key elements of this strategy are to: . extend our market leadership position; . further penetrate our existing accounts; . expand our solution breadth to enter new markets; . provide focused business-to-consumer and business-to-business solutions; . expand content distribution and payment options to include additional Internet destinations and devices; and . increase direct sales and indirect distribution and implementation channels worldwide. Our History edocs, Inc. was incorporated in California in December 1996. In May 1998, edocs, Inc. was reincorporated in Delaware. Unless the context otherwise requires, any reference to "edocs", "we", "our" and "us" in this prospectus refers to edocs, Inc., a Delaware corporation, and its predecessors. Our principal executive offices are located at Two Apple Hill, 598 Worcester Road, Natick, Massachusetts 01760, and our telephone number is (508) 652-8600. Our Internet address is www.edocs.com. Information contained on our web site does not constitute part of this prospectus. "edocs", "BillDirect," "BillPost" and "XMLDirect" are trademarks or service marks of edocs, Inc. Other trademarks and tradenames in this prospectus are the property of their respective owners. The Offering <TABLE> <S> <C> Shares offered by edocs................ shares Shares to be outstanding after the shares offering.............................. Proposed Nasdaq National Market EDCS symbol................................ Use of proceeds........................ To provide working capital for general corporate purposes and geographic expansion. See "Use of Proceeds". </TABLE> The shares of common stock to be outstanding after this offering exclude: . 1,981,400 shares issuable upon the exercise of stock options as of December 31, 1999 at a weighted average exercise price of $0.48; and . 168,260 shares issuable upon the exercise of warrants outstanding as of December 31, 1999 at an exercise price of $2.62 per share. Unless otherwise specifically stated, information throughout this prospectus assumes: . no exercise of the underwriters' over-allotment option; and . the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,770,881 shares of common stock immediately prior to the closing of this offering. Summary Financial Data The following table summarizes our statement of operations data. Shares used in computing unaudited pro forma basic and diluted net loss per share give effect to the conversion of all outstanding shares of our preferred stock into shares of common stock, as if the shares had converted immediately upon their issuance. <TABLE> <CAPTION> Year Ended December 31, --------------------------------------- 1997 1998 1999 ------------------------ ------------- (in thousands, except per share data) <S> <C> <C> <C> Statement of Operations Data: Revenue: License revenue.................... $ -- $ 154 $ 1,963 Service revenue.................... 65 327 1,660 ---------- ------------ ------------- Total revenue........................ 65 481 3,623 ---------- ------------ ------------- Cost of revenue: Cost of license revenue............ -- -- 3 Cost of service revenue............ -- 164 1,961 ---------- ------------ ------------- Total cost of revenue............ -- 164 1,964 ---------- ------------ ------------- Gross profit......................... 65 317 1,659 ---------- ------------ ------------- Stock based compensation............. -- -- 283 Total operating expenses............. 193 2,686 13,396 Loss from operations................. (128) (2,369) (11,737) Net loss............................. (128) (2,273) (11,703) Dividends on redeemable convertible preferred stock..................... -- (196) (1,058) Net loss available to common stockholders........................ (128) (2,469) (12,761) ========== ============ ============= Basic and diluted net loss available to common stockholders per share.... $ -- $ (3.66) $ (6.13) ========== ============ ============= Shares used in computing basic and diluted net loss available to common stockholders per share.............. -- 674 2,081 ========== ============ ============= Unaudited pro forma basic and diluted net loss per common share........... $ (1.40) ============= Shares used in computing unaudited pro forma basic and diluted net loss per common share.................... 8,358 ============= </TABLE> The following table presents a summary of our balance sheet at December 31, 1999 (1) on an actual basis, and (2) on a pro forma basis to reflect conversion of our convertible preferred stock into a total of 7,705,237 shares of common stock upon closing of this offering and (3) on a pro forma basis as adjusted to reflect the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share after deducting the estimated underwriting discount and offering expenses. <TABLE> <CAPTION> As of December 31, 1999 ---------------------------- Pro Forma As Actual Pro Forma Adjusted ------- --------- --------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents........................ $ 9,782 $9,782 Working capital.................................. 6,706 6,706 Total assets..................................... 14,885 14,885 Deferred revenue................................. 1,766 1,766 Long-term portion of capital lease obligations and long-term debt.............................. 2,231 2,231 Redeemable convertible preferred stock........... 18,795 -- Total stockholders' equity (deficit)............. (11,231) 7,564 </TABLE>