<PAGE>
3,750,000 SHARES
ONEWAVE, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------
Of the 3,750,000 shares of Common Stock offered hereby, 3,000,000 shares are
being sold by the Company and 750,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. For factors considered in determining the initial public
offering price, see "Underwriting".
SEE "RISK FACTORS" ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "OWAV".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $16.00 $1.12 $14.88 $14.88
Total(3)........... $60,000,000 $4,200,000 $44,640,000 $11,160,000
</TABLE>
- --------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $1,100,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 562,500 shares at the initial public offering price
per share, less the underwriting discount, solely to cover over-
allotments. If such option is exercised in full, the total initial public
offering price, underwriting discount and proceeds to Company will be
$69,000,000, $4,830,000 and $53,010,000, respectively. See "Underwriting".
----------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about July 9, 1996, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO. HAMBRECHT & QUIST
----------------
The date of this Prospectus is July 2, 1996.
<PAGE>
[Graphic depicts a three dimensional rectangular platform angled from the
upper left to bottom right of the page, divided into three segments. There is a
small gap between each of the platform segments. The front edges of these
segments are labeled, from right to left, "Data Access", "Functionality" and
"Presentation". The left end of the platform ends in a low brick wall, labeled
"Firewall." On the left side of the firewall is a cloud labeled "Internet".
Beyond the "Internet" cloud are three personal computers, labeled "Distributor",
"Partner" and "Customer". The screen of each computer says "Web Browser", and
the top of each computer is labeled "OpenScape WebEngine Client". There are
arrows from each computer to the "Firewall". On the "Presentation" platform
segment there are two computers. One is labeled "OpenScape WebEngine Client",
with the words "Web Browser" on its screen, and the other is labeled "OpenScape
WebEngine Client", with the words "Desktop Application" on its screen. There are
arrows between the "Firewall" and each of these computers to the box on the
"Functionality" platform segment. The "Functionality" segment is entirely
occupied by a box labeled "OpenScape Distributed WebEngine Data Integration &
Analysis". Attached to this box and extending across the gap and over a small
portion of the "Data Access" segment is a rectangular box with four cylinders
extending farther out over the "Data Access" segment labeled "OpenScape
OpenExtension". Placed on the "Data Access" segment, in front of each of these
cylinders, are four small rectangular boxes labeled (from back to front) "Legacy
System", "Client/Server System", "Database" and "Emerging Technologies". There
is an arrow from each of the "OpenExtension" cylinders to the box directly in
front of it. Behind the "Presentation" segment is the label "Intranet"; behind
the "Functionality" segment is the label "Enterprise"; and behind the "Data
Access" segment is the label "Current IT System."]
OneWave's OpenScape products allow organizations to Web-enable business
applications through use of a distributed component, multi-tier client/server
architecture, where presentation, functionality and data access layers are
developed and deployed independently of each other. OpenScape products provide
the high-volume and real-time performance capabilities required by businesses
through the utilization of standard Internet protocols, component-based,
object-oriented technology, a scalable, multi-tier architecture and an
intuitive point-and-click development environment. The Company believes that
its products will enable organizations to achieve significant competitive
advantages by increasing responsiveness to changing business conditions, and
exploiting the low cost, flexibility and ease-of-use of Internet technologies.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
---------------------
"OneWave" and all of the Company's logos and product names are trademarks of
the Company and are used throughout this document as such. This prospectus
also contains trademarks of other companies.
<PAGE>
1
[4/c )
[Graphic entitled "OneWave Solution" depicts a map of the United States, with
images of buildings labeled as "Company Headquarters", "Company Sales Office",
"Company Manufacturing Plant", "Company Distribution Center", "Company R&D
Center" and "Company Southeast Regional Office", placed at various locations
around the map, and encircled by arrows labeled "Intranet" in two places.
Another arrow leads from "Company Headquarters" to "Company Sales Office".
Another arrow leads from "Company Headquarters" to a brick wall labeled
"Firewall" located in the upper left quarter of the graphic. Beyond the
"Firewall" there is a cloud labeled "Internet". Beyond the cloud farther to the
left and top of the picture, there are nine buildings, arranged in three lines
of three buildings each, with each building in the first line labeled
"Distributors", in the second line labeled "Business Partners" and in the third
line labeled "Customers". There are arrows leading from each of the buildings
which is first in each line into the "Internet" cloud.]
OneWave Inc. is a provider of "Web-enabled" software for the development and
deployment of mission-critical business applications across an organization's
disparate information technology ("IT") systems and the extension of those
applications to Intranets and the Internet. The Company's OpenScape products
enable organizations to extend their current IT capabilities to conduct new,
dynamic and interactive communications and transactions with key audiences in
their extended enterprise, including customers, suppliers, distributors and
business partners.
<PAGE>
[4/C ART]
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and qualified in
its entirety by, the more detailed information and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Except as otherwise
noted, all information contained in this Prospectus, including share and per
share information, (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) reflects the conversion upon the consummation of this offering of
all outstanding shares of the Company's Series B Redeemable Convertible
Preferred Stock ("Series B Preferred Stock") and Series C Convertible Preferred
Stock ("Series C Preferred Stock") into 1,688,074 shares of Common Stock, and
(iii) reflects a two-for-three reverse stock split of the Company's Common
Stock effected in May 1996.
THE COMPANY
OneWave, Inc., formerly Business@Web, Inc. ("OneWave" or the "Company"), is a
provider of "Web-enabled" software for the development and deployment of
mission-critical business applications across an organization's disparate
information technology ("IT") systems and the extension of those applications
to Intranets and the Internet. The Company's OpenScape products enable
organizations to extend their current IT capabilities to conduct new, dynamic
and interactive communication and transactions with key audiences in their
"extended enterprise", including customers, suppliers, distributors and
business partners. OpenScape products provide the high-volume and real-time
performance capabilities required by businesses through the utilization of
standard Internet protocols, component-based, object-oriented technology, a
scaleable, multi-tier architecture and an intuitive point-and-click development
environment. The Company believes that its products will enable organizations
to achieve significant competitive advantages by increasing responsiveness to
changing business conditions, and exploiting the low cost, flexibility and
ease-of-use of Internet technologies.
In response to increased competitive pressures, businesses have engaged in
the reengineering of critical business processes in an attempt to realize
productivity and efficiency gains. A critical enabler of these reengineering
efforts has been the strategic use of information technology, such as legacy
and client/server systems. To date, the development and deployment of effective
enterprise-wide business applications have been limited by the proliferation of
multiple IT systems. The recent emergence of the World Wide Web and Internet
technologies offers businesses the opportunity to significantly improve
collaboration and communication both within the enterprise and with the
extended enterprise. Accordingly, organizations are increasingly seeking a
cost-effective IT solution which maximizes the value of their existing IT
infrastructure, while simultaneously capturing the strategic business benefits
of the Internet. Organizations are able to address this need through the use of
the Company's OpenScape development environment and its Distributed WebEngine,
WebEngine Client and OpenExtension products.
The Company's objective is to be a leading provider of software which
supports the development and deployment of Web-enabled business applications.
The Company intends to integrate emerging technologies in future OpenScape
product releases and to continually introduce additional OpenExtensions,
specific preconfigured add-on products which enable communications with
proprietary environments. The Company also intends to develop multiple
distribution channels, focusing primarily on the Company's direct sales force,
and its strategic relationships with leading technology companies including
BBN, Baan, Deloitte & Touche/ICS, Hewlett-Packard, Informix, NEC, PeopleSoft
and SAP.
The Company was incorporated in Delaware in January 1994. The Company's
executive offices are located at One Arsenal Marketplace, Watertown, MA 02172
and its telephone number is (617) 923-6500.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...................... 3,000,000 shares
Common Stock offered by the Selling Stock holders........ 750,000 shares
Common Stock to be outstanding after the offering........ 14,757,770 shares(1)
Nasdaq National Market symbol............................ OWAV
Use of proceeds.......................................... For working capital,
repayment of debt
and other general
corporate purposes,
including possible
acquisitions.
</TABLE>
3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 19, 1994
(INCEPTION) TO YEAR ENDED THREE MONTHS
DECEMBER 31, 1994 DECEMBER 31, 1995 ENDED MARCH 31,
----------------- ----------------- ----------------
1995 1996
------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ -- $6,070 $ 416 $ 2,381
Gross profit............ -- 2,669 222 1,118
Operating loss.......... (1,180) (2,621) (290) (8,497)
Net loss................ (1,180) (2,698) (290) (8,515)
Pro forma net loss per
common and common
equivalent share(2).... $(.21) $ (.65)
Pro forma weighted
average number of
common and common
equivalent shares
outstanding(2)......... 12,871 13,141
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 4,822 $ 4,792 $48,332
Working capital (deficit).................. (925) (955) 42,585
Total assets............................... 8,939 8,909 52,449
Redeemable preferred stock................. 7,380 -- --
Stockholders' equity (deficit)............. (6,933) 417 43,957
</TABLE>
- --------
(1) Based upon the number of shares of Common Stock outstanding as of June 24,
1996 after giving effect to the conversion of all outstanding shares of
Series C Preferred Stock into 799,994 shares of Common Stock and all
outstanding shares of Series B Preferred Stock into 888,080 shares of
Common Stock, in each case upon the consummation of this offering. Excludes
(i) 4,150,000 shares of Common Stock reserved for issuance pursuant to the
Company's stock option plans, under which options for the purchase of an
aggregate of 3,356,600 shares were outstanding as of June 24, 1996, (ii)
150,000 shares of Common Stock reserved for issuance pursuant to the
Company's Employee Stock Purchase Plan and (iii) 23,333 shares of Common
Stock that may be issued upon the exercise of an outstanding Common Stock
purchase warrant. See "Management--Stock Plans", "Description of Capital
Stock--Authorized and Outstanding Capital Stock", "--Employee Stock
Purchase Plan" and "--Warrant" and Note 6 of Notes to Financial Statements.
(2) See Note 1(k) of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per common and common equivalent share.
(3) Presented on a pro forma basis to give effect to (i) the sale subsequent to
March 31, 1996 of 1,200,000 shares of Series C Preferred Stock and the
receipt of $5,970,000 in net proceeds therefrom, (ii) the repurchase and
retirement subsequent to March 31, 1996 of 800,000 shares of Common Stock
for $6,000,000 and (iii) the automatic conversion of all outstanding shares
of Series B Preferred Stock and Series C Preferred Stock into 1,688,074
shares of Common Stock upon the consummation of this offering. See
"Description of Capital Stock--Authorized and Outstanding Capital Stock".
(4) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company, after deduction of the underwriting discount and
estimated offering expenses payable by the Company.
4
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements as a result
of certain of the risk factors set forth below and elsewhere in this
Prospectus. In addition to the other information contained in this Prospectus,
the following factors should be considered carefully in evaluating an
investment in the Common Stock offered by this Prospectus.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT
The Company was founded in January 1994 and introduced its first OpenScape
products on a commercial basis in late December 1995. Most of the Company's
revenues to date have been attributable to consulting and education services.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its products and prospects can be based. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
management and other employees, continue to upgrade its technologies and
commercialize products and services which incorporate such technologies and
achieve market acceptance for its OpenScape products. There can be no
assurance that the Company will be successful in addressing such risks. The
Company has incurred net losses since inception and expects to continue to
operate at a loss for the foreseeable future. As of March 31, 1996, the
Company had an accumulated deficit of approximately $12,400,000. There can be
no assurance that the Company will achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction, enhancement or announcement of products by
the Company and its competitors, market acceptance of new products, size and
timing of significant orders, budgeting cycles of its customers, mix of
distribution channels, mix of products and services sold, mix of international
and North American revenues, changes in the level of operating expenses,
changes in the Company's sales incentive plans, customer order deferrals in
anticipation of enhancements or new products offered or announced by the
Company or its competitors, and general economic conditions. The Company
believes that a significant portion of its revenues may be derived from a
limited number of large orders, and the timing of such orders and their
fulfillment can be expected to cause material fluctuations in the Company's
operating results, particularly on a quarterly basis. In addition, the Company
intends to continue to expand its direct sales force. The timing of such
expansion and the rate at which new salespeople become productive could also
cause material fluctuations in the Company's quarterly financial condition and
operating results. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. In
addition, it is typical for software companies to recognize a substantial
portion of their revenues during the last few weeks of each quarter;
therefore, any delays in orders or shipments are likely to result in revenues
not being recognized until the following quarter. The Company's current
expense levels are based in part on its expectations of future revenues and,
as a result, net income for a given period could be disproportionately
affected by any reduction in revenues. There can be no assurance that the
Company will be able to achieve significant revenues, that the level of
revenues in the future will not decrease from past levels or that in some
future quarter the Company's revenues or operating results will not be below
the expectations of stock market securities analysts and investors. In such
event, the
5
<PAGE>
Company's profitability and price of its Common Stock could be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
RECENT INTRODUCTION OF OPENSCAPE PRODUCTS; NEW RELEASES
The Company introduced its first OpenScape products in late December 1995.
Sales of OpenScape products accounted for $488,000, or 20% of total revenues,
in the three months ended March 31, 1996. The Company's future success will
depend in large part on the Company's ability to increase sales of the
OpenScape product line which, in turn, will depend in part on the successful
development, introduction and market acceptance of new releases of OpenScape
products. To date, only a limited number of the Company's customers have
developed and deployed Internet applications using the Company's software. In
June 1996, the Company introduced Version 2.0 of its OpenScape product, which
provides additional capabilities for the effective development of Internet
applications. The Company anticipates that its future revenues will depend to
a significant degree on the successful introduction and market acceptance of
its OpenScape Version 2.0. In addition, the Company's future success will
depend on its ability to develop new OpenExtensions that enable applications
developed with the Company's products to integrate with various back-end
systems, applications and databases from vendors such as Baan, Informix,
PeopleSoft and SAP. There can be no assurance that any of the Company's
planned products will be successfully introduced or will achieve market
acceptance, and such failure to do so could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS
The market for the Company's software and services has only recently begun
to develop, is rapidly evolving and is characterized by an increasing number
of market entrants who have introduced, developed or announced products and
services for communication, collaboration and commerce over Intranets and the
Internet. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. The industry is evolving and has few
proven products. While the Company believes that its software products offer
significant advantages for communication, collaboration and commerce over
Intranets and the Internet, there can be no assurance that the market for the
Company's products and services will develop, that the Company's products and
services will achieve market acceptance, or that Intranets, the Internet and
related technologies will achieve widespread acceptance by businesses. If the
market for the Company's software and services fails to develop, develops more
slowly than expected or becomes saturated with competitors, or if the
Company's products do not achieve market acceptance, the Company's business,
prospects, financial condition and results of operations will be materially
adversely affected.
DEPENDENCE ON THE INTERNET
Sales of the Company's products will depend to a significant degree upon
development of robust demand for, and the infrastructure necessary to support,
commercial Internet access and traffic. The Internet may not prove to be a
viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as a reliable network backbone or timely
development of complementary products, such as high speed modems. Because
communication, collaboration and commerce over Intranets and the Internet is
new and evolving, it is difficult to predict with any certainty whether the
infrastructure or complementary products necessary to make such applications
commercially viable will develop or, if developed, that there will be
sufficient commercial demand for the use of Intranets and the Internet. In
addition, critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease-of-use, access, and quality of
service, remain
6
<PAGE>
unresolved and may impact the growth of such use by businesses. Moreover, the
adoption of Intranets and the Internet for communications, collaboration and
commerce may be slowed as a result of enterprises that have already invested
substantial resources in other IT systems being particularly reluctant or slow
to adopt a new strategy or technology. If the infrastructure or complementary
products necessary for widespread business use of Intranets and the Internet
are not developed, or if Intranets or the Internet does not otherwise become
commercially viable, the Company's business, prospects, financial condition
and results of operations will be materially adversely affected.
COMPETITION
The market for Internet-based software and services is new, intensely
competitive and subject to rapid technological change. The Company expects
competition to persist and intensify in the future. Almost all of the
Company's current and potential competitors have significantly greater
financial, technical and marketing resources than the Company. The Company's
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources
than the Company to the development, promotion and sale of their products.
Also, many current and potential competitors have greater name recognition and
more extensive customer bases that could be leveraged to gain market share to
the Company's detriment.
The Company expects to face additional competition as other established and
emerging companies enter the market for Internet-based solutions and new
products and technologies are introduced. Increased competition could result
in price reductions, fewer customer orders, reduced profitability and loss of
market share, any of which could materially adversely affect the Company's
business, prospects, financial condition and results of operations. In
addition, current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to deliver products which address the needs
of the Company's prospective customers. Current and potential competitors may
also be more successful than the Company in having their products or
technologies widely accepted. Accordingly, it is possible that new competitors
or alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could materially adversely affect
the Company's ability to obtain and retain market acceptance for its products
and services. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure
to do so could have a material adverse effect upon the Company's business,
prospects, financial condition and results of operations. See "Business--
Competition".
NEW PRODUCT DEVELOPMENT
A substantial portion of the Company's future revenues is expected to be
derived from the license of its OpenScape software and the sale of related
services. Accordingly, broad acceptance of the Company's software products and
services by customers is critical to the Company's future success, as is the
Company's ability to design, develop, test and support new software products
and enhancements on a timely basis that meet changing customer needs and
respond to technological developments and emerging industry standards. There
can be no assurance that the Company will be successful in developing and
marketing new software products and enhancements that meet changing customer
needs and respond to such technological changes or evolving industry
standards. In addition, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and enhancements, or
that its new products and enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. If any of the Company's
future enhancements or products experience delays in release dates, or if they
fail to achieve market acceptance, the Company's business, prospects,
financial condition and results of operations could be materially adversely
affected. In addition, the introduction or announcement of new product
offerings or
7
<PAGE>
enhancements by the Company or the Company's competitors may cause customers
to defer or forgo purchases of current versions of the Company's products
which could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See "Business--
Products" and "--Research and Development".
RISK OF SOFTWARE DEFECTS
Software products as internally complex as the Company's products frequently
contain errors or defects, especially when first introduced or when new
versions or enhancements are released. The Company introduced Version 2.0 of
OpenScape in June 1996. There can be no assurance that, despite testing by the
Company, defects and errors will not be found in OpenScape Version 2.0, the
Company's other current products, or future products and enhancements,
resulting in loss of revenues or delay in market acceptance, which in turn
could have a material adverse effect upon the Company's business, prospects,
financial condition and results of operations. See "Business--Research and
Development".
RELIANCE ON STRATEGIC RELATIONSHIPS
A key element of the Company's business strategy is to develop relationships
with leading industry organizations in order to increase the Company's market
presence, expand distribution channels and broaden the Company's product line.
The Company believes that its continued success depends in large part on its
ability to develop and maintain such relationships. Many of the Company's
strategic relationships are informal and non-exclusive, and do not require the
other party to sell the Company's products or expend resources toward the
promotion of the Company's products. In addition, these relationships
generally can be terminated by either party at any time. There can be no
assurance that the Company's existing or future strategic partners will not
develop and market products in direct competition with the Company or
otherwise discontinue their relationships with the Company, or that the
Company will be able to successfully develop additional strategic
relationships. The failure of the Company's strategic partners to augment the
sales of the Company's products could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
See "Business--Strategic Alliances".
MANAGEMENT OF GROWTH
The rapid execution necessary for the Company to fully exploit the market
window for its products and services requires an effective planning and
management process. The Company's rapid growth has placed, and is expected to
continue to place, a significant strain on the Company's managerial,
operational and financial resources. The senior members of the Company's
management, including Klaus P. Besier, the Company's Chairman of the Board,
President and Chief Executive Officer, Mark Gallagher, the Company's Chief
Financial Officer, John Burke, the Company's Vice President of Sales, Carolyn
LoGalbo, the Company's Vice President of Marketing, John Coviello, the
Company's Vice President of Technology, and Joseph Grattadauria, the Company's
Vice President of Support Services and Quality, have joined the Company during
1996. In addition, most of the Company's development and engineering staff was
only recently hired. To manage its growth, the Company must continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company's future operating results
will also depend on its ability to expand its sales and marketing
organizations, implement and manage new distribution channels, penetrate
different and broader markets, and grow its services and support organizations
commensurate with the increasing base of its installed products. Further
strain could also be placed on the Company's resources should the Company
choose to make acquisitions of complementary businesses, products or
technologies. If the Company is unable to plan and manage its growth
effectively, the Company's business, prospects, financial condition and
results of operations could be materially adversely affected. See "Business--
Research and Development" and "-- Employees".
8
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees, most of whom have worked together
for only a short period of time. Given the Company's early stage of
development, the Company is dependent on its ability to retain and motivate
high quality personnel, especially its management and highly skilled
development teams. The loss of the services of Klaus P. Besier, the Company's
Chairman of the Board, President and Chief Executive Officer, or any of its
executive officers or other key employees could have a material adverse effect
on the Company. The Company's future success also depends on its continuing
ability to identify, hire, train and retain other highly qualified technical
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract, assimilate or
retain other highly qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
business, prospects, financial condition and results of operations. See
"Business--Employees" and "Management".
EVOLVING DISTRIBUTION STRATEGY
The Company's distribution strategy includes leveraging its strategic
relationships and expanding its direct sales force. The Company has received
limited commitments to assist in the marketing and sale of its products from
the organizations with which it has established strategic relationships, but
there can be no assurance that any such commitments will lead to sales of such
products. The Company plans to expand its direct sales and support
organization to pursue prospects generated through its strategic relationships
and marketing initiatives. There can be no assurance that such internal
expansion will be successfully completed, that the cost of such expansion will
not exceed the revenues generated, or that the Company's sales and marketing
organization will be able to successfully compete against the significantly
more extensive and well-funded sales and marketing operations of many of the
Company's current or potential competitors. The Company's inability to
effectively manage its internal expansion could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
The Company also expects to augment its direct sales efforts by adding
value-added resellers ("VARs") and independent software vendors ("ISVs"). The
Company expects that any material increase in sales through VARs and ISVs as a
percentage of total revenues, especially in the percentage of sales through
VARs, will adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that are typically received by the vendor
when selling through indirect channels. Agreements with VARs and ISVs
typically do not restrict VARs and ISVs from distributing competing products,
and in many cases may be terminated by either party without cause. The
Company's inability to recruit, manage or retain qualified VARs and ISVs, or
their inability to penetrate their respective market segments, could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business--Sales and Marketing".
PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on a combination of
trademark, copyright and trade secret laws, employee and third-party
nondisclosure agreements and other methods to protect its technology, the
Company believes that factors such as the skills of its development personnel
are more essential to establishing and maintaining a technology leadership
position. The Company presently has no patents or patent applications pending.
There can be no assurance that competitors will not develop technologies that
are similar or superior to the Company's technology. The Company generally
enters into confidentiality or license agreements with its employees and
consultants, and generally controls access to and distribution of its source
code and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
products or technology without authorization, or to develop similar technology
independently. In
9
<PAGE>
addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries, and the global nature of the Internet
makes it virtually impossible to control the ultimate destination of the
Company's products. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that such agreements will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
DEPENDENCE ON THIRD-PARTY TECHNOLOGY
Certain of the Company's products contain software that is licensed to the
Company by third parties. There can be no assurance that these third-party
software licenses will continue to be available to the Company on commercially
reasonable terms. For example, certain technology incorporated in the
Company's software, including InterGroup Technologies, Inc.'s VisualWare for
Windows and Mystic River Software, Inc.'s Softbridge Basic Language, is
licensed from third parties on a nonexclusive basis. The termination of any of
such licenses, or the failure of the third-party licensors to adequately
maintain or update their products, could result in significant delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources. In addition, any required
replacement licenses could prove more costly than the Company's current
license relationships and might not provide technology as powerful and
functional as the third-party technology currently licensed by the Company.
Also, any such delay could have a material adverse effect on the Company's
results of operations for that quarter. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of the
Company's products or relating to current or future technologies, there can be
no assurance that the Company will be able to do so on commercially reasonable
terms or at all. The loss of, or inability to maintain, any such software
could result in shipment delays or reductions until equivalent software could
be developed, identified, licensed and integrated which could materially
adversely affect the Company's business, prospects, financial condition and
results of operations. See "Business--Strategic Alliances" and "--Proprietary
Rights".
PRODUCT LIABILITY
The Company markets its products and services to customers for the
development, deployment and management of critical business applications. The
Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability
claims. The Company may not, however, always be able to obtain adequate
contractual limitations on liability from its customers and end users and, in
any event, such provisions may not be effective as a result of existing or
future federal, state or local laws or ordinances or unfavorable judicial
decisions. Although the Company has not experienced any material product
liability claims to date, the sale and support of the Company's products may
entail the risk of such claims, which could be significant. A successful
product liability claim brought against the Company could have a material
adverse effect upon the Company's business, prospects, financial condition and
results of operations.
RISKS ASSOCIATED WITH GLOBAL OPERATIONS
Since its inception, the Company has derived less than 17% of its total
revenues in each year from sales to customers outside of the United States.
The Company intends to expand its operations outside of the United States and
enter additional international markets, which will require significant
10
<PAGE>
management attention and financial resources. The Company's ability to expand
the acceptance and use of its core technologies internationally is limited by
the general acceptance of the Internet and Intranets in other countries. The
Company expects to commit additional time and development resources to
customizing its products for selected international markets and developing
international sales and support channels. There can be no assurance that such
efforts will be successful. In addition, as the Company increases its
international sales, its total revenues may also be affected to a greater
extent by seasonal fluctuations resulting from lower sales that typically
occur during the summer months in Europe and other parts of the world. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". In addition, the use of encryption technologies in the Company's
products could subject such products to export and/or import restrictions. Any
such export or import limitations could have a material adverse effect on the
ability to sell the Company's products outside the United States.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any
governmental agency, other than regulations applicable to business generally,
and there are currently few laws or regulations directly applicable to access
to or commerce on the Internet. Due to the increasing popularity and use of
the Internet, however, it is possible that a number of laws and regulations
may be adopted with respect to the Internet, covering issues such as user
privacy, pricing and characteristics and quality of products and services. The
adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products
and increase the Company's cost of doing business or otherwise have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, libel and personal privacy
is uncertain.
CONCENTRATION OF STOCK OWNERSHIP; RELATED-PARTY TRANSACTIONS
Upon completion of this offering, the present directors, executive officers,
holders of 5% or more of the Common Stock, and their respective affiliates
will beneficially own approximately 67% of the outstanding Common Stock
assuming no exercise of the Underwriters' over-allotment option and 65% of the
outstanding Common Stock assuming full exercise of the Underwriters' over-
allotment option. As a result, these stockholders will be able to exercise
significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company. See "Principal and
Selling Stockholders" and "Description of Capital Stock--Delaware Law and
Certain Charter Provisions". In addition, the Company has in the past entered
into transactions with certain of its principal stockholders and their
affiliates. To the extent the Company enters into transactions with its
affiliates in the future, such transactions could result in conflicts of
interest. See "Certain Transactions".
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or be sustained after the offering. The initial
offering price was determined by negotiation between the Company and the
Underwriters based upon several factors. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
The market price of the Company's Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new
products by the Company or its competitors, changes in financial estimates by
securities analysts, or other events or factors. In addition, the stock market
has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that have been unrelated to the operating performance
of such companies. In the past, following periods of volatility in the market
price of a company's securities, securities class
11
<PAGE>
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock. See "Underwriting".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock. See "Description of Capital Stock" and "Shares Eligible for Future
Sale".
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF RESTATED
CERTIFICATE OF INCORPORATION, RESTATED BY-LAWS AND DELAWARE LAW
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue shares of Preferred Stock. Further, certain provisions of the Company's
Restated Certificate of Incorporation, including provisions that create a
classified board of directors, and of the Company's Restated By-laws and of
Delaware law could delay or make difficult a merger, tender offer or proxy
contest involving the Company. See "Management--Executive Officers and
Directors", "Description of Capital Stock--Preferred Stock" and "--Delaware
Law and Certain Charter Provisions".
DILUTION
Investors in this offering will incur immediate, substantial dilution. To
the extent outstanding options to purchase the Company's Common Stock are
exercised, there will be further dilution. See "Dilution".
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock being offered by the Company in this offering are estimated to be
$43,540,000 ($51,910,000 if the Underwriters' over-allotment option is
exercised in full), after the deduction of the underwriting discount and
estimated offering expenses payable by the Company. The Company will not
receive any proceeds from the sale of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders".
The principal purposes of this offering are to increase the Company's equity
capital, to create a public market for the Company's Common Stock, to
facilitate future access by the Company to public equity markets, to provide
liquidity to existing stockholders, to provide increased visibility and
credibility in a marketplace where many of its current and potential
competitors are or will be publicly held companies, and to enhance the ability
of the Company to use its Common Stock as consideration for acquisitions and
as a means of attracting and retaining key employees.
The Company intends to use a portion of the net proceeds for the repayment
of a $2,000,000 principal amount term loan from State Street Bank and Trust
Company which matures in September 1996. The term loan bears interest at the
bank's prime rate plus 1% and the proceeds thereof were used to fund the
license fees due under a certain source code license agreement.
The remainder of the net proceeds will be used for working capital and other
general corporate purposes. The amount actually expended by the Company for
working capital purposes will vary significantly depending upon a number of
factors, including future revenue growth, the amount of cash generated by the
Company's operations and the progress of the Company's product development
efforts. The Company may also use a portion of the net proceeds to fund
possible acquisitions of, or investments in, businesses, products and
technologies that are complementary to those of the Company. The Company has
no specific agreements, commitments or understandings with respect to any such
acquisitions or investments. Pending such uses, the Company intends to invest
the net proceeds of this offering in investment-grade, interest bearing
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all of its earnings to finance future
growth and therefore does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Company is prohibited by its term
loan agreement from paying cash dividends.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996: (i) on an actual basis, (ii) on a pro forma basis as described in
Note 2 below and (iii) on a pro forma basis, as adjusted to give effect to the
sale of 3,000,000 shares of Common Stock offered by the Company. See "Use of
Proceeds". The capitalization information set forth in the table below is
qualified by the more detailed Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996(1)
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(2)
-------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................. $ 2,000 $ 2,000 $ 2,000
======== ======== ========
Series B Redeemable Convertible Preferred
Stock, $1.00 par value; 1,332,127 shares
authorized, issued and outstanding
(actual); no shares authorized, issued or
outstanding (pro forma and pro forma as
adjusted).................................. 7,380 -- --
Stockholders' equity (deficit)(3):
Series C Convertible Preferred Stock, $1.00
par value; 1,220,000 shares authorized, no
shares issued or outstanding (actual); no
shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)...... -- -- --
Preferred Stock, $1.00 par value;
447,873 shares authorized, no shares issued
or outstanding (actual); 5,000,000 shares
authorized, no shares issued or outstanding
(pro forma and pro forma as adjusted)...... -- -- --
Common Stock, $.001 par value;
30,000,000 shares authorized, 10,803,030
shares issued and outstanding (actual);
50,000,000 shares authorized, 11,691,104
and 14,691,104 shares issued and
outstanding (pro forma and pro forma as
adjusted)(3).............................. 11 12 15
Additional paid-in capital.................. 8,145 15,494 59,031
Note receivable from executive officer...... (2,560) (2,560) (2,560)
Deferred compensation....................... (135) (135) (135)
Accumulated deficit......................... (12,394) (12,394) (12,394)
-------- -------- --------
Total stockholders' equity (deficit)........ (6,933) 417 43,957
-------- -------- --------
Total capitalization........................ $ 447 $ 417 $ 43,957
======== ======== ========
</TABLE>
- --------
(1) The Company's Certificate of Incorporation was amended on May 30, 1996 to
increase the number of authorized shares of Common Stock and Preferred
Stock to 50,000,000 and 5,000,000 shares, respectively. See "Description
of Capital Stock" and Note 6 of Notes to Financial Statements.
(2) Presented on a pro forma basis to give effect to (i) the sale subsequent
to March 31, 1996 of 1,200,000 shares of Series C Preferred Stock and the
receipt of $5,970,000 in net proceeds therefrom, (ii) the repurchase and
retirement subsequent to March 31, 1996 of 800,000 shares of Common Stock
for $6,000,000 and (iii) the automatic conversion of all outstanding
shares of Series C Preferred Stock into 799,994 shares of Common Stock and
all outstanding shares of Series B Preferred Stock into 888,080 shares of
Common Stock, in each case upon the consummation of this offering. See
"Description of Capital Stock--Authorized and Outstanding Capital Stock"
and "Statement of Redeemable Convertible Stock and Stockholders' Equity
(Deficit)" contained on page F-5 of the Financial Statements.
(3) Excludes (i) 4,150,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans, under which options for the
purchase of an aggregate of 3,356,600 shares were outstanding as of June
24, 1996, (ii) 150,000 shares of Common Stock reserved for issuance
pursuant to the Company's Employee Stock Purchase Plan and (iii) 23,333
shares of Common Stock that may be issued upon the conversion of an
outstanding common stock warrant. See "Management--Stock Plans" and "--
Employee Stock Purchase Plan", "Description of Capital Stock--Warrant" and
Note 6 of Notes to Financial Statements.
14
<PAGE>
DILUTION
As of March 31, 1996, the Company had a pro forma net tangible book value of
approximately $417,000 or $.04 per share of Common Stock. Pro forma net
tangible book value per share represents the Company's total tangible assets
less its total liabilities, divided by the aggregate pro forma number of
shares of Common Stock outstanding (after giving effect to the conversion of
the outstanding shares of Series C Stock and Series B Preferred Stock into
1,688,074 shares of Common Stock as described in Note 1 below, and the
repurchase of 800,000 shares of Common Stock by the Company). After giving
effect to the sale of the 3,000,000 shares of Common Stock offered by the
Company hereby and after deducting the underwriting discount and estimated
offering expenses payable by the Company, the pro forma net tangible book
value at March 31, 1996 would have been approximately $43,957,000 or $2.99 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value per share of $2.95 to existing stockholders and an
immediate dilution of $13.01 per share to the investors purchasing the shares
of Common Stock offered hereby. The following table illustrates such dilution
per share:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $16.00
Pro forma net tangible book value per share as of
March 31, 1996............................................... $ .04
Increase per share attributable to this offering.............. 2.95
Pro forma net tangible book value per share after this
offering...................................................... 2.99
------
Dilution per share to new investors............................ $13.01
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the total number of shares of Common Stock purchased from the Company, the
total consideration paid, and the average price per share paid, by existing
stockholders and by new investors (before deducting the underwriting discount
and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(2)(3) 11,691,104 79.6% $14,440,784 23.1% $ 1.24
New investors(3)........ 3,000,000 20.4 48,000,000 76.9 16.00
---------- ----- ----------- -----
Total................... 14,691,104 100.0% $62,440,784 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) All outstanding shares of Series C Preferred Stock convert into 799,994
shares of Common Stock and all outstanding shares of Series B Preferred
Stock convert into 888,080 shares of Common Stock, in each case upon the
consummation of this offering. See "Description of Capital Stock--
Authorized and Outstanding Capital Stock".
(2) Does not includes an aggregate of 4,323,333 shares reserved for issuance
under the Company's stock option plans, the Company's Employee Stock
Purchase Plan and upon exercise of an outstanding Common Stock warrant and
66,666 shares issued upon the exercise of a stock option subsequent to
March 31, 1996. See "Management--Stock Plans" and "Description of Capital
Stock--Warrant".
(3) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by existing stockholders to 11,007,770, or 74.6% (71.9% if
the over-allotment option is exercised in full) of the total shares
outstanding after this offering, and will increase the number of shares
held by new investors to 3,750,000, or 25.4% of the total number of shares
of Common Stock outstanding after this offering (4,312,500 or 28.1% of the
total number of shares of Common Stock after this offering if the over-
allotment option is exercised in full).
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company, including the Notes
thereto, included elsewhere in this Prospectus. The statement of operations
data set forth below for the period from inception (January 19, 1994) to
December 31, 1994, and for the fiscal year ended December 31, 1995 and the
balance sheet data as of December 31, 1994 and 1995 are derived from the
Company's audited financial statements which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this Prospectus. The statement of operations data for the three months
ended March 31, 1995 and 1996 and the balance sheet data as of March 31, 1996
are derived from unaudited financial statements of the Company and include, in
the opinion of the Company, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
results of operations for those periods. Operating results for the three month
period ended March 31, 1996 are not necessarily indicative of the results to
be expected for the year ending December 31, 1996. The historical results are
not necessarily indicative of the results of operations to be expected in the
future.
<TABLE>
<CAPTION>
JANUARY 19, 1994 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------
1994 1995 1995 1996
---------------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license and main-
tenance................... $ -- $ 2,151 $ 43 $ 710
Consulting and education
services.................. -- 3,919 373 1,671
------- ------- ------- -------
Total revenues........... -- 6,070 416 2,381
Cost of Revenues:
Software license and main-
tenance................... -- 717 22 289
Consulting and education
services.................. -- 2,684 172 974
------- ------- ------- -------
Total cost of revenues... -- 3,401 194 1,263
Gross profit............. -- 2,669 222 1,118
Operating Expenses:
Selling, general and admin-
istrative................. 286 2,108 337 1,701
Research and development... 894 3,182 175 399
Compensation to executive
officer................... -- -- -- 7,515
------- ------- ------- -------
Total operating ex-
penses.................. 1,180 5,290 512 9,615
------- ------- ------- -------
Operating loss........... (1,180) (2,621) (290) (8,497)
Interest Expense, net........ -- (77) -- (18)
------- ------- ------- -------
Net loss................. $(1,180) $(2,698) $ (290) $(8,515)
======= ======= ======= =======
Pro forma net loss per common
and common equivalent
share(1).................... $ (.21) $ (.65)
Pro forma weighted average
number of common and common
equivalent shares
outstanding(1).............. 12,871 13,141
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996(2)
---------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.... $ -- $ 105 $ 4,822 $ 4,792
Working capital (deficit).... (932) (1,967) (925) (955)
Total assets................. 63 2,626 8,939 8,909
Redeemable convertible pre-
ferred stock................ -- -- 7,380 --
Stockholders' equity (defi-
cit)........................ (868) (2,804) (6,933) 417
</TABLE>
- -------
(1) See Note 1(k) of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per common and common equivalent share.
(2) Presented on a pro forma basis to give effect to (i) the sale subsequent
to March 31, 1996 of 1,200,000 shares of Series C Preferred Stock and the
receipt of $5,970,000 in net proceeds therefrom, (ii) the repurchase and
retirement subsequent to March 31, 1996 of 800,000 shares of Common Stock
for $6,000,000 and (iii) the automatic conversion of all outstanding
shares of Series C Convertible Preferred Stock into 799,994 shares of
Common Stock and all outstanding shares of Series B Preferred Stock into
888,080 shares of Common Stock, in each case upon the consummation of this
offering. See "Description of Capital Stock--Authorized and Outstanding
Capital Stock".
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in Delaware in January 1994 (under the name
Object Power, Incorporated) and changed its name to Business@Web, Inc. in
February 1996 and to OneWave, Inc. in June 1996. In 1994, the Company focused
on research and development and did not generate revenues. In 1995, the
Company began generating revenues through the reselling of software licenses
of a related party and associated maintenance and providing consulting and
education services. These revenues contributed to the funding of increased
research and development and the creation of market awareness for its
OpenScape product line. The Company began shipping OpenScape products in late
December 1995. Total revenues from the sale of OpenScape products in 1995 were
$609,000, which included a sale to Hewlett-Packard of $490,000, or 80% of
total 1995 OpenScape revenues. For the three months ended March 31, 1996, the
Company generated total revenues of $2,381,000, of which $710,000, or 30%,
were software license and maintenance revenues and $1,671,000, or 70%, were
consulting and education services revenues. The OpenScape product line
accounted for 69% of total software license and maintenance revenues for the
three months ended March 31, 1996, with the remaining software license and
maintenance revenues generated through reselling related party software
licenses and maintenance. In June 1996, the Company introduced Version 2.0 of
its OpenScape product, which provides additional capabilities for the
effective development of Internet applications. As a result, the Company
anticipates that its future revenues will depend to a significant degree on
successful introduction and market acceptance of OpenScape Version 2.0.
In 1996, the Company intends to increase its research and development
expenses and selling, general and administrative expenses. The Company's
expected levels of research and development expenditures are based on a plan
for current product enhancements and new product development. Selling and
marketing expenses are expected to increase significantly as a result of
continued expansion of distribution channels, strategic relationships,
headcount, and marketing programs. Increases in general and administrative
expenses are planned as the Company expands its executive management, finance
and administration support, information systems and other administrative
functions required to support the Company's operations.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets and technologies. To address
these risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified management
and other employees, continue to upgrade its technologies and commercialize
products and services which incorporate such technologies, and achieve market
acceptance for its OpenScape products. There can be no assurance that the
Company will be successful in addressing such risks. The Company has achieved
only limited revenues to date and its ability to generate significant revenues
is subject to substantial uncertainty. The limited operating history of the
Company makes the prediction of future results of operations difficult or
impossible, and therefore, there can be no assurance that the Company will
sustain revenue growth or achieve profitability. The Company has incurred net
losses since inception and expects to continue to incur losses on a quarterly
and annual basis for the foreseeable future. Due to all of the foregoing
factors, it is possible that in some future quarter, the Company's operating
results may be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock may be materially
adversely affected.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
total revenues for the year ended December 31, 1995 and the three months ended
March 31, 1995 and 1996. The table does not set forth such operational data as
a percentage of total revenues for the period from inception
17
<PAGE>
to December 31, 1994, as the Company did not generate revenues in such period
and therefore such information is not meaningful.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- --------
<S> <C> <C> <C>
Revenues:
Software license and maintenance........... 35% 10% 30%
Consulting and education services.......... 65 90 70
--- ------- --------
Total revenues........................... 100 100 100
Cost of Revenues:
Software license and maintenance........... 12 5 12
Consulting and education services.......... 44 41 41
--- ------- --------
Total cost of revenues................... 56 47 53
Gross profit............................. 44 53 47
Operating Expenses:
Selling, general and administrative........ 35 81 71
Research and development................... 52 42 17
Compensation to executive officer.......... -- -- 316
--- ------- --------
Total operating expenses................. 87 123 404
--- ------- --------
Operating loss........................... (43) (70) (357)
Interest Expense, net........................ 1 -- 1
--- ------- --------
Net loss................................. (44)% (70)% (358)%
=== ======= ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
REVENUES. Total revenues increased $1,965,000 to $2,381,000, for the three
months ended March 31, 1996 from $416,000 for the comparable quarter in 1995.
The increase was due primarily to the introduction and expansion of the
Company's product offerings, including consulting and education services,
related party software licenses and the OpenScape product line. For the three
months ended March 31, 1996, revenues consisted of 30% from software license
and maintenance revenues and 70% from consulting and education services
revenues compared with 10% and 90%, respectively, for the comparable period
for the prior year. For the three months ended March 31, 1996, OpenScape
software license and maintenance revenues were $488,000, representing 69% of
software license and maintenance revenues and 20% of total revenues. For the
three months ended March 31, 1995, the Company's software license and
maintenance revenues consisted solely of sales of software licenses of a
related party and associated maintenance. The Company has achieved only
limited revenues from OpenScape products and there can be no assurance that
the Company will sustain revenue growth or market acceptance for these or
other products which it markets.
COST OF REVENUES. Cost of software license and maintenance revenues consists
of the cost of software and maintenance purchased for resale from a related
party, distribution costs and support personnel costs. The cost of consulting
and education services consists primarily of consulting and support personnel
salaries, related costs and fees to third-party service providers. Total cost
of revenues increased $1,069,000 to $1,263,000 for the three months ended
March 31, 1996 from $194,000 for the comparable prior period. Total cost of
revenues as a percentage of total revenues was 47% and 53% for the three
months ended March 31, 1995 and 1996, respectively. The cost of revenues as a
percentage of associated software license and maintenance revenues for the
three months ended March 31, 1996 and 1995 were 41% and 52%, respectively. The
cost of software license and maintenance revenues as a percentage of
associated revenues has decreased due to an increase in revenues derived from
the sale of the Company's OpenScape products, which have a lower cost of
revenues than the resale of related party software licenses and maintenance.
The cost
18
<PAGE>
of revenues as a percentage of associated consulting and education services
revenues for the three months ended March 31, 1996 and 1995 were 58% and 46%,
respectively. The cost of consulting and education services revenues increased
as a percentage of associated revenues due to the greater costs associated
with consulting services, which the Company commenced offering in the third
quarter of 1995. Consulting service revenues generally have a higher cost of
associated revenue as compared with education service revenues. The Company
believes that cost of revenues comparisons are not meaningful or
representative of future results. In future periods, cost of revenues may be
affected by several factors, including distribution channels, price
reductions, competition, increases in cost of revenues, changes in product mix
and other factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist of payroll costs related to executive
management, finance, administration, sales and marketing personnel, and costs
for advertising, marketing and related administrative support. Selling,
general and administrative expenses increased to $1,701,000 for the three
months ended March 31, 1996 from $337,000 for the comparable prior period,
representing 71% and 81% of total revenues, respectively. The total dollar
increase reflects the Company's increased sales, marketing and distribution
efforts through increased headcount and related staffing expenditures. The
Company expects such total dollar increases to continue throughout 1996 and
future periods.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
primarily consist of payroll-related costs, fees to independent contractors
and purchases of technology. To date, the Company has expensed all software
development costs as incurred. Research and development expenses increased to
$399,000 for the three months ended March 31, 1996 from $175,000 for the
comparable prior period, representing 17% and 42% of total revenues,
respectively. The total dollar increase is attributable to increased headcount
and related costs which reflect the Company's efforts to enhance the
functionality of its products. The Company believes that it will be necessary
to make continued significant expenditures on research and development to
remain competitive.
COMPENSATION TO EXECUTIVE OFFICER. During the three months ended March 31,
1996, certain of the Company's controlling stockholders sold 960,000 shares of
Common Stock to Klaus Besier for an aggregate purchase price of $1,440,000,
and agreed to make certain payments to Mr. Besier to secure his services as
the Company's Chief Executive Officer. In accordance with generally accepted
accounting principles, the Company recorded a non-cash expense of $7,515,000
relating to these transactions. This non-cash expense consists of: (i)
$5,760,000, which represents the difference between the purchase price paid by
Mr. Besier for the shares of Common Stock that he purchased and the fair
market value of those shares at that time; (ii) $1,000,000, relating to a
payment received by Mr. Besier from one of the Company's controlling
stockholders; and (iii) $755,000, representing the value of a payment that
such stockholder agreed to make to Mr. Besier in the event of a decline in the
value of certain stock appreciation rights held by Mr. Besier on capital stock
of his former employer. In the event of fluctuations in the value of these
stock appreciation rights, the Company may record additional non-cash charges
or credits, which could be significant, through September 30, 1996. See Note
10 of Notes to the Financial Statements.
INTEREST EXPENSE, NET. For the three months ended March 31, 1996, the
Company recorded net interest expense of $18,000. This expense is comprised of
interest on the Company's $1,000,000 notes payable to stockholders and
$2,000,000 advance under its secured term note with a bank, offset by interest
income of approximately $16,000 on the Company's cash and cash equivalents.
The Company did not have any outstanding debt for the comparable period in the
prior year. In March 1996, the outstanding notes payable to stockholders were
repaid in full.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE PERIOD FROM INCEPTION
(JANUARY 19, 1994) TO DECEMBER 31, 1994
REVENUES. In 1994, the Company focused on research and development and did
not generate revenues. In 1995, the Company began generating revenues through
the reselling of related-party
19
<PAGE>
software licenses and associated maintenance and providing consulting and
education services. These revenues contributed to the funding of increased
research and development and creation of market awareness for its OpenScape
product line. The Company began shipping OpenScape in late December 1995.
Total revenues in 1995 were $6,070,000, of which 35%, or $2,151,000, were
software license and maintenance revenues and 65%, or $3,919,000, were
consulting and education services revenues. Software license revenues includes
$500,000 from a non-recurring sale of source code for an application unrelated
to the OpenScape product line to a related party. See "Certain Transactions"
and Note 7 of Notes to Financial Statements. In 1995, OpenScape software
license and maintenance revenues were $609,000, which represented 28% of total
software license and maintenance revenues for the year. Total 1995 OpenScape
revenues included a sale to Hewlett-Packard of $490,000, or 80% of total 1995
OpenScape revenues. The Company has achieved only limited revenues from
OpenScape products and there can be no assurance that the Company will sustain
revenue growth or market acceptance for these or other products which it
markets.
COST OF REVENUES. The Company did not generate revenues in 1994 and
therefore did not incur cost of revenues in this period. Total cost of
revenues as a percentage of total revenues was 56% in 1995. Total software
license and maintenance costs and consulting and education services costs as a
percentage of associated revenues were 33% and 68%, respectively, in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2,108,000 in 1995 from $286,000 for the
prior year. Selling, general and administrative expenses represented 35% of
total revenues in 1995. The total dollar increase in selling, general and
administrative expenses reflected the Company's increased sales, marketing and
distribution efforts from increased headcount and related staffing. The
Company expects such total dollar increases to continue throughout 1996 and
future periods.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $3,182,000 in 1995 from $894,000 for the prior year. Research and
development expenses represented 52% of total revenues in 1995. To date, the
Company has expensed all software development costs as incurred. Research and
development expenses in 1994 included $350,000 relating to the purchase of
technology rights and $373,000 for independent contractors. The total dollar
increase is attributable to increased headcount and related costs which
reflect the Company's efforts to enhance the functionality of products. During
1995, the Company recorded non-recurring expenses of $2,550,000 for purchases
of technology rights to incorporate in its OpenScape products. See Note 1 of
Notes to Financial Statements.
INTEREST EXPENSE, NET. For the year ended December 31, 1995, the Company
recorded net interest expense of $77,000. This expense is comprised of
interest on the Company's $1,000,000 debt to stockholders. The Company did not
have any outstanding debt for the period from inception to December 31, 1994.
20
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth statement of operations data for each of the
five quarters in the period ended March 31, 1996, as well as the percentage of
the Company's total revenues represented by each item. This unaudited
quarterly information has been prepared on the same basis as the audited
financial statements appearing elsewhere in this Prospectus and in the opinion
of management, all necessary adjustments (consisting only of normal recurring
adjustments) have been included to present fairly the unaudited quarterly
results when read in conjunction with the Company's audited financial
statements and the notes thereto appearing elsewhere in this Prospectus. The
operating results for any quarter are not necessarily indicative of the
results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DEC.
MARCH 31, JUNE 30, SEPT. 30, 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- --------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Software license and main-
tenance................... $ 43 $ -- $ 400 $ 1,708 $ 710
Consulting and education
services.................. 373 598 1,629 1,319 1,671
----- ----- ------ ------- -------
Total revenues........... 416 598 2,029 3,027 2,381
Cost of Revenues:
Software license and main-
tenance................... 22 -- 208 487 289
Consulting and education
services.................. 172 407 1,170 935 974
----- ----- ------ ------- -------
Total cost of revenues... 194 407 1,378 1,422 1,263
Gross profit............. 222 191 651 1,605 1,118
Operating Expenses:
Selling, general and admin-
istrative................. 337 313 440 1,018 1,701
Research and development... 175 139 331 2,537 399
Compensation to executive
officer................... -- -- -- -- 7,515
----- ----- ------ ------- -------
Total operating ex-
penses.................. 512 452 771 3,555 9,615
Operating loss........... (290) (261) (120) (1,950) (8,497)
Interest Expense, net........ -- 17 20 40 18
----- ----- ------ ------- -------
Net loss................. $(290) $(278) $ (140) $(1,990) $(8,515)
===== ===== ====== ======= =======
<CAPTION>
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues:
Software license and main-
tenance................... 10% -- % 20% 56% 30%
Consulting and education
services.................. 90 100 80 44 70
----- ----- ------ ------- -------
Total revenues........... 100 100 100 100 100
Cost of Revenues:
Software license and main-
tenance................... 5 -- 10 16 12
Consulting and education
services.................. 41 68 58 31 41
----- ----- ------ ------- -------
Total cost of revenues... 47 68 68 47 53
Gross profit............. 53 32 32 53 47
Operating Expenses:
Selling, general and admin-
istrative................. 81 52 22 34 71
Research and development... 42 23 16 84 17
Compensation to executive
officer................... -- -- -- -- 316
----- ----- ------ ------- -------
Total operating ex-
penses.................. 123 76 38 117 404
Operating loss........... (70) (44) (6) (64) (357)
Interest Expense, net........ -- 3 1 1 1
----- ----- ------ ------- -------
Net loss................. (70)% (46)% (7)% (66)% (358)%
===== ===== ====== ======= =======
</TABLE>
Software license and maintenance revenues and consulting and education
services revenues commenced in the three months ended March 31, 1995, and
increased significantly in the second half
21
<PAGE>
of 1995. Software license and maintenance revenues increased in the three
months ended December 31, 1995 as a result of the $500,000 non-recurring sale
of source code for an application unrelated to the OpenScape product line to a
related party; the $490,000 license of OpenScape to Hewlett-Packard; and
increased revenues from the resale of software licenses from a related party
and associated maintenance. Software license and maintenance revenues for the
three months ended March 31, 1996 decreased from the prior three month period
due to the $500,000 nonrecurring sale in the prior three month period, and a
decrease in revenues from resale activities, partially offset by an increase
in OpenScape software license revenues. Consulting and education services
revenues increased significantly in the three months ended September 30, 1995
primarily as a result of increased consulting activities and to a lesser
extent an increase in education services. Consulting and education services
revenues decreased in the three months ended December 31, 1995 and increased
in the three months ended March 31, 1996, primarily due to seasonal
fluctuations in education service activities, while consulting activities
remained relatively stable. Operating expenses increased in the second half of
1995 primarily due to the increase in personnel and the purchase of technology
in the three months ended December 31, 1995.
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors including, among others,
the timing or introduction of, or enhancement to, the Company's products or
services, the demand for the Company's products or services, the distribution
of the Company's products and services, the timing of introduction of products
or services by the Company's competition, the mix of products and services
that the Company provides, the rate of market acceptance of Internet
technology, the timing and rate at which the Company increases its expenses to
support projected growth, competitive conditions in the industry and general
economic conditions. The Company believes that period-to-period comparisons of
its operating results are not meaningful and should not be relied upon as any
indication of future performance. Due to the foregoing factors, among others,
it is possible that the Company's future quarterly operating results from time
to time will not meet the expectations of market analysts or investors, which
may have an adverse effect on the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its cash requirements principally
through the sale of its equity securities, borrowings from its stockholders
and bank borrowings. From inception through March 31, 1996, the Company had
raised net proceeds of approximately $7,842,000 from the private sale of
equity securities, including approximately $6,780,000 in the three months
ended March 31, 1996. The Company, as of March 31, 1996, had cash and cash
equivalents of $4,822,000 and a working capital deficit of $925,000. In April
1996, the Company issued 1,200,000 shares of Series C Preferred Stock at a
price of $5.00 per share for net proceeds of $5,970,000 and repurchased and
retired 800,000 shares of outstanding Common Stock at $7.50 per share. In
addition, in April 1996, the Company received $100,000 upon the exercise of an
option to purchase 66,666 shares of Common Stock at $1.50 per share.
In February 1996, the Company entered into a financing agreement with a
bank. The agreement provides for a revolving line of credit, an equipment line
of credit and a secured term note. As of May 1, 1996, the Company had no
outstanding balances under the revolving line of credit or the equipment line
of credit. Borrowings under the revolving line of credit are limited to the
lesser of $2,500,000 or 80% of qualified accounts receivable and bear interest
at either the bank's prime rate plus 1% or LIBOR. Borrowings under the
equipment line are limited to $500,000 for the purchase of new equipment.
Advances under the equipment line of credit will be repaid over a three-year
period. Borrowings under the equipment line bear interest at either the bank's
cost of funds plus 3 1/2% or the bank's prime rate plus 1 1/2%. In March 1996,
the Company borrowed the $2,000,000 under the secured term note, which was
used to pay for source code technology purchased from a related party. The
secured term note is repayable on September 30, 1996. Borrowings under the
secured term note bear interest at the bank's prime rate plus 1%. The
revolving line of credit and equipment line of credit
22
<PAGE>
expire on June 30, 1997. The financing agreement contains certain restrictive
covenants regarding, among other items, minimum levels of tangible net worth.
The agreement is collateralized by all assets of the Company and is guaranteed
by certain stockholders.
The Company's operating activities utilized cash and cash equivalents of
approximately $236,000, $1,495,000 and $1,801,000 in the period from inception
to December 31, 1994, the year ended December 31, 1995 and the three months
ended March 31, 1996, respectively.
The Company's investing activities, which consisted of purchases of property
and equipment, utilized cash and cash equivalents of approximately $76,000,
$150,000 and $1,261,000 in the period from inception to December 31, 1994, the
year ended December 31, 1995 and the three months ended March 31, 1996,
respectively.
The Company's financing activities provided cash and cash equivalents of
approximately $312,000, $1,750,000 and $7,780,000 in the period from inception
to December 31, 1994, the year ended December 31, 1995 and the three months
ended March 31, 1996, respectively, primarily from the private issuance of
equity securities, borrowings under its secured term note payable and
borrowings under its long term debt agreements with stockholders.
The Company has agreed to loan to an executive officer up to $2,560,000 for
payment of his anticipated income tax liability resulting from his purchase of
960,000 shares of the Company's Common Stock from a significant stockholder
for a purchase price less than its then current fair market value. The Company
believes that it will fund the amounts under the loan agreement in the first
quarter of 1997. See "Certain Transactions". The Company has no other
significant commitments other than obligations under its secured term note
payable and operating leases.
At December 31, 1995, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $3,020,000. These
losses are available to reduce federal and state taxable income, if any, in
future years. See Note 4 of Notes to Financial Statements.
The Company estimates that capital expenditures in 1996 will be
approximately $2,000,000 to $3,000,000. In the event that the public offering
contemplated by this Prospectus is not consummated, the Company believes that
its existing capital resources are adequate to meet its cash requirements
through December 31, 1996. In addition, certain stockholders have committed,
in the event that the public offering is not consummated, to provide the
necessary funding to allow the Company to operate through December 31, 1996 if
the existing capital resources are not sufficient to fund the Company's
operations. See "Certain Transactions".
The Company currently anticipates that the net proceeds of this offering,
existing cash balances and borrowings available under the Company's bank
agreement will be sufficient to meet its anticipated working capital and
capital expenditure requirements for the next 18 months. Thereafter, the
Company may need to raise additional funds. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new
or enhanced products or services, to respond to competitive pressures or to
acquire complementary businesses or technologies. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company or at all. If adequate funds are not available
or are not available on acceptable terms, the Company may be unable to develop
or enhance products or services, take advantage of future opportunities, or
respond to competitive pressures, which could have a material adverse effect
on the Company's business, financial condition or operating results.
23
<PAGE>
BUSINESS
OneWave, Inc., formerly Business@Web, Inc. ("OneWave" or the "Company"), is
a provider of "Web-enabled" software for the development and deployment of
mission-critical business applications across an organization's disparate
information technology ("IT") systems and the extension of those applications
to Intranets and the Internet. The Company's OpenScape products enable
organizations to extend their current IT capabilities to conduct new, dynamic
and interactive communication and transactions with key audiences in their
"extended enterprise" including customers, suppliers, distributors and
business partners. OpenScape products provide the high-volume and real-time
performance capabilities required by businesses through the utilization of
standard Internet protocols, component-based, object-oriented technology, a
scaleable, multi-tier architecture and an intuitive point-and-click
development environment. The Company believes that its products will enable
organizations to achieve significant competitive advantages by increasing
responsiveness to changing business conditions, and exploiting the low cost,
flexibility and ease-of-use of Internet technologies.
INDUSTRY BACKGROUND
BUSINESS REENGINEERING AND THE USE OF INFORMATION TECHNOLOGY
In response to increased competitive pressures, businesses in recent years
have engaged in the extensive reengineering of critical business processes in
an attempt to reduce operating costs, shorten product development cycles and
time-to-market, improve product quality and increase responsiveness to the
demands of customers and business partners. To date, these reengineering
efforts have primarily focused on realizing productivity and efficiency gains
within internal business processes, such as finance, order entry,
manufacturing and resource planning. Businesses have begun to shift the focus
of their reengineering efforts from internal to external business processes,
such as supply chain and distribution channel management. A key enabler of
reengineering efforts has been the deployment and effective use of IT systems
to manage critical business processes and information. Historically, most
organizations addressed their IT requirements through legacy systems, which
are highly customized, proprietary mainframe or mini-computer systems. The
limitations of legacy systems, such as cost and lack of flexibility, have led
organizations to utilize powerful and relatively inexpensive personal
computers and networking technologies to deploy departmental client/server IT
systems.
Organizations' ability to develop and deploy effective, enterprise-wide
business applications has been limited by the proliferation of disparate IT
systems. The lack of interoperability across different systems has introduced
inefficiencies by creating isolated islands of information which are
inaccessible from certain locations within an organization. Such problems are
dramatically compounded when organizations attempt to extend business
applications to connect their IT systems with the disparate IT systems of
their "extended enterprise", including customers, suppliers, distributors and
business partners.
THE EMERGENCE OF THE INTERNET AND INTRANETS
The recent emergence of the World Wide Web ("Web") and Internet technologies
offers businesses the opportunity to significantly improve collaboration and
communication both within the enterprise and with the extended enterprise.
Unlike current legacy and client/server IT solutions, Internet technologies
enable data exchange and collaboration based on cost-effective, easily
deployable and non-proprietary technology. The Company believes that
businesses will be able to realize substantial productivity and efficiency
gains by using the Internet to conduct business transactions with key
audiences of the extended enterprise. The Company also believes that
significant gains will be realized by organizations deploying "Intranets",
internal networks that utilize the same
24
<PAGE>
Internet technologies and protocols. Intranets exploit the openness, ease-of-
use and cross-platform functionality of Internet technologies to facilitate
information dissemination, communication and collaboration within the
enterprise.
MARKET OPPORTUNITY
The Company believes that significant demand exists for a solution which not
only integrates business applications with legacy systems, client/server
systems and databases, but also seamlessly extends those applications across
the enterprise to internal users via Intranets or to users in the extended
enterprise through the Internet. The Company believes that an effective IT
solution must address the following challenges:
. LACK OF ENTERPRISE-WIDE SOLUTIONS FOR THE EXTENDED ENTERPRISE. Current
legacy and client/server systems generally do not adequately integrate
an organization's enterprise-wide business applications with the
constituents of its extended enterprise. Historically, business-to-
business electronic transactions have been limited to inflexible,
platform-specific electronic data interchange ("EDI") links. The
emergence of the Internet has made the development of more dynamic
applications for business-to-business communication and transactions
possible. However, current Internet business applications addressing the
extended enterprise require expertise in multiple, complex Web-related
programming languages, the costly use of multiple Web servers and the
difficult integration of those servers and applications across disparate
IT systems.
. ABSENCE OF FLEXIBLE DEVELOPMENT ENVIRONMENT. Most current development
and application frameworks are designed for specific IT systems and do
not provide a migration path for extending business applications from
one IT infrastructure to another. For example, a business application
developed for a client/server system would typically require substantial
redevelopment in order to be deployed in an Intranet or Internet
environment.
. LACK OF HIGH-PERFORMANCE INTERNET BUSINESS SOLUTIONS. Effective use of
the Internet for mission-critical business processes requires that
existing Web technologies be enhanced to accommodate the high volume and
performance requirements of most business transactions. For example,
most current Web technologies rely on the retrieval of "static" Web
pages from a dedicated Web server. As a result, such technologies do not
allow the development of a business application with a robust, real-
time, direct connection between a business user in the extended
enterprise and the necessary database, application server, legacy or
client/server system within an enterprise, Intranet or Internet
environment.
. SIGNIFICANT CONTINUED USE OF LEGACY SYSTEMS. Many businesses seeking to
implement Web-enabled solutions must do so while preserving their
significant investments in legacy systems. Legacy systems continue to
play an integral role in IT infrastructures of numerous organizations
due to the importance of the functions managed by those systems, the
desire to preserve the integrity and validity of the data in those
systems, and the cost and/or time constraints of migrating those systems
to a client/server framework.
. EXISTENCE OF INACCESSIBLE ISLANDS OF INFORMATION. Businesses with IT
infrastructures based on legacy or client/server frameworks often deploy
several different hardware, software and networking technologies in the
attempt to capture the benefits of the best components from multiple
vendors. Current development environments have limited ability to
address this "best-of-breed" approach, which results in limited
operability across systems and applications and has created isolated
islands of information throughout an organization.
. NEED TO ACCELERATE APPLICATION DEVELOPMENT. Organizations are
increasingly seeking flexible IT solutions that enable the rapid
development and deployment of robust business
25
<PAGE>
applications. Rapid application development is currently limited by the
need for recoding each time a new application is developed. Object-
oriented computing provides the benefit of reusable software, but is
limited by the necessity of using complex programming languages.
Although current object-oriented application development tools enable
the creation of shareable, reusable software components, few such tools
offer rapid development and deployment capabilities across the
enterprise, Intranet and Internet environments.
THE ONEWAVE SOLUTION
The Company's OpenScape product line enables organizations to develop and
deploy business applications which take advantage of the low cost, ease-of-use
and flexibility of Internet technologies. OpenScape solutions not only
integrate existing legacy systems, client/server systems and databases within
the enterprise, but also extend applications on those systems through Intranet
and Internet environments. The Company's products allow organizations to reach
beyond the enterprise and conduct new, dynamic and interactive transactions
with key audiences in the extended enterprise. The Company believes that its
products and services offer businesses a number of key benefits, including the
following:
. ENABLE RAPID ADOPTION AND MIGRATION OF INTRANET AND INTERNET
STRATEGIES. The Company's OpenScape development environment, based upon
a distributed component, multi-tiered architecture, allows the
development of enterprise-wide applications which can be easily
integrated with disparate legacy and client/server systems, existing
business applications and emerging technologies. The integration and
extension capabilities of OpenScape provide organizations with the
ability to rapidly adopt an Intranet or Internet strategy which is
highly customized to current business needs and flexible enough to be
reconfigured to meet future business requirements and evolving
technology standards.
. SUPPORT HIGH PERFORMANCE INTERNET BUSINESS APPLICATIONS. Unlike current
Web technologies, OpenScape allows development of applications with the
high volume and real-time performance capabilities required by
businesses. For example, using OpenScape and a Web browser, suppliers in
the extended enterprise can directly access the necessary business
application on their manufacturer's legacy or client/server system
without being routed through a Web server. This direct access can
provide the speed and robustness required for high performance business
transactions.
. LEVERAGE EXISTING IT INVESTMENTS. The open, standards-based nature of
the Company's products allows businesses to maximize the value of their
existing IT systems. The Company's "Web-enabled" application framework
provides organizations with an inexpensive and efficient method for
developing new applications and modifying existing applications to
access current legacy and client/server systems and extend those
applications to Intranets and the Internet. The Company's powerful and
easy-to-use development and deployment products also allow organizations
to extend their IT capabilities while preserving investments in training
and personnel.
. CONNECT ISOLATED ISLANDS OF INFORMATION. Through OpenScape's open,
standards-based architecture and its broad, cross-platform operability,
the Company is able to bridge the traditional communication gaps between
disparate systems within an organization. In addition, organizations are
able to rapidly develop and deploy enterprise-wide business applications
that access multiple information sources and business applications
through an Intranet or Internet environment.
. ACCELERATE APPLICATION DEVELOPMENT. The Company's OpenScape development
products utilize distributed component, object-oriented technology which
provides an intuitive point-and-click development environment. These
products enable organizations to rapidly develop
26
<PAGE>
shareable, reusable software components by utilizing existing skills
without requiring mastery of complex programming languages. Once
business applications have been developed, they can be easily modified
with little or no recoding through component sharing and reuse. The use
of OpenScape components can create competitive advantages for
organizations by reducing the time-to-market of future business
applications, increasing responsiveness to changing business conditions
and increasing return on IT investments.
THE ONEWAVE STRATEGY
OneWave's objective is to be a leading provider of "Web-enabled" software
that supports the development and deployment of mission-critical business
applications across disparate IT systems and extends those applications to
Intranets and the Internet. To achieve this objective, the Company is focusing
on the following key elements of its business strategy:
. CONTINUALLY RELEASE NEW PRODUCTS TO INTEGRATE EMERGING TECHNOLOGIES. The
Company's OpenScape products are able to access a wide variety of
environments and applications. Due to the modular nature of the
Company's core OpenScape technology, the Company can rapidly develop
OpenExtensions--specific add-on products which enable communication with
proprietary environments, such as SAP R/3--and continually integrate new
capabilities such as improved security mechanisms and component
repositories. The Company intends to release OpenExtensions for Baan and
PeopleSoft applications during the fall of 1996 and regularly introduce
additional OpenScape products for emerging environments and
applications.
. SUPPORT MULTIPLE POINTS OF ENTRY. The Company's OpenScape products have
been designed to provide organizations with a flexible and comprehensive
Internet solution regardless of their current IT infrastructure.
Business applications developed with OpenScape products support multiple
points of entry due to their ability to function in enterprise, Intranet
and Internet environments. The Company's products utilize Internet
protocols and a scalable multi-tier architecture which provide
organizations with the built-in capability of extending an enterprise
solution to an Intranet or the Internet at a later date. This
flexibility allows the Company's solution to be adapted to changing
business needs and the evolving Internet environment.
. LEVERAGE RELATIONSHIPS WITH LEADING TECHNOLOGY COMPANIES. The Company
believes that a key element to the success of delivering a complete Web-
enabled business solution is to leverage the use of its technologies
through the development of strategic relationships with leading
technology companies. To this end, the Company has developed
relationships with third-party technology implementors such as Deloitte
& Touche/ICS, software application vendors such as Baan, PeopleSoft and
SAP, an Internet service provider, BBN, and other technology providers
such as Hewlett-Packard, NEC and Informix. These strategic relationships
provide the Company with the opportunity to market its products to a
large installed base of organizations in need of Web-enabling extensions
and enhancements for their current IT infrastructure.
. DEVELOP MULTIPLE CHANNELS OF DISTRIBUTION. To reach a broad potential
customer base, the Company believes that it must develop multiple
distribution channels. The Company anticipates that its direct sales
force will focus on large and mid-sized customers and leverage the
Company's strategic relationships to access particular vertical markets
of target organizations. Through its strategic relationships with system
integrators, hardware vendors, application providers and database
vendors, the Company expects to gain access to a large installed base of
potential customers. Over time, the Company intends to extend the depth
and breadth of its product penetration by augmenting its direct selling
efforts and strategic relationships with additional indirect
distribution channels, including VARs and ISVs.
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TECHNOLOGY
OVERVIEW
The Company's OpenScape products allow organizations to Web-enable business
applications through the use of a distributed component architecture employing
a multi-tier client/server infrastructure, where presentation, functionality
and data access are developed and deployed as independent layers. In this
multi-tier architecture, each tier may be expanded in a modular fashion by
adding components which are reusable and shareable across applications.
Client-based components are handled by the Company's WebEngine Client and the
server-based components are run using the Company's Distributed WebEngine.
OpenScape components can be partitioned, or split apart, placing the
appropriate application logic on the server or client.
[Graphic depicts a rectangle divided into three segments. There is a small gap
between each of the segments. The front edges of these segments are labeled,
from right to left, "Data Access", "Functionality" and "Presentation". The left
end of the rectangle contains a low brick wall, labeled "Firewall." In the
"Presentation" segment to the left side of the firewall are three personal
computers, labeled "Distributor", "Partner" and "Customer". The screen of each
computer says "Web Browser", and the top of each computer is labeled "OpenScape
WebEngine Client". There are arrows from each computer to the "Firewall". On
the "Presentation" segment to the right of the firewall there are two computers.
One is labeled "OpenScape WebEngine Client", with the words "Web Browser on its
screen, and the other is labeled "OpenScape WebEngine Client" with the words
"Desktop Application" on its screen. There are arrows between the Firewall and
each of these computers to the box on the "Functionality" segment. The
"Functionality" segment is entirely occupied by a box labeled "OpenScape
Distributed WebEngine Data Integration & Analysis". Attached to this box and
extending across the gap and over a small portion of the "Data Access" segment
is a rectangular box with four cylinders extending farther out over the "Data
Access" segment labeled "OpenScape OpenExtension". Placed on the "Data Access"
segment, next to each of these cylinders, are four small rectangular boxes
labeled (from back to front) "Legacy System", "Client/Server System",
"Database" and "Emerging Technologies". There is an arrow from each of the
"OpenExtension" cylinders to the box next to it. Above the "Presentation"
segment is the label "Intranet"; above the "Functionality" segment is the label
"Enterprise; and above the "Data Access" segment is the label "Current IT
System".]
Presentation components within the WebEngine Client run on the client
machine and provide the screens and dialogs needed for highly interactive
applications. When deployed, OpenScape presentation components require minimal
processing power from the client machine, allowing standard desktop PCs to
access an organization's business applications. The presentation layer
implemented in OpenScape may be used in multiple Web browsers as well as other
client environments to allow for support of multiple deployment environments
and migration of enterprise applications towards Web-enabled solutions.
Functionality components implement the business logic of an application and
support several types of requesting clients such as enterprise, Intranet or
Internet users. The separation of the functionality layer from the
presentation and data access layers allows modification of the functionality
layer independent from the other layers. Functionality components run on
either the WebEngine Client or the Distributed WebEngine, but are typically
server-based to simplify management and to leverage the server's processing
capabilities.
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Data access components running in the Distributed WebEngine are used to
retrieve data from databases and other sources such as legacy applications.
Functionality components which utilize this information are not dependent on
the actual data source, but only the results which are supplied by the data
access components. This independence allows data sources to be changed without
requiring modifications to the business logic. The Distributed WebEngine
supports data translation and local calculations with retrieved data, thereby
facilitating the creation of consistent results from different data sources.
To reduce the amount of traffic between the client and the server, and thereby
increase the performance of the Web-enabled application, the Distributed
WebEngine transfers only necessary data to the client.
OpenScape's distributed component architecture allows disparate back-end
information systems to be "plugged-in" to the same application framework. For
example, OneWave products allow development of an application with seamless
access to data from both an SAP R/3 system and a mainframe database. Access to
each system is provided through the Company's Distributed WebEngine, which
regulates, manages and secures all application traffic from the clients. The
Company's OpenExtensions provide pre-configured connectivity to each back-end
system managed by the Distributed WebEngine. The code libraries and processes
that are typically required for integrating with a target back-end IT system
need only reside on the server with the OpenExtension, which simplifies
licensing and management and eliminates the need for installation on the
client machine. Any number of OpenExtensions may be incorporated into an
application as required. OpenExtensions also may be used to support access to
connectivity standards such as Microsoft's OLE (Object Linking and Embedding)
and the Open Software Foundation's DCE (Distributed Computing Environment).
The Company will continually develop additional OpenExtensions to support
connectivity to new systems and standards as they evolve.
DEVELOPMENT
Components for all application tiers are developed and defined within the
OpenScape Workbench, a graphical environment designed to simplify and
accelerate application development by minimizing, and often eliminating,
programming tasks. The OpenScape development environment is extensible to
accommodate rapid changes in technology. OpenScape provides the following
capabilities during the development process:
. RAPID APPLICATION DEVELOPMENT. Components may be run and debugged within
the Workbench to facilitate testing and iterative development. Most
aspects of the OpenScape scripting language and visual components are
compatible with Visual Basic for Applications ("VBA"), allowing an
organization to leverage the existing programming skills of its
application developers.
. VISUAL COMPONENT REUSE. OpenScape utilizes a modular building block
approach to development where complex components are assembled from sets
of more basic components. Once a visual component has been developed for
an application, the same component can be embedded in additional
components or deployed in the original application for use in the
enterprise, Intranet or Internet without any additional recoding.
. EASE OF INTEGRATION. OpenExtensions directly import function definitions
from back-end systems using point-and-click operations. The same
scripting language can be used to access all back-end systems and
components regardless of the original development environment. This
significantly reduces the complexity typically involved in creating
applications with numerous back-end systems.
. LOCAL AND REMOTE TRANSPARENCY. The scripting language used to access a
client-based or server-based component with OpenScape is the same.
Applications that have been configured for a specific environment, such
as Microsoft's desktop environment, do not have to be significantly
rewritten to accommodate a different configuration, such as NetScape's
Navigator.
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. THIRD-PARTY COMPONENTS. Components from other vendors, such as
Microsoft's ActiveX controls, may be used as part of an OpenScape
project for enhanced functionality. In addition, interoperability with
productivity applications, such as Microsoft Excel, allows these
applications to be utilized as part of an OpenScape solution.
DEPLOYMENT
Once developed, an application's components are deployed onto an
organization's server platforms. The visual components of an application are
deployed onto the Web server, and are stored there with the organization's Web
pages. The components in the functionality and data access layers are
typically deployed onto a separate server that hosts the Distributed
WebEngine.
Once an application has been deployed, it can be accessed over the Internet
through an organization's Web site. The visual components are downloaded on
demand to a Web browser using the standard Internet HTTP protocol. This
process ensures that the client always runs the most current version of an
application. To minimize download time, only the necessary components need be
downloaded initially; additional components may be transferred and run by an
application as needed. Multiple browser standards are supported for running
components, such as ActiveX from Microsoft and the plug-in capabilities of
Netscape. An external viewer is also available for browsers that do not
support component standards or to run downloaded applications independently
from a browser. Desktop environments are also supported by OpenScape
components using OLE or OCX standards.
Once the client application is downloaded, the Web server does not need to
be contacted for further application functions. Web page access and delivery
is separated from back-end integration and multiple geographically dispersed
servers may be accessed directly from the client. All application
communication occurs via an encrypted, secure connection between the WebEngine
Client on the Internet client machine and the Distributed WebEngine on the
application server hardware. The Distributed WebEngine supports multiple
security standards for different customer needs and can be expanded to
accommodate additional standards as they emerge. The Distributed WebEngine is
multi-threaded, which enables high performance for many simultaneous users.
While the Company's other current products have certain limited development
capabilities for Internet applications, the Company in June 1996 introduced
OpenScape Version 2.0, which provides additional capabilities for the
effective development of Internet applications. See "Risk Factors-- Recent
Introduction of OpenScape Products; New Releases".
PRODUCTS
DEVELOPMENT PRODUCTS
The Company's development products are designed to facilitate the rapid
development of multi-tiered enterprise, Intranet and Internet applications
from a single platform. Except as otherwise noted, all of the development
products described below are currently available. OpenScape development
products include the following:
OPENSCAPE. OpenScape provides a single environment for building all tiers of
a distributed enterprise, Intranet or Internet business application. OpenScape
includes the OpenScape Workbench, the Visual Component Builder, the
OpenExtension for OLE Automation and the OpenExtension for Open Database
Connectivity ("ODBC"). The OpenScape Workbench acts as a repository for
storing and managing multiple applications while providing the ability to
share and reuse components between applications. The Visual Component Builder
provides a point-and-click development environment for the creation of
reusable graphical user interface screens. The Visual Component Builder's
integrated development environment, with application programming and debugging
features, provides the ability to write application code in a VBA compatible
language. Application components built with the Visual Component Builder can
also incorporate off-the-shelf user interface controls, such as Microsoft's
ActiveX controls, and can integrate with off-the-shelf productivity
applications, such as Microsoft Excel and Lotus Notes. The OpenExtension for
OLE Automation automatically imports function and interface
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information from existing OLE Automation servers. The OpenExtension for ODBC
provides graphical database browsing and query-building tools for quickly
exposing ODBC-compliant data sources as logical components.
OPENSCAPE OPENEXTENSIONS. OpenExtensions communicate with targeted back-end
systems using each system's native protocols, while providing a single,
standard interface to the end-users of integrated OpenScape business
applications. The following environments are currently accessible via
OpenExtensions: Open Software Foundation's DCE, ODBC, OLE Automation, SAP R/3
and Open Environment's Entera. OneWave is currently developing additional
OpenExtensions, which will allow OpenScape applications to communicate with
Baan and PeopleSoft applications, the Illustra multimedia database from
Informix, and CORBA systems.
OPENSCAPE VIRTUAL DATABASE SOLUTION. The OpenScape Virtual Database
solution, which the Company expects to incorporate in Version 2.0 and have
available in the third quarter of 1996, allows multiple disparate data sources
to be accessed through a unified view, which simplifies the development and
deployment of applications that access multiple data sources. The Virtual
Database does not rely upon batch feeds or data extracts to provide the common
data view. Instead, live connections are maintained with master production
data to ensure that OpenScape applications access current data.
DEPLOYMENT PRODUCTS
The OpenScape deployment architecture enables reusable components to be
managed, stored and accessed across an enterprise; provides organizations with
the flexibility to create applications on demand through a Web server; and
encrypts application data for transmission over an Intranet or the Internet.
While the Company's other current products have certain limited development
capabilities for Internet applications, the Company in June 1996 introduced
OpenScape Version 2.0, which provides additional capabilities for the
effective development of Internet applications. See "Risk Factors--Recent
Introduction of OpenScape Products; New Releases". All of the deployment
products described below are currently available. OpenScape deployment
products include the following:
OPENSCAPE WEBENGINE CLIENT. The OpenScape WebEngine Client is a freely
distributable runtime library that allows Intranet or Internet users to
execute OpenScape user interfaces within leading Web browsers. The WebEngine
Client also allows OpenScape visual components to run in other desktop
applications, such as Visual Basic and Lotus Notes. In addition, the WebEngine
Client facilitates secure communications over the Internet to and from an
OpenScape visual component. Other key features of the WebEngine Client
include: 16-bit and 32-bit platform support; the exposure of visual components
such as Netscape plug-ins, ActiveX Internet controls or Desktop OLE objects;
the ability of individual users to restrict downloaded applications from
performing unwanted actions (such as local file access); and facilitation of
secure, encrypted Internet connections with Distributed WebEngines.
OPENSCAPE DISTRIBUTED WEBENGINE. The OpenScape Distributed WebEngine is a
server-based runtime process that provides application and integration
services to OpenScape WebEngine Clients. The Distributed WebEngine manages all
network communication in OpenScape applications and facilitates the
appropriate levels of security for applications on the Internet. Because all
WebEngine Clients access information via the Distributed WebEngine, third-
party networking or client software is only necessary on the application
server, and not on Internet client machines. Other key features of the
Distributed WebEngine include: multi-threaded operation for high-performance
and scaleability; the ability to facilitate RSA-encrypted communications with
the Web; the ability to distribute onto multiple application servers for
optimal load-balancing; and the ability to support single-log-on for systems
which integrate multiple enterprise applications and databases. The Company is
also integrating NEC's workflow product that will plug into the Distributed
WebEngine and allow multiple organizations to participate in integrated
workflow processes over the Internet.
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The Company first began shipping OpenScape development and deployment
products in December 1995 and has achieved only limited revenues from such
sales to date. Prior to sales of OpenScape products, the Company generated
revenues through the reselling of software licenses of a related party and
associated maintenance and providing consulting and education services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
PRICING
OpenScape development license fees are priced on a per developer basis. Each
developer on a corporate application development team is required to purchase
an OpenScape license. Each developer who accesses specific back-end systems is
required to purchase an appropriate OpenExtension license. Total development
license fees are expected to range from $5,000 (for an OpenScape license only)
to $35,000 (for certain OpenExtensions) per named developer for a specific
project. The pricing of the development licenses is intended to facilitate
broader use of the Company's products by software application developers and
thereby accelerate market penetration of the Company's products.
For enterprise and Intranet applications, OpenScape deployment license fees
are priced on a simultaneous user basis. For Internet applications, OpenScape
deployment license fees are based on server hardware capacity. All costs are
associated with the Distributed WebEngine on the server; there is no
deployment fee for the WebEngine Client. Depending on the number of
simultaneous users accessing the system, the license fees for OpenScape
deployment products are expected to range from $25,000 to $250,000. Given the
relatively low price point of the Company's development products and the
Company's initial focus on large and mid-sized customers, the Company
anticipates that, to be successful, a substantial portion of its revenues must
be generated from sales of deployment licenses for large numbers of
simultaneous users.
The Company's product pricing for its OpenScape products is new and
evolving. There can, therefore, be no assurance that the Company's pricing
strategy will be accepted in the marketplace or that it will not be subject to
change in response to market or other conditions.
CUSTOMER SUPPORT AND MAINTENANCE
The Company offers a wide range of customer support options which can be
packaged to meet the specific needs of customers and business partners. The
Company's Professional Services Group ("PSG") provides technical support to
customers, distributors and strategic partners throughout the implementation
cycle of a OneWave solution as well as on an on-going basis. Support service
offerings include direct telephone consulting support by experienced technical
account representatives, toll-free telephone customer support, 24-hour pager
access, e-mail and fax support, Internet access to the Company's knowledge
repository, case study updates and discussion group access. The Company's
maintenance support services are typically charged at an annual maintenance
fee equal to approximately 20% of the then-current list price of the licensed
products. In addition, this maintenance fee entitles customers to receive
software enhancements to their licensed versions of software.
SERVICES
The Company's consulting and education services are designed to educate the
Company's potential customers and support its customers and strategic alliance
partners in implementing the Company's software solutions. The Company
believes that its services play a significant role in generating demand for
its solutions by demonstrating the capabilities and advantages of its software
solutions. Historically, the Company's consulting and education services have
generated the vast majority of the Company's revenues, representing 65% of the
Company's revenues in 1995. The Company expects that the percentage of its
revenues resulting from sales of software licenses will increase over time,
resulting in a corresponding decrease in the percentage of revenues derived
from its services.
CONSULTING SERVICES
OneWave's consulting services are designed to minimize the implementation
cycle of the Company's software solutions. The range of services offered
includes the scoping, design and
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implementation of the Company's products and comprehensive solutions. A
critical portion of the Company's consulting service strategy is to leverage
the skills and reach of the Company's strategic alliance partners,
supplemented by the Company's internal consulting personnel. The Company's
consulting services personnel are highly trained and experienced in
identifying and delivering system architecture analysis, design plans and
implementation strategies for organizations worldwide.
EDUCATION SERVICES
OneWave's education services are used primarily to educate potential
customers on the strategic business benefits of the Company's technologies and
to support current customers at any stage of the implementation cycle of the
Company's software solutions. The Company's education services may be
purchased individually or in a packaged form through open enrollment sessions
or focused programs delivered at on-site customer locations. The Company
anticipates broadening its education services offerings to support future
product releases and target specific industry segments. A key responsibility
of the education services group is to actively engage in certifying third-
party implementation providers to facilitate accelerated adoption of its
software-based business solutions and to assure that the highest quality of
service is provided to the Company's customers.
STRATEGIC RELATIONSHIPS
The Company is actively developing a network of strategic relationships in
order to accelerate the adoption of the Company's products and to assist the
Company in delivering complete business solutions to its customers. The
Company believes that these relationships allow it to focus on developing,
marketing, distributing and supporting its core software products, while also
accelerating the introduction of those products into major customer accounts
and providing those customers with additional sources of established
implementation support and consulting services.
The Company believes that its relationships with hardware systems vendors,
such as Hewlett-Packard and NEC, help to accelerate the introduction of the
Company's products to new customers. For example, Hewlett-Packard trained over
100 of its Information Integration Solutions Practice consultants to deliver
solutions on the Company's software. Additional Hewlett-Packard service groups
are marketing the Company's software in connection with their Internet, Baan,
PeopleSoft and SAP practices. Hewlett-Packard is sponsoring numerous one-day
seminars around the world to market the use of the Company's products to major
Hewlett-Packard customers, and Hewlett-Packard and the Company have jointly
developed service engagements as an immediate follow-on to the seminars. NEC
and the Company are jointly developing workflow application software for the
Internet based on OpenScape and NEC's current workflow application StarOffice.
NEC will be marketing, selling and supporting the installation of this
workflow software in the Pacific Rim. Both Hewlett-Packard and NEC have made
equity investments of $1,000,000 each in the Company.
The Company believes that its relationships with major applications
providers such as Baan, PeopleSoft and SAP will help such providers improve
the speed and flexibility of their implementations. Baan, PeopleSoft and SAP
are educating their organizations on the Company's products, as well as
marketing the products externally to their customers through trade shows, user
group meetings and joint demonstrations. In addition, the Company believes
that these application providers benefit from these relationships because the
Company provides an effective means for them to bring their applications onto
the Web.
The Company is seeking to establish relationships with major and regional
systems integrators. The objective of these alliances with solutions providers
is to establish a large number of trained experts who will incorporate the
Company's products into their business solutions projects. Deloitte &
Touche/ICS, for example, has trained a group of consultants to offer the
Company's solutions to its installed base of SAP users. Deloitte & Touche/ICS
is sponsoring marketing seminars jointly implementing the Company's solutions.
The Company has also entered into an alliance agreement with Computer Sciences
Corporation to jointly market their products.
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The Company is seeking to establish relationships with other industry
software leaders. For instance, the Company has developed a sales, marketing
and technology alliance with Informix based upon Informix's new Illustra
server. The Company is engaged in joint development efforts with Informix,
will be showcased at their user conference and plans to introduce their joint
capabilities to Informix channel partners. Informix has made an equity
investment of $1,000,000 in the Company.
The Company is seeking to establish relationships with major Internet
service providers ("ISPs"). ISPs offer managed Internet access and value-added
services to corporations planning to establish and maintain an Internet
presence. The Company believes that its technology can be published by ISPs as
part of their Internet service, further expanding the reach and reuse of the
Company's component technology. In particular, the Company has a strategic
alliance with BBN and is marketing its capabilities with BBN through a series
of seminars.
SALES AND MARKETING
To reach a broad potential customer base, the Company believes that it must
pursue multiple distribution channels. The Company's direct sales force will
focus on large and mid-sized customers and leverage the Company's strategic
relationships to access target organizations within particular vertical
markets of target organizations. The Company will also seek to develop and
maintain a sales force with expertise in specific industries and intends to
open two additional U.S. regional offices to support its sales force. The
Company's strategic relationships with hardware vendors, systems integrators,
application providers and database vendors are expected to provide the Company
with access to a large installed based of potential customers. The Company
will engage in joint marketing programs and targeted industry events. Over
time, the Company intends to extend the depth and breadth of its product
penetration by augmenting direct selling efforts and strategic relationships
with additional indirect distribution channels including VARs and ISVs. The
Company also intends to promote general awareness for its products and
services among business and trade press and industry analysts and to advertise
in selected business media and target industry press.
CUSTOMERS AND MARKETS
As of May 1, 1996, the Company has sold software, consulting services and
education services to customers in a wide variety of industries. In an effort
to generate demand for its solutions by demonstrating the capabilities and
advantages of its software solutions, the Company has provided consulting and
education services to over 80 customers. Although the Company expects that the
number of purchasers of its software will increase over time, to date the
Company has had limited software sales. In 1994, no individual customer
accounted for more than 10% of the Company's total revenues. In 1995,
approximately 21% and 10% of the Company's revenues were derived from sales of
services and products to Hewlett-Packard and Shell Oil, respectively.
The following examples illustrate how organizations are using OneWave
products to provide "Web-enabled" IT solutions for their extended enterprises:
WHOLESALE SALES AND DISTRIBUTION
Associated Foods, a large, regional food wholesaler and distributor, is
working with the Company to create an on-line Intranet application to analyze
retail sales. The purpose of the application is to provide the wholesaler with
the capability to quickly consolidate store purchase data from the over 700
independent stores which it services and transform the data into useable,
easily accessible information. Using OpenScape's reusable object-oriented
technology, the wholesaler will be able to efficiently distribute an accurate
database of store performance. The application will enable accurate reporting,
providing valuable statistical analysis of buying trends and performance while
presenting the information in a clear, easy-to-use manner for store managers,
regional directors, managers and executives.
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EDUCATION
Babson College, a New England college with over 1,600 undergraduate students
and various graduate and executive education programs, is working with the
Company to implement an on-line grading system via an Intranet which will
eliminate all forms and enable faculty members to submit grades
electronically. In addition, the college is implementing a workflow process
which will route the "virtual forms" to the appropriate faculty members for
input and approval. It is anticipated that the workflow application will be
expanded to include a "to do" list of activities that will circulate to
relevant faculty members as workflow processes are completed. The new system
will interact with the college's existing reengineering initiatives. A college
official anticipates that the new system will improve communication between
departments by sharing existing information, eliminating redundancy of data
and reducing both faculty and administrative time. Currently, the college is
completing the implementation and is expecting a fully operational on-line
grading system in 1996. Following this Intranet implementation, the college
plans to extend the system to the Internet by building an on-line college
handbook that allows any student on or off campus to review course material
and register for classes.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance its OpenScape product line, develop new products,
maintain technological leadership, and satisfy continually changing customer
requirements for Web-based business application development. The Company's
product management and development groups are responsible for product
architecture, functionality and quality assurance. This group is also
responsible for expanding OpenScape's ability to integrate with emerging
industry standards, additional third-party application packages and leading
database management systems as well as for new product definition and
development.
The Company has made substantial investments in product development and
technology integration. The OpenScape product line has been developed
primarily by the Company's internal development staff. Certain technologies
also have been purchased and integrated into OpenScape products. The Company
spent approximately $894,000 and $3,182,000 on research and development
activities in 1994 and 1995, respectively (including purchased technology
rights of approximately $350,000 in 1994 and $2,550,000 in 1995). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
During 1996, the Company intends to extend OpenScape's functionality by
adding support for Macintosh browser platforms and UNIX server platforms,
creating additional OpenExtensions for Baan, PeopleSoft, CORBA and Informix
Illustra applications, and enabling the product to accommodate Japanese
character sets. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products and enhancements, or that its new
products and enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance.
COMPETITION
The market for Internet-based technologies is new, intensely competitive and
subject to rapid technological change. The Company expects competition to
persist and intensify in the future. The Company has experienced and expects
to continue to experience increased competition from current and future
competitors, many of whom have significantly greater financial, technical,
marketing and other resources than the Company. The Company's current and
potential competitors include, among others: software companies which offer
proprietary all-in-one development tools, such as Dynasty, Forte, NeXT, Spider
and Gradient; established client/server tools and database vendors who may
transfer their technology to take advantage of the Internet, such as Borland
(which has recently announced an agreement to acquire Open Environment), Parc
Place and Sybase; companies which develop electronic commerce and automated
service software products and services, such as Edify,
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Open Market and Premenos; major systems vendors such as DEC, IBM and Sun
Microsystems; packaged application developers such as Baan and SAP; software
industry leaders such as Microsoft, Netscape and Oracle; and emerging
alliances between industry participants such as the recently announced
alliances between Microsoft and SAP; Digital, MCI and Microsoft; and GE and
Netscape.
The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than the
Company. Also, many current and potential competitors have greater financial
or management resources or name recognition or more extensive customer bases
that could be leveraged, thereby gaining market share to the Company's
detriment. The Company expects to face additional competition as other
established and emerging companies enter the market for Internet-based
technologies and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market shares, any of which could materially
adversely affect the Company's business, operating results and financial
condition. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of the Company's prospective customers. Current and potential customers
may also be more successful than the Company in having their products or
technologies accepted as industry standards. Accordingly, it is possible that
new competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain and retain support for the
Company's products and services. There can be no assurance that the Company
will be able to compete successfully against current and future competitors
and the failure to do so could have a material adverse effect upon the
Company's business, operating results and financial condition.
The principal competitive factors affecting the market for the Company's
products and services are ease of application development, deployment and
management functionality and features, product architecture, product
performance, reliability and scaleability, product quality, price and customer
support. The Company believes it presently competes favorably with respect to
each of these factors. However, the Company's market is still evolving and
there can be no assurance that the Company will be able to compete
successfully against current and future competitors. The failure to compete
successfully could have a material adverse affect upon the Company's business,
operating results and financial condition.
PROPRIETARY TECHNOLOGY
The Company relies on a combination of trademark, copyright and trade secret
laws, employee and third-party nondisclosure agreements and other methods to
protect its proprietary rights in its products. Many products are distributed
in object code form only, and all end-user license agreements prohibit the
reverse engineering or decompiling of the Company's software. The Company is
considering the possibility of obtaining patents covering its technology, and
the Company intends to file applications for registration of its various
trademarks in the near future. There can be no assurance that any trademark or
patent applications will result in issued patents or trademarks or that, if
issued, such patents or trademarks would be upheld if challenged.
There can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. There can also be no assurance that the
measures taken by the Company to protect its proprietary rights will be
adequate to prevent misappropriation of its technology or independent
development by others of similar technology. In addition, the laws of various
countries in which the Company's products may be sold may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.
There can be no assurance that third parties will not assert intellectual
property infringement claims against the Company or that any such claims will
not require the Company to enter into royalty
36
<PAGE>
arrangements or result in costly litigation. The Company is not the subject of
any legal action alleging that the Company's products infringe on any
copyright or trademark rights of any person or of any violation of trade
secrets or other proprietary rights claimed by any third party relating to the
Company or the Company's products, nor is the Company aware of any threatened
litigation with regard thereto. However, the computer software market is
characterized by frequent and substantial intellectual property litigation.
Intellectual property litigation is complex and expensive, and the outcome of
such litigation is difficult to predict.
The Company believes that, due to the rapid pace of technological innovation
for software products, the Company's ability to establish and maintain a
position of technology leadership in the industry is dependent more upon the
skills of its development personnel than upon the legal protections afforded
its existing technology.
Certain of the Company's products contain software that is licensed to the
Company by third parties. There can be no assurance that these third-party
software licenses will continue to be available to the Company on commercially
reasonable terms. The loss of, or inability to maintain, any such software
could result in shipment delays or reductions until equivalent software could
be independently developed or licensed from a third party and integrated,
which could materially adversely affect the Company's business operating
results and financial condition.
EMPLOYEES
As of June 1, 1996, the Company had a total of 114 employees, 33 of whom
were engaged in sales, marketing and alliance management, 32 were in research
and development, 29 were in professional services and 20 were in general and
administration. The Company's future success depends in significant part upon
the continued service of its key technical and senior management personnel and
its continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for highly qualified personnel is intense
and there can be no assurance that the Company will be able to retain its key
managerial and technical employees or that it will be able to attract and
retain additional and highly technical and managerial personnel in the future.
None of the Company's employees is represented by a labor union. The Company
has not experienced any work stoppages and considers its relations with its
employees to be good.
The rapid execution necessary for the Company to fully exploit the market
opportunity for its products and services requires an effective planning and
management process. The Company's rapid growth has placed, and is expected to
continue to place, a significant strain on the Company's managerial,
operational and financial resources. The senior members of the Company's
management, including Klaus P. Besier, the Company's Chairman of the Board,
President and Chief Executive Officer, Mark Gallagher, the Company's Chief
Financial Officer, John Burke, the Company's Vice President of Sales, Carolyn
LoGalbo, the Company's Vice President of Marketing, John Coviello, the
Company's Vice President of Technology, and Joseph Gruttadauria, the Company's
Vice President of Support Services and Quality, joined the Company during
1996. In addition, most of the Company's development and engineering staff was
only recently hired. To manage its growth, the Company must continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company's future operating results
also will depend on its ability to expand its sales and marketing
organizations, implement and manage new distribution channels to penetrate
different and broader markets and expand its support organization commensurate
with the increasing base of its installed products. If the Company is unable
to manage growth effectively, the Company's business, operating results and
financial condition could be materially adversely affected.
FACILITIES
The Company leases approximately 26,000 square feet of office space in
Watertown, Massachusetts under a five-year lease agreement which commenced in
March 1996. Depending on its future growth, the Company may need to expand its
existing facilities or obtain additional space prior to the end of 1996.
Management believes that adequate facilities for expansion will be available,
if necessary, in the greater Boston area at competitive rates.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, key employees and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Klaus P. Besier.............. 44 Chairman of the Board, President and
Chief Executive Officer
John Burke................... 36 Vice President of Sales
John Coviello................ 50 Vice President of Technology
William Cullen............... 37 Director of Product Development
Mark Gallagher............... 41 Chief Financial Officer
Joseph Gruttadauria.......... 36 Vice President of Support Services and Quality
Carolyn LoGalbo.............. 45 Vice President of Marketing
Craig Newfield............... 36 General Counsel and Secretary
James Nondorf................ 28 Vice President of Strategic Alliances
Eric Sockol.................. 35 Vice President of Finance and Treasurer
Albert Carnesale(1).......... 59 Director
Manuel Diaz.................. 62 Director
Stephen R. Levy(2)........... 56 Director
Ofer Nemirovsky(2)........... 38 Director
Sundar Subramaniam(1)........ 30 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Klaus P. Besier has served as Chairman, President and Chief Executive
Officer of the Company since February 1996. Mr. Besier has more than 20 years
of experience in international management and computer services. From 1994 to
1996, Mr. Besier was the Chief Executive Officer of SAP America, Inc., a
business application software vendor. From 1992 to 1993, Mr. Besier served as
the President of SAP America, Inc. From 1991 to 1992, Mr. Besier was Vice
President of Sales of SAP America, Inc. From 1977 to 1990, Mr. Besier held
various senior management positions, including General Manager and Corporate
Vice President, with various affiliates of Hoechst Celanese in Germany, Italy
and the U.S.
John Burke has served as Vice President of Sales of the Company since April
1996. From 1994 to 1996, Mr. Burke served as Senior Vice President of SAP
America, Inc. and was responsible for the Midwest region. From 1990 to 1994,
Mr. Burke held various senior sales management positions with SAP America,
Inc. From 1981 to 1990, Mr. Burke held management and sales positions at Dun
and Bradstreet Software (formerly Management Science America, Inc.) and
International Business Machines.
John Coviello has served as Vice President of Technology since June 1996.
From 1994 to 1996, Mr. Coviello served as Vice President of Technology,
Planning & Architecture for SABRE of AMR Corporation, the parent corporation
of American Airlines. From 1992 to 1994, Mr. Coviello served as Director of
Open Systems Marketing of Amdahl Corporation. Prior to 1992, Mr. Coviello
served as Amdahl's Director of Open Systems Development.
William Cullen has served as Director of Product Development of the Company
since May 1995. From May 1994 to April 1995, Mr. Cullen served as a Software
Architect for Progress Software Corporation, a 4GL software tools provider.
From June 1993 to April 1994, Mr. Cullen served as Project Leader/Senior
Software Engineer of Information Resources, Inc. From January 1991 to May
1993, Mr. Cullen was a software consultant at Softbridge Microsystems, Inc.
38
<PAGE>
Mark Gallagher has served as Chief Financial Officer since June 1996. From
December 1995 to June 1996, Mr. Gallagher served as Vice President and Chief
Financial Officer of Gel Sciences, Inc. From 1988 to 1995, Mr. Gallagher
served as a Vice President of Finance & Administration and Chief Financial
Officer of Parametic Technology Corp.
Joseph Gruttadauria has served as Vice President of Support Services and
Quality of the Company since April 1996. From March 1995 to April 1996, Mr.
Gruttadauria served as Director of Customer Services for SAP America, Inc. Mr.
Gruttadauria was responsible for building and managing SAP America's worldwide
customer service and support organization. From 1989 to 1995, Mr. Gruttadauria
served as Vice President of Services and Manufacturing for SoftSwitch, Inc., a
supplier of enterprise electronic mail products.
Carolyn LoGalbo has served as Vice President of Marketing of the Company
since March 1996. From 1993 to 1995, Ms. LoGalbo served as Chief Marketing
Officer of MFS Intelenet Inc., a wholly owned subsidiary of MFS Communications
Company. From 1990 to 1993, Ms. LoGalbo served as Category Manager at Kraft
General Foods and was responsible for segmented coffee brands. From 1988 to
1990, Ms. LoGalbo served as Group Product Manager at Kraft General Foods and
was responsible for Maxwell House Coffee. Prior to Kraft General Foods, Ms.
LoGalbo served as Marketing Manager at Nestle Corporation.
Craig Newfield has served as General Counsel to the Company since April 1996
and as Secretary of the Company since May 1996. From February 1993 to April
1996, Mr. Newfield served as in-house counsel for Marcam Corporation, a
business application software vendor. From 1990 to 1993, Mr. Newfield was
employed as an associate at the law firm of Jager, Smith, Stetler & Arata,
P.C. From 1987 to 1990, Mr. Newfield was employed as an associate at the law
firm of Brown, Rudnick, Freed & Gesmer.
James Nondorf has served as Vice President of Strategic Alliances of the
Company since February 1996. From 1995 to 1996, Mr. Nondorf served as the
President and a director of the Company. From 1994 to 1996, Mr. Nondorf served
as the Company's Chief Executive Officer. From 1990 to 1994, Mr. Nondorf
served as the Chief Operating Officer of Cambridge Technology Group, a
provider of technology seminars and executive training services. Mr. Nondorf
also serves as a director of Open Environment Corporation.
Eric Sockol has served as Vice President of Finance of the Company since
June 1996 and as Treasurer of the Company since October 1995. From October
1995 to June 1996, Mr. Sockol served as Chief Financial Officer of the
Company. From May 1995 to October 1995, Mr. Sockol served as Finance Director
for Stream International Inc. (a merger of Corporate Software and Global
Software Services), a manufacturer and reseller of PC software and related
services. From June 1990 to May 1995, Mr. Sockol served as Finance Director
and Corporate Controller for Corporate Software. Mr. Sockol is a Certified
Public Accountant.
Albert Carnesale has served as a director of the Company since April 1996.
Dr. Carnesale is the Don K. Price Professor of Public Policy at Harvard
University. Since July 1994, Dr. Carnesale has been Provost of Harvard
University. From July 1991 through December 1995, Dr. Carnesale served as the
Dean of the John F. Kennedy School of Government at Harvard University. From
1981 to 1991, Dr. Carnesale served as the Academic Dean of the John F. Kennedy
School of Government of Harvard University. Dr. Carnesale has held positions
with Martin Marietta Corporation from 1957 to 1962 and the United States Arms
Control and Disarmament Agency from 1969 to 1972. He is also a member of the
Council on Foreign Relations and of the International Institute for Strategic
Studies. Dr. Carnesale also serves as a director of Open Environment
Corporation and Teradyne, Inc.
Manuel Diaz has served as a director of the Company since May 1996. Since
1993, Mr. Diaz has been a Vice President for Hewlett-Packard Company and
general manager of worldwide sales,
39
<PAGE>
marketing and services for its Computer Systems Organization ("CSO"). Mr. Diaz
joined HP Mexicana in Mexico City as its general manager in 1982, and was
promoted to managing director of HP Latin America in 1986. In 1991, Mr. Diaz
was named sales and marketing manager of CSO for the US, Canada and Latin
America, and in 1993 named to his current position. Prior to joining HP,
Mr. Diaz was director general of Infodinamica S.A. de C.V. in Mexico City,
executive vice president of Bancomer, S.A. and general manager of IBM
Corporation's Northern Latin America Region.
Stephen R. Levy has served as a director of the Company since May 1996.
Since 1995, Mr. Levy has been a private investor. Mr. Levy is presently a
director of BBN Corporation (formerly Bolt Beranek and Newman Inc.) and
previously served BBN as President and Chief Executive Officer from 1976 to
1983, as Chairman of the Board and Chief Executive Officer from 1983 to 1993,
as Chairman of the Board, President and Chief Executive Officer in 1993, and
as Chairman of the Board from 1994 to 1995. Mr. Levy also serves as a director
of ThermoOptek Corporation.
Ofer Nemirovsky has served as a director of the Company since March 1996.
Since December 1988, Mr. Nemirovsky has been a Vice President of, and a
general partner of the respective general partners of several investment funds
managed by, Hancock Venture Partners, Inc. ("HVP"). Prior to joining HVP in
1986, Mr. Nemirovsky held various computer sales and marketing positions at
Hewlett-Packard. He is currently a director of NETCOM On-Line Communications
Services, Inc. and AXENT Technologies, Inc., as well as several privately held
companies.
Sundar Subramaniam has been a director of the Company since January 1994.
Since 1994, Mr. Subramaniam has been President of Cambridge Technology
Enterprise, a group of companies which focus on the development of emerging
technology and new markets. He is also Chairman of International Integration
Incorporated ("I-Cube") and of Integrated Computing Engines ("ICE") and
Adjunct Assistant Professor of Finance at Brandeis University. He served as
Chairman of the Company from 1995 to 1996. From 1993 to 1994, Mr. Subramaniam
was President and Chief Executive Officer of Open Environment Corporation, and
from 1990 through 1993 he held various executive and management positions with
Cambridge Technology Group.
Officers of the Company are elected by, and serve at the discretion of, the
Board of Directors.
There are no family relationships among any of the executive officers or
directors of the Company.
BOARD OF DIRECTORS
Each director holds office until that director's successor has been elected
and qualified. The Company's Board of Directors is divided into three classes.
Messrs. Nemirovsky and Subramaniam serve in the class whose term expires in
1997; Messrs. Carnesale and Levy serve in the class whose term expires in
1998; and Messrs. Besier and Diaz serve in the class whose term expires in
1999. Upon expiration of the term of each class of director, directors
comprising such class will be elected for a three-year term at the annual
meeting of stockholders in the year of which such term expires.
Mr. Nemirovsky was nominated and elected to the Board of Directors pursuant
to a voting agreement among certain stockholders of the Company. This
agreement will terminate upon consummation of this offering. See "Certain
Transactions".
The Company's Board of Directors has established an Audit Committee (the
"Audit Committee") and a Compensation Committee (the "Compensation
Committee"). The Audit Committee recommends the firm to be appointed as
independent accountants to audit the Company's financial statements and to
perform services related to the audit, reviews the scope and results of the
audit with the independent accountants, reviews with management and the
independent accountants the Company's year-end operating results and considers
the adequacy of the Company's internal accounting procedures. The
40
<PAGE>
Audit Committee consists of Messrs. Levy and Nemirovsky. The Compensation
Committee, which consists of Messrs. Carnesale and Subramanian, reviews and
recommends the compensation arrangements for all directors and officers and
approves such arrangements for other senior level employees. The Compensation
Committee also administers and takes such other action as may be required in
connection with the incentive plans of the Company, including the 1995 Stock
Plan and the 1996 Stock Plan.
DIRECTOR COMPENSATION
Non-employee directors receive $1,250 for each Board of Directors meeting
attended in addition to reimbursement for reasonable out-of-pocket expenses
incurred. Non-employee directors are eligible to participate in the Company's
1996 Stock Plan under which each non-employee director will receive an initial
option to purchase 7,000 shares upon first joining the board and thereafter
receive an automatic grant to purchase 1,700 shares on each January 1,
beginning in 1997, that such director is a member of the Board of Directors.
In addition, all of the current non-employee directors who joined the Board of
Directors in 1996 shall be entitled to receive an option to purchase 7,000
shares of Common Stock upon consummation of this offering at a per share
exercise price equal to the initial public offering price. All such options
will vest equally over four years and have an exercise price equal to the fair
market value of the Common Stock on the date of grant. See "--Stock Plans".
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company during
the fiscal year ended December 31, 1995 to the person who was employed during
the fiscal year ended December 31, 1995 as the Company's Chief Executive
Officer (the "Named Executive Officer"). No officer or employee of the Company
received annual compensation exceeding $100,000 in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS(1)
------------ ------------
SECURITIES
UNDERLYING
YEAR SALARY OPTIONS
---- ------------ ------------
<S> <C> <C> <C>
James Nondorf................................... 1995 $39,086 266,666
Former President and Chief Executive Officer(2)
</TABLE>
- --------
(1) The Company did not grant any restricted stock awards or stock
appreciation rights (SARs) or make any long-term incentive plan payouts
during the fiscal year ended December 31, 1995.
(2) Mr. Nondorf became Vice President of Strategic Alliances in February 1996.
His current annual base salary is $110,000.
The following information with regard to executive compensation is provided
for the Company's current Chief Executive Officer and for the five other
current most highly compensated officers of the Company:
Klaus P. Besier joined the Company as Chairman, President and Chief
Executive Officer in February 1996. Mr. Besier's annual salary is set at
$200,000 for the years 1996 through 1998. Mr. Besier has been granted options
to purchase 330,000 shares of Common Stock, at an exercise price of $7.50 per
share, in lieu of receiving cash bonuses for the years 1996 through 1998. The
options vest as follows: (i) an option for 180,000 shares vesting equally over
three years and (ii) an option for 150,000 shares vesting equally in
six annual installments subject, in each case, to accelerated vesting upon the
occurrence of certain events.
41
<PAGE>
In connection with his employment, Mr. Besier purchased 960,000 shares of
Common Stock from a principal stockholder of the Company for an aggregate
purchase price of $1,440,000. At the time of that purchase, the fair market
value of the Common Stock that Mr. Besier purchased exceeded the purchase
price paid by him and the Company agreed to lend Mr. Besier up to $2,560,000
to fund his income tax liability on account of such purchase. See "Certain
Transactions".
Mr. Besier also received (i) a $1,000,000 payment from a principal
stockholder of the Company and (ii) an agreement from such stockholder to
provide him with a payment related to changes in the value of his interest in
the SAP Phantom Convertible Debenture Appreciation Rights 1994/2004 Program.
See "Certain Transactions".
John Burke joined the Company as Vice President of Sales in April 1996. Mr.
Burke's annual salary is set at $200,000 for the years 1996 through 1998. Mr.
Burke has been granted an option to purchase 70,000 shares of Common Stock, at
an exercise price of $7.50 per share, in lieu of receiving cash bonuses for
the years 1996 through 1998. In addition Mr. Burke was granted an option to
purchase 333,333 shares of Common Stock at an exercise price of $7.50 per
share. The options vest as follows: (i) an option for 220,000 shares vesting
over three years and (ii) an option for 183,333 shares vesting equally in six
annual installments subject, in each case, to accelerated vesting at varying
rates upon the occurrence of certain events.
John Coviello joined the Company as Vice President of Technology in June
1996. Mr. Coviello's current base salary is $215,000 with a bonus of up to 30%
of his annual base salary. Mr. Coviello was granted options to purchase, in
the aggregate, 250,000 shares of Common Stock at an exercise price of $12.00
per share. The options vest as follows: (i) an option for 50,000 shares
vesting six months from the date of hire and (ii) an option for 200,000 shares
vesting equally over four years from the date of hire.
Mark Gallagher joined the Company as Chief Financial Officer in June 1996.
Mr. Gallagher's annual salary is $200,000 for 1996. Mr. Gallagher was granted
options to purchase, in the aggregate, 400,000 shares of Common Stock at an
exercise price of $12.00 per share. The options vest as follows: (i) an option
for 75,000 shares vesting six months from date of hire, (ii) an option for
125,000 shares vesting 24 months from the date of hire, (iii) an option for
100,000 shares vesting 30 months from the date of hire subject to accelerated
vesting upon the occurrence of certain events and (iv) an option for 100,000
shares vesting 42 months from the date of hire subject to accelerated vesting
upon the occurrence of certain events.
Joseph Gruttadauria joined the Company as Vice President of Support Services
and Quality in April 1996. Mr. Gruttadauria's current base salary is $132,000
with a bonus of $80,000 for 1996. Mr. Gruttadauria was granted an option to
purchase 46,666 shares of Common Stock at an exercise price of $7.50 per
share, of which options for 13,333 shares vest within six months of grant and
the remaining options vest in equal installments over four years.
Carolyn LoGalbo joined the Company as Vice President of Marketing in March
1996. Ms. LoGalbo's annual salary is $175,000 plus a guaranteed cash bonus of
$50,000 for 1996. Ms. LoGalbo was granted an option to purchase, in the
aggregate, 233,333 shares of Common Stock at an exercise price of $7.50 per
share. The options vest as follows: (i) an option for 200,000 shares vesting
over two years and (ii) an option for 33,333 shares vesting equally in six
annual installments subject, in each case, to accelerated vesting upon the
occurrence of certain events.
42
<PAGE>
OPTION GRANTS
The following table sets forth certain information regarding stock options
granted during the fiscal year ended December 31, 1995 by the Company to the
Named Executive Officer. The Company granted no SARs during the fiscal year
ended December 31, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS(1) FOR OPTION TERM(2)
-------------------------------------------------- -----------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS EXERCISE
SECURITIES GRANTED PRICE
UNDERLYING TO EMPLOYEES PER EXPIRATION
OPTIONS GRANTED IN FISCAL YEAR SHARE(3) DATE(4) 5% 10%
--------------- -------------- -------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
James Nondorf........... 66,666 5.41% $1.50 03/01/05 $ 62,889 $ 159,373
200,000 16.22% $4.50 10/01/05 $566,055 $1,434,368
</TABLE>
- --------
(1) All options were granted at an exercise price equal to market value as
determined by the Board of Directors of the Company on the date of grant.
The Board of Directors determined the market value of the Common Stock
based on various factors, including the illiquid nature of an investment
in the Company's Common Stock, the Company's historical financial
performance, the preferences (including liquidation) of the Company's
outstanding Preferred Stock, the Company's future prospects and the price
paid for securities of the Company in arms-length transactions with third
parties.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date. The
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, are dependent on the performance of the Common Stock
and the date on which the option is exercised. There can be no assurance
that the amounts reflected will be achieved.
(3) The exercise price equals the fair market value of the Common Stock on the
date of grant as determined by the Company's Board of Directors.
(4) The vesting schedule for the option to purchase 66,666 shares of Common
Stock was accelerated so as to become fully exercisable on February 19,
1996. The option to purchase 200,000 shares of Common Stock became
exercisable with respect to 66,666 shares on March 8, 1996, and with
respect to the remaining 133,333 shares became exercisable when the Common
Stock was listed for trading on the Nasdaq National Market.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information with respect to the
unexercised stock options held as of December 31, 1995 by the Named Executive
Officer.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY
OPTIONS OPTIONS AT DECEMBER 31,
AT DECEMBER 31, 1995(1) 1995(1)
------------------------- -------------------------
NAME
- ---- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
James Nondorf............... 16,666 250,000 $100,000 $900,000
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1995 of $7.50 per share, as determined by the
Company's Board of Directors, minus the per share exercise price.
43
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to May 1996, the Company did not have a Compensation Committee and
decisions relating to executive compensation were made by the Board of
Directors. On May 10, 1996, the Board of Directors established a Compensation
Committee, consisting of Messrs. Carnesale and Subramaniam and delegated to
the Compensation Committee responsibility for decisions concerning executive
compensation.
STOCK PLANS
The Company's 1995 Stock Plan (the "1995 Plan") was adopted by the Board of
Directors and approved by the stockholders of the Company in March 1995. The
Company's 1996 Stock Plan (the "1996 Plan", and collectively with the 1995
Plan, the "Stock Plans") was adopted by the Board of Directors and approved by
the stockholders in May 1996, and an amendment to the 1996 Plan was adopted by
the Board of Directors and approved by the stockholders in June 1996. The
Company has reserved an aggregate of 4,150,000 shares of Common Stock for
issuance under the Stock Plans. The Company's Stock Plans permit the grant of
(i) options to purchase shares of Common Stock intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended, (the "Code"), (ii) options that do not so qualify, and (iii)
shares of Common Stock. Each non-employee director first joining the Board of
Directors in the future will receive an automatic option grant to purchase
7,000 shares of Common Stock when such director is first elected or appointed
to the Board of Directors. In addition, each non-employee director will
receive an automatic option grant to purchase 1,700 shares of Common Stock on
each January 1 that such director is a member of the Board of Directors. All
option shares granted to non-employee directors will vest in equal annual
installments over a four-year period. All option grants to non-employee
directors will be at a per share exercise price equal to the fair market value
of the Common Stock at the time of grant. The Stock Plans are designed and
intended as a performance incentive for officers, directors, employees,
consultants and other key persons performing services for the Company to
encourage such persons to acquire or increase a proprietary interest in the
success of the Company. The Stock Plans are administered by the Compensation
Committee as appointed by the Board of Directors from time to time. The
Compensation Committee determines the terms of each individual stock option
and stock award, subject to the terms of the Stock Plans, including the
exercise price or purchase price of such awards. The exercise price for
incentive stock options must be equal to the fair market value of the Common
Stock on the date of grant. The exercise price for non-qualified stock options
and the purchase price for Common Stock awards is determined at the discretion
of the Compensation Committee. As of June 24, 1996, options to purchase
3,356,600 shares of Common Stock were outstanding and an additional 726,734
shares of Common Stock were available for issuance under the Stock Plans.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("ESPP") was adopted by the Board
of Directors and approved by the stockholders of the Company in May 1996. The
Company has reserved a total of 150,000 shares of Common Stock for issuance
under the ESPP. The ESPP, which is intended to qualify under Section 423(b) of
the Code permits eligible employees of the Company to purchase Common Stock
through payroll deductions of up to ten percent of their salaries. The price
of Common Stock purchased under the ESPP will be 85% of the lower of the fair
market value of the Common Stock on the first or last day of each six-month
purchase period. The ESPP will be administered by the Compensation Committee
of the Board of Directors. Employees are eligible to participate if they are
customarily employed by the Company or any designated subsidiary for at least
20 hours per week.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock as of June 30, 1996, and as adjusted to reflect the sale of the
Company's Common Stock offered hereby, by (i) each person or entity known to
the Company to own beneficially more than 5% of the outstanding shares of
Common Stock and certain other principal stockholders of the Company, (ii)
each of the Company's directors, (iii) the Named Executive Officer, (iv) all
directors and executive officers of the Company as a group and (v) each of the
other Selling Stockholders. Except as indicated in the footnotes to this
table, the Company believes that the persons named in this table have sole
voting and investment power with respect to the shares of Common Stock
indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THIS OWNED AFTER THIS
OFFERING(1)(2) OFFERING(1)(2)
-------------------- --------------------
NUMBER OF
DIRECTORS, OFFICERS SHARES
AND 5% STOCKHOLDERS NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Sundar Subramaniam(3)...... 3,332,000 28.34% 200,000 3,132,000 21.22%
219 Vassar Street
Cambridge, MA 02139
Harrington Trust Limited,
as Trustee of the Appleby
Trust..................... 3,009,697 25.60 287,574 2,722,123 18.45
Cedar House, 41 Cedar Ave-
nue
Hamilton, Bermuda HM 12
J&S Limited Partner-
ship(4)................... 1,100,000 9.36 118,022 981,978 6.65
219 Vassar Street
Cambridge, MA 02139
Legacy Investment Partner-
ship(5)................... 1,333,333 11.34 -- 1,333,333 9.03
219 Vassar Street
Cambridge, MA 02139
Klaus P. Besier............ 1,026,667 8.73 -- 1,026,667 6.96
c/o OneWave, Inc.
One Arsenal Marketplace
Watertown, MA 02172
Entities Managed by
Hancock Venture Partners,
Inc. (6)................. 481,347 4.09 -- 481,347 3.26
One Financial Center, 44th
Floor
Boston, MA 02111
James Nondorf(7)........... 66,666 * -- 200,000 *
Albert Carnesale........... -- -- -- -- --
Manuel Diaz................ -- -- -- -- --
Stephen R. Levy(8)......... 33,333 * -- 33,333 *
Ofer Nemirovsky(9)......... 481,347 4.09 -- 481,347 3.26
All directors and executive
officers as a group (14
persons)(7)............... 4,940,013 41.78 200,000 4,873,347 32.58
OTHER SELLING STOCKHOLDERS
- --------------------------
Pantio Holding Ltd.(10).... 120,337 1.02 120,337 -- --
Lorenzo Cue(11)............ 24,067 * 24,067 -- --
</TABLE>
- --------
* Less than one percent (1%).
45
<PAGE>
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes general voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable or exercisable within 60 days
after June 30, 1996 ("Currently Exercisable Options") are deemed
outstanding for computing the percentage of a person holding such options
but are not deemed outstanding for computing the percentage of any other
person. For purposes of this table, stock options subject to acceleration
upon the occurrence of events other than the passage of time are not
deemed to be Currently Exercisable Options.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Does not include 1,100,000 shares held by J&S Limited Partnership in which
Mr. Subramaniam holds a 50% beneficial interest but over which Mr.
Subramaniam exercises no voting or investment power.
(4) John J. Donovan, Sr. is the president and sole stockholder of Controller
Corp., Inc., the general partner of J&S Limited Partnership, and, as such,
may be deemed the beneficial owner of these shares.
(5) John J. Donovan, Jr. is the managing partner of Legacy Investment
Partnership and, as such, has exclusive voting and investment power over
these shares.
(6) Includes (i) 457,280 shares of Common Stock issuable upon conversion of
Series B Preferred Stock held by Hancock Venture Partners IV-Direct Fund
L.P. and (ii) 24,067 shares of Common Stock issuable upon conversion of
Series B Preferred Stock held by Falcon Ventures II L.P. Hancock Venture
Partners, Inc. is the managing general partner of the respective general
partners of such entities.
(7) Includes 66,666 shares of Common Stock which may be purchased within 60
days of June 30, 1996 upon the exercise of stock options and an additional
133,334 shares of Common Stock which may be purchased immediately after
the consummation of this offering.
(8) Includes 33,333 shares of Common Stock issuable upon conversion of Series
C Preferred Stock.
(9) Includes (i) 457,280 shares of Common Stock issuable upon conversion of
Series B Preferred Stock held by Hancock Venture Partners IV-Direct Fund
L.P. and (ii) 24,067 shares of Common Stock issuable upon conversion of
Series B Preferred Stock held by Falcon Ventures II, L.P., of which
partnerships Mr. Nemirovsky is a general partner of the respective general
partners, but as to which Mr. Nemirovsky disclaims beneficial ownership.
(10) Includes 120,337 shares of Common Stock issuable upon conversion of
Series B Preferred Stock.
(11) Includes 24,067 shares of Common Stock issuable upon conversion of Series
B Preferred Stock.
46
<PAGE>
CERTAIN TRANSACTIONS
Certain of the Company's principal stockholders are affiliated with each
other through family and other relationships. Sundar Subramaniam, a director
of the Company, and John J. Donovan, Sr., are limited partners, and Mr.
Donovan, Sr. is the sole stockholder and president of the corporate general
partner, of J&S Limited Partnership ("J&S"). Mr. Donovan Sr.'s adult children
are the ultimate beneficial owners of the shares of Common Stock held by
Harrington Trust Limited, as Trustee of the Appleby Trust ("Appleby"), and
Legacy Investment Partnership ("Legacy") and one of his sons, John J. Donovan,
Jr., was the President of the Company from its inception through June 1995 and
a director of the Company from its inception through March 1996. See
"Principal and Selling Stockholders".
On May 3, 1995, the Company issued 6% 5-year convertible subordinated notes
to each of J&S (in the original principal amount of $250,000) and Appleby (in
the original principal amount of $750,000). On November 30, 1995, Appleby
converted the promissory note held by it into 1,136,363 shares of Common
Stock. In March 1996, the Company repaid in full the promissory note held by
J&S. On December 29, 1995, Appleby loaned the Company the principal sum of
$750,000 under a 9% 5-year subordinated note. The Company prepaid this note,
in full, in March 1996.
From its inception through March 1, 1996, the Company shared office
facilities in Cambridge, Massachusetts with Cambridge Technology Group, Inc.
("CTGroup"). John J. Donovan, Sr. is the President, sole director and sole
stockholder of CTGroup. During the period from the Company's inception until
December 1995, CTGroup provided a variety of technical and support services
for the Company and, from time to time, advanced funds to meet the Company's
operating expenses. The Company has reimbursed CTGroup, at cost, for all
services rendered and has repaid in full all amounts advanced for its benefit
by CTGroup. For use of the shared office facilities in Cambridge, the Company
reimbursed CTGroup for the Company's pro rata share (based on head count) of
the lease and maintenance costs of the facilities. The Cambridge facilities
are owned by a partnership in which Messrs. Donovan Sr. and Jr. are the
partners. A number of the Company's employees are former employees of CTGroup.
On July 28, 1995, in connection with the establishment by CTGroup of a
credit facility for $2,500,000 with the State Street Bank and Trust Company
("State Street"), the Company gave an unlimited guaranty of all of CTGroup's
obligations to State Street. The Company's obligations under the unlimited
guaranty were terminated on February 16, 1996.
In connection with the establishment by the Company of credit facilities in
the aggregate amount of $5,000,000 with State Street on February 16, 1996,
John J. Donovan, Sr., John J. Donovan, Jr. and J&S each gave an unlimited
guaranty of all of the Company's obligations to State Street. The guaranty of
J&S is secured by a pledge of 520,000 shares of common stock of Open
Environment Corporation ("OEC"). At April 30, 1996, the total amount
outstanding under the Company's credit facilities with State Street was
$2,000,000. Upon completion of this offering, the Company intends to request
that State Street terminate the guaranty obligations of Messrs. Donovan Sr.
and Jr. and J&S. The Company intends to use a portion of the proceeds of this
offering to repay the amounts borrowed under the $2,000,000 term loan portion
of this credit facility upon maturity in September 1996. See "Use of
Proceeds". John J. Donovan, Sr. has also personally guaranteed the performance
by the Company of its obligations under the lease of the Company's
headquarters in Watertown, Massachusetts. Mr. Donovan's obligation under the
lease guaranty will terminate upon consummation of this offering. Legacy, J&S
and Mr. Subramaniam have also agreed with the Company that, in the event this
offering is not successful, they will provide the funding, if any, necessary
to sustain the Company's operations through December 31, 1996. The terms on
which such funding would be provided would be determined by negotiation
between such stockholders and the Company at the time of any such funding.
47
<PAGE>
In connection with the Company's offer of employment to Klaus P. Besier as
President and Chief Executive Officer, J & S made a $1,000,000 payment to Mr.
Besier. The Company incurred no liability for such payment. As a former
employee of SAP America, Mr. Besier continues to be a participant in the SAP
Phantom Convertible Debenture Appreciation Right 1994/2004 Program (the "SAP
Plan") pursuant to which he holds a phantom stock appreciation right
evidencing the right to receive the appreciation in value of a specified
number of shares of SAP Preferred Stock. In connection with the Company's
offer of employment and as an inducement to Mr. Besier, J&S also agreed to pay
Mr. Besier an amount equal to the amount, if any, by which the value of his
stock appreciation right decreases between the date of such offer and
September 30, 1996. The Company has no liability or responsibility to make any
payment to Mr. Besier in connection with the SAP Plan. In addition, Appleby
sold 960,000 shares of Common Stock to Mr. Besier for a purchase price of
$1.50 per share, for an aggregate purchase price of $1,440,000. At the time of
this stock purchase, the Common Stock had a fair market value of $7.50 per
share. As an inducement to Mr. Besier to accept the Company's employment
offer, the Company agreed to lend Mr. Besier up to $2,600,000 to fund the
amount of income tax liability incurred by Mr. Besier in connection with this
stock purchase based upon the difference between the purchase price for the
shares and the fair market value of the shares at the time of such purchase.
The Company and OEC are parties to a Software, Education, Services
Distribution Agreement dated June 21, 1995 (as amended, the "Distribution
Agreement"), pursuant to which the Company is authorized to distribute, on a
non-exclusive basis, worldwide (except Japan) OEC's software products and
services. The Distribution Agreement expires on June 21, 1997, subject to
annual renewals by mutual consent. Under the Distribution Agreement, the
Company purchased, for $260,000, a master copy of OEC's software products and
received the right to make 25 copies of such software for resale during the
term of the Distribution Agreement. The Company is entitled to purchase for
resale additional copies of OEC software products at a discount of 50% below
OEC's list price, and to resell OEC services and education products at a
discount of 25% below OEC's list price. Under the Distribution Agreement, the
Company is prohibited from marketing, reselling or advocating products or
services competitive with the products or services of OEC. At the time the
Company entered into the Distribution Agreement, John J. Donovan, Jr. was
President and a director of the Company and a director of OEC and John J.
Donovan, Sr. was the Chairman of the Board of OEC. Sundar Subramaniam is a
former President and former director of OEC. James G. Nondorf, formerly
President and a director of the Company and currently the Company's Vice
President of Strategic Alliances, is a director of OEC. Appleby, Legacy, J&S
and Mr. Subramaniam are principal stockholders of OEC. A number of the
Company's employees are former employees of OEC.
On October 31, 1995, the Company sold to OEC the source code for certain
software technology relating to the customization and enhancement of SAP
software products. OEC paid the Company an initial fee of $500,000 under the
agreement by which the source code was transferred, and agreed to pay the
Company a royalty in an amount equal to 20% of the first $1,000,000 of sales
revenue recognized by OEC related to products incorporating components of the
transferred source code and 10% of such sales revenues in excess of
$1,000,000. OEC's royalty obligations expire on the earlier of October 1, 1997
or the date on which OEC's aggregate sales revenues related to products
incorporating components of the transferred source code exceed $3,000,000.
The Company and OEC are also parties to an OEM Source Code License Agreement
dated as of December 29, 1995 (the "OEM Agreement"), pursuant to which the
Company holds a perpetual, non-exclusive license to incorporate certain OEC
software products into, or bundle such products with, the Company's software
products and has received the source code for such OEC products. The Company
paid a license fee of $2,200,000 to OEC under the OEM Agreement. The Company
has allocated the cost of the source code to research and development expenses
in 1995.
48
<PAGE>
The Company, from time to time, sub-contracts consulting services from
International Integration Incorporated ("I-Cube"), a provider of systems
integration, implementation and application development services. Sundar
Subramaniam is a significant stockholder and the Chairman of the Board of
Directors of I-Cube. During the fiscal year ended December 31, 1995, fees for
system migration and integration consulting services provided by I-Cube
totaled $662,000.
During April 1996, the Company repurchased an aggregate of 800,000 shares of
Common Stock from four stockholders, at a price of $7.50 per share. Of these
shares, 66,667 shares were repurchased from James Nondorf, a former President
and director of the Company and the current Vice President of Strategic
Alliances, for an aggregate price of $500,000; 233,333 shares were repurchased
from J&S, for an aggregate price of $1,750,000; and 233,333 shares were
repurchased from Appleby, for an aggregate price of $1,750,000. The remaining
266,667 shares were repurchased from Len Hafetz for an aggregate price of
$2,000,000, pursuant to a Stock Purchase Agreement between Mr. Hafetz and John
Donovan, Sr., who assigned his rights and obligations under such agreement to
the Company.
Since February 29, 1996, the Company has sold 1,332,127 shares of Series B
Preferred Stock at a purchase price per share of $5.54 and 1,200,000 shares of
Series C Preferred Stock at a purchase price per share of $5.00. Such shares
of Preferred Stock will be converted into shares of Common Stock as provided
by a formula set forth in the Company's Restated Certificate of Incorporation.
See "Description of Capital Stock--Authorized and Outstanding Capital Stock".
All of the Convertible Preferred Stock has been granted registration rights by
the Company. See "Description of Capital Stock--Registration Rights".
In connection with the purchase of Series B Preferred Stock, certain
purchasers of such stock and certain common stockholders agreed that such
stockholders would vote their shares to elect one director to the Board of
Directors designated by the holders of the Series B Preferred Stock. Pursuant
to such agreement, Ofer Nemirovsky, a general partner of the general partners
of certain investment funds which participated in such offering, was nominated
and elected to the Board of Directors. This Agreement will terminate upon
consummation of this offering.
In connection with its purchase of Series B Preferred Stock, Hewlett-Packard
Company was granted a right of first refusal, for as long as it owns at least
36,603 shares of Common Stock, with respect to securities of the Company which
the Company proposes to sell in private placements to designated computer
hardware manufacturers and other companies that derive a majority of their
revenues from the sale of computer hardware.
CONFLICTS OF INTEREST
Conflicts of interest may arise in the course of business transactions
between the Company, its officers, directors and principal stockholders, and
their affiliates. The Company believes that the transactions described above
were at terms no less favorable than the Company would have obtained from
unaffiliated third parties. See Note 7 of Notes to Financial Statements. The
Company has adopted a policy that all future transactions between the Company
and its officers, directors or other affiliates (other than compensation and
employment matters) be reviewed by the Board of Directors on an on-going basis
and submitted to the Audit Committee or other comparable body for review where
appropriate.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The description of the capital stock below is qualified in its entirety by
reference to the Company's Third Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") and Amended and
Restated By-Laws ("Restated By-Laws" together with the Restated Certificate of
Incorporation, the "Charter Documents"), copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information".
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Immediately following the consummation of this offering, the authorized
capital stock of the Company will consist of 50,000,000 shares of Common
Stock, par value $.001 per share ("Common Stock"), and 5,000,000 shares of
Preferred Stock, par value $1.00 per share ("Preferred Stock"). Prior to the
commencement of this offering, the Company's authorized capital stock included
the following shares: 30,000,000 shares of Common Stock, of which 10,069,696
shares were issued and outstanding, 1,332,127 shares of Series B Redeemable
Convertible Preferred Stock, par value $1.00 per share ("Series B Preferred
Stock"), of which 1,332,127 shares were issued and outstanding, and 1,220,000
shares of Series C Convertible Preferred Stock, par value $1.00 per share
("Series C Preferred Stock"), of which 1,200,000 were issued and outstanding.
Upon consummation of this offering, all of the issued and outstanding shares
of Series C Preferred Stock will convert into 799,994 shares of Common Stock.
Upon consummation of this offering, all of the issued and outstanding shares
of Series B Preferred Stock will convert into 888,080 shares of Common Stock.
Immediately following such conversion, all such shares of the Preferred Stock
shall have been cancelled, retired and eliminated from the Company's
authorized capital stock. At May 1, 1996, the Company's Series B Preferred
Stock, Series C Preferred Stock and Common Stock were held of record by 32
stockholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted on by stockholders. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the Directors then
standing for election, subject to the rights of the holders of Preferred
Stock, if and when issued. The holders of Common Stock have no preemptive or
other subscription rights.
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor, with each share of Common Stock sharing equally in
such dividends. The possible issuance of Preferred Stock with a preference
over Common Stock as to dividends could impact the dividend rights of holders
of Common Stock. See "Dividend Policy".
There are no redemption or sinking fund provisions with respect to the
Common Stock. All outstanding shares of Common Stock, including the shares
offered hereby, are, or will be upon completion of this offering, fully paid
and non-assessable.
The Restated By-laws provide, subject to the rights of the holders of the
Preferred Stock, if and when issued, that the number of directors shall be
fixed by the Board of Directors. The directors, other than those who may be
elected by the holders of Preferred Stock, if and when issued, are divided
into three classes, as nearly equal in number as possible, with each class
serving for a three-year term,
50
<PAGE>
except with respect to the initial term of each class of directors which shall
be for the period described under "Management--Board of Directors". Subject to
any rights of the holders of Preferred Stock, if and when issued, to elect
directors, and to remove any director whom the holders of any such stock had
the right to elect, any director of the Company may be removed from office
only with cause and by the affirmative vote of at least two-thirds of the
total votes eligible to be cast by stockholders in the election of such
director.
UNDESIGNATED PREFERRED STOCK
Upon consummation of this offering, the Board of Directors of the Company
will be authorized, without further action of the stockholders of the Company,
to issue up to 5,000,000 shares of Preferred Stock in classes or series and to
fix the designation, voting powers, preferences and the relative,
participating optional and other special rights of the shares of each series
and any qualifications, limitations and restrictions thereon as set forth in
the Restated Certificate of Incorporation. Any such Preferred Stock issued by
the Company may rank prior to the Common Stock as to dividend rights,
liquidation preferences or both, may have full or limited voting rights and
may be convertible into shares of Common Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock
is, in part, to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of Preferred Stock could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring or seeking to acquire, a significant portion of the
outstanding stock of the Company.
WARRANT
On February 16, 1996, in connection with the establishment of a bank credit
facility, the Company issued to SSB Investments, Inc. a warrant (the
"Warrant") to purchase 23,333 shares of Common Stock at an exercise price per
share of $8.31. The Warrant is exercisable in whole or in part, at any time on
or before February 15, 2003.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER DOCUMENTS
A number of provisions of the Company's Restated Certificate of
Incorporation and Restated By-laws concern matters of corporate governance and
the rights of stockholders. Certain of these provisions, as well as the
ability of the Board of Directors to issue shares of Preferred Stock and to
set the voting rights, preferences and other terms thereof, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). These provisions,
together with the classified Board of Directors and the ability of the Board
of Directors to issue Preferred Stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption
of control by stockholders, even if such removal or assumption would be
beneficial to stockholders of the Company. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest,
even if they could be favorable to the interests of stockholders, and could
potentially depress the market price of the Common Stock and deprive
stockholders of an opportunity to receive a premium for their shares. The
Board of Directors of the Company believes that these provisions are
appropriate to protect the interests of the Company and all of its
stockholders. The Board of Directors has no present plans to adopt any other
measures or devices which may be deemed to have an "anti-takeover effect".
MEETINGS OF STOCKHOLDERS. The Restated By-laws provide that a special
meeting of stockholders may be called only by the Board of Directors unless
otherwise required by law. The Restated By-laws provide that only those
matters set forth in the notice of the special meeting may be considered or
acted upon at that special meeting, unless otherwise provided by law. In
addition, the Restated By-laws set forth certain advance notice and
informational requirements and time limitations on any director nomination or
any new business which a stockholder wishes to propose for consideration at an
annual meeting of stockholders.
51
<PAGE>
NO STOCKHOLDER ACTION BY WRITTEN CONSENT. The Restated Certificate of
Incorporation provides that any action required or permitted to be taken by
the stockholders of the Company at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders in lieu thereof.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Restated By-laws provide
that directors and officers of the Company shall be, and in the discretion of
the Board of Directors non-officer employees may be, indemnified by the
Company to the fullest extent authorized by Delaware law, as it now exists or
may in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the Company. The
Restated By-laws also provide that the right of directors and officers to
indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any by-law, agreement,
vote of stockholders or otherwise. The Restated Certificate of Incorporation
contains a provision permitted by Delaware law that generally eliminates the
personal liability of directors for monetary damages for breaches of their
fiduciary duty, including breaches involving negligence or gross negligence in
business combinations, unless the director has breached his or her duty of
loyalty failed to act in good faith, engaged in intentional misconduct or a
knowing violation of law, paid a dividend or approved a stock repurchase in
violation of the Delaware General Corporation Law or obtained an improper
personal benefit. This provision does not alter a director's liability under
the federal securities laws. In addition, this provision does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty.
AMENDMENT OF RESTATED CERTIFICATE. The Restated Certificate of Incorporation
provides that an amendment thereof must first be approved by a majority of the
Board of Directors and (with certain exceptions) thereafter approved by the
holders of a majority of the total votes eligible to be cast by holders of
voting stock with respect to such amendment or repeal; provided however, that
the affirmative vote of not less than 80% of the total votes eligible to be
cast by holders of voting stock, voting together as a single class, is
required to amend the provisions described above.
AMENDMENT OF RESTATED BY-LAWS. The Restated Certificate of Incorporation
provides that the Restated By-laws may be amended or repealed by the Board of
Directors or by the stockholders. Such action by the Board of Directors
requires the affirmative vote of a majority of the directors then in office.
Such action by the stockholders requires the affirmative vote of the holders
of at least two-thirds of the total votes eligible to be cast by holders of
voting stock with respect to such amendment or repeal at an annual meeting of
stockholders or a special meeting called for such purpose, unless the Board of
Directors recommends that the stockholders approve such amendment or repeal at
such meeting, in which case such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast by
holders of voting stock with respect to such amendment or repeal.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person, or affiliate or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved
by the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the
52
<PAGE>
same transaction that makes it an interested stockholder (excluding shares
owned by persons who are both officers and directors of the corporation, and
shares held by certain employee stock ownership plans) or (iii) on or after
the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66% of the corporation's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested
stockholder. Under Section 203, an "interested stockholder" is defined (with
certain limited exceptions) as any person that is (i) the owner of 15% or more
of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation that was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such charter
or by-law amendment shall not become effective until twelve months after the
date it is adopted. Neither the Restated Certificate of Incorporation nor the
Restated By-laws of the Company contains any such exclusion, although the
Board of Directors has excluded the stockholders of the Company prior to the
offering from the coverage of Section 203.
REGISTRATION RIGHTS
The holders of the Company's Series B Preferred Stock (the "Series B
Investors") and the holders of the Company's Series C Preferred Stock (with
the Series B Investors, the "Preferred Registration Rights Holders") who
collectively will own a total of 1,543,670 shares of Common Stock (the
"Preferred Registrable Securities") upon the closing of this offering, and SSB
Investments, Inc., the Warrant Holder (with the Preferred Registration Rights
Holders, the "Registration Rights Holders") who will have the right to under
the Warrant to acquire 23,333 shares of Common Stock (with the Preferred
Registrable Securities, the "Registrable Securities"), are parties to
agreements with the Company under which each has certain rights with respect
to the registration under the Securities Act, for resale to the public, of
such Registrable Securities. If the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the Registration Rights Holders are
entitled to notice of such registration and to include their shares of
Registrable Securities therein, subject to certain conditions and limitations,
which include the right of the managing underwriter of any such offering to
exclude some or all of such shares from such registration. Each of the
Preferred Registration Rights Holders had these so-called "piggy-back"
registration rights with respect to this offering and the shares of Common
Stock being sold in this offering by Pantio Holding Ltd. and Lorenzo Cue have
been included pursuant to the exercise of such rights. Additionally, the
Series B Investors have certain demand registration rights pursuant to which
they may require the Company on two occasions to register all or part of their
shares of Registrable Securities for resale to the public under the Securities
Act, subject to certain conditions and limitations, including the requirement
that the anticipated aggregate price of the shares to be registered exceeds
$10,000,000 and the right of the Company not to effect such requested
registration within 180 days after the effective date of a registration
statement filed by the Company covering a firm commitment underwritten public
offering of the securities of the Company under the Securities Act. Further,
the Series B Investors may require the Company to file additional registration
statements on Form S-3 if the Company qualifies for the use of such form,
subject to certain conditions and limitations. The Company is required to bear
the expenses of all such registrations (except underwriting discounts and
commissions) and to use its best efforts to effect such registrations.
TRANSFER AGENT AND REGISTRAR
The Company has selected State Street Bank and Trust Company as the transfer
agent and registrar for the Common Stock.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
14,757,770 shares of Common Stock (assuming no exercise of outstanding options
after May 1, 1996). Of these shares, the 3,750,000 shares sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subjected to the resale limitations of Rule
144 adopted under the Securities Act. The remaining 11,007,770 shares
outstanding upon completion of this offering and held by existing stockholders
will be "Restricted Securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144 or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below,
and the provisions of Rules 144 and 701, additional shares will be available
for sale in the public market as follows: (i) 108,113 shares issuable upon the
exercise of stock options granted under the 1995 Plan and the 1996 Plan that
are vested or will vest and, if exercised, will become eligible for sale
without lock-up restrictions on various dates prior to 180 days following the
date of this Prospectus, (ii) 7,113,978 currently outstanding shares will be
eligible for sale upon expiration of lock-up agreements 180 days after the
date of this Prospectus (as well as 874,111 additional shares issuable upon
the exercise of stock options granted under the 1995 Plan and the 1996 Plan
that will be vested as of such date) and (iii) 3,893,802 additional currently
outstanding shares will be eligible for sale upon expiration of their
respective two-year holding periods, subject in the case of shares held by
affiliates to compliance with certain volume restrictions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years (and, with respect to non-affiliates of the Company, a
person who has beneficially owned Restricted Securities less than three
years), will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Company's Common Stock (approximately 147,578 shares immediately after the
offering) or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities
and Exchange Commission. Such sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned Restricted Shares for at least three years is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. The Securities and Exchange Commission has recently proposed
to reduce the two and three year holding periods under Rule 144 to one and two
years, respectively. If enacted, such modification will have a material effect
on the timing of when certain shares of Common Stock become eligible for
resale.
In addition, following the offering, the holders of 1,543,670 shares of
outstanding Common Stock and 23,333 shares of Common Stock issuable upon
exercise of a certain warrant will have rights under certain circumstances to
require the Company to register their shares for future sale. See "Description
of Capital Stock--Registration Rights".
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144
54
<PAGE>
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares
are required to wait until 90 days after the date of this Prospectus before
selling such shares.
Persons who will hold approximately 10,946,999 shares of the Company's
Common Stock after completion of the offering, including all officers and
directors and certain securityholders of the Company, have agreed with the
Representatives and/or the Company that, for a period of 180 days following
the date of this Prospectus, they will not sell, offer to sell, contract to
sell, grant any option to purchase, make any short sale or otherwise dispose
of any shares of Common Stock of the Company, or any options or warrants to
purchase any shares of Common Stock of the Company, or any securities
convertible into or exchangeable for shares of Common Stock of the Company,
whether now owned or hereinafter acquired, by such holders or with respect to
which they have beneficial ownership within the rules and regulations of the
SEC. The Company has also agreed not to sell, offer to sell, contract to sell,
grant any option to purchase or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or any rights to acquire Common Stock for a period of 180 days
following the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. on behalf of the Underwriters, subject to certain limited
exceptions. The lockup agreements may be released at any time as to all or any
portion of the shares subject to such agreements at the sole discretion of
Goldman, Sachs & Co. on behalf of the Underwriters.
Promptly following the consummation of this offering, the Company intends to
file a Registration Statement on Form S-8 to register the shares of Common
Stock issuable upon exercise of options granted under the 1995 Plan, the 1996
Plan and the ESPP. Following the filing of the Form S-8, shares of Common
Stock issued under the 1995 Plan, the 1996 Plan and the ESPP will be available
for sale in the public market upon vesting and exercise of such options,
subject to lock-up restrictions described above and the Rule 144 volume
limitations applicable to affiliates.
Prior to this offering, there has been no prior public market for the Common
Stock and there is no assurance a significant public market for the Common
Stock will develop or be sustained after this offering. Sales of a substantial
amount of Common Stock in the public market could adversely affect the market
price of the Common Stock and could impair the Company's future ability to
raise capital through the sale of its equity securities. See "Risk Factors".
55
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company and the Selling Stockholders by Peabody &
Arnold, Boston, Massachusetts. Certain other legal matters in connection with
this offering will be passed upon for the Company by Goodwin, Procter & Hoar
llp, Boston, Massachusetts, for the Selling Stockholders by Peabody & Arnold
and for the Underwriters by Hale and Dorr, Boston, Massachusetts.
EXPERTS
The financial statements and schedule for the period from inception (January
19, 1994) to December 31, 1994 and the year ended December 31, 1995 included
in this Prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (of which this Prospectus
is a part) under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information about the Company and the securities
offered by this Prospectus, reference is made to the Registration Statement,
including the exhibits and schedules filed as a part thereof. Statements made
in this Prospectus as to the contents of any document referred to are not
necessarily complete, and in each instance, if such document is filed as an
exhibit, reference is made to such exhibit and each such statement is
qualified in its entirety by such reference.
The Registration Statement, including exhibits and schedules thereto, filed
by the Company with the Commission may be inspected, without charge, and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, Room 1024; 7 World Trade Center,
New York, New York 10048, Room 1400; and 500 West Madison Street, Chicago,
Illinois 60661, Suite 1400. Copies of such materials also may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, Room 1024, at prescribed rates. In addition, the
Company is required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http:/ /www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and an opinion thereon expressed by
independent auditors and with quarterly reports for the first three quarters
of each fiscal year containing unaudited summary financial information.
56
<PAGE>
ONEWAVE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of December 31, 1994 and 1995, March 31, 1996 (unau-
dited) and Pro Forma as of March 31, 1996 (unaudited).................... F-3
Statements of Operations for the Period from Inception (January 19, 1994)
to December 31, 1994 for the Year Ended December 31, 1995 and for the
Three-Months Ended March 31, 1995 and 1996 (unaudited)................... F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit) for the Period from Inception (January 19, 1994) to
December 31, 1994, for the Year Ended December 31, 1995, for the
Three-Months Ended March 31, 1996 (unaudited) and Pro Forma as of
March 31, 1996 (unaudited).............................................. F-5
Statements of Cash Flows for the Period from Inception (January 19, 1994)
to December 31, 1994, for the Year Ended December 31, 1995 and the Three-
Months Ended March 31, 1995 and 1996 (unaudited)......................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OneWave, Inc.:
We have audited the accompanying balance sheets of OneWave, Inc. (a Delaware
corporation, formerly Business@Web, Inc.) as of December 31, 1994 and 1995,
and the related statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for the period from
inception (January 19, 1994) to December 31, 1994 and for the year ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OneWave, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for the period from inception (January 19, 1994) to December 31, 1994
and for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 12, 1996 (except with respect to the
matters discussed in Note 6
as to which the date is May 20, 1996)
F-2
<PAGE>
ONEWAVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
------------------------ --------------------------
PRO FORMA
1994 1995 ACTUAL (NOTE 1)
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equiva-
lents (Note 1)......... $ 70 $ 104,622 $ 4,822,127 $ 4,792,127
Accounts receivable,
less reserve of
$100,000 and $150,000
at December 31, 1995
and March 31, 1996,
respectively........... -- 1,908,541 1,775,199 1,775,199
Inventories (Note 1).... -- 292,000 227,000 227,000
Prepaid expenses and
other current assets... -- 157,333 573,329 573,329
Due from affiliates
(Note 7)............... -- -- 168,793 168,793
----------- ----------- ------------ ------------
Total current as-
sets............... 70 2,462,496 7,566,448 7,536,448
----------- ----------- ------------ ------------
Property and Equipment,
at cost (Note 1):
Computer and office
equipment.............. 76,078 226,550 1,074,336 1,074,336
Furniture and fix-
tures.................. -- -- 371,978 371,978
Leasehold improve-
ments.................. -- -- 41,252 41,252
----------- ----------- ------------ ------------
76,078 226,550 1,487,566 1,487,566
Less--Accumulated
depreciation and
amortization........... 12,680 63,118 115,483 115,483
----------- ----------- ------------ ------------
Net property and
equipment.......... 63,398 163,432 1,372,083 1,372,083
----------- ----------- ------------ ------------
Total assets........ $ 63,468 $ 2,625,928 $ 8,938,531 $ 8,908,531
=========== =========== ============ ============
LIABILITIES AND STOCK-
HOLDERS' EQUITY (DEFI-
CIT)
Current Liabilities:
Accounts payable........ $ 275,000 $ 575,575 $ 2,153,072 $ 2,153,072
Note payable to a bank
(Note 2)............... -- -- 2,000,000 2,000,000
Due to affiliates
(Note 7)............... 656,844 2,938,086 553,302 553,302
Accrued expenses
(Note 10).............. -- 637,613 3,467,396 3,467,396
Deferred revenues
(Note 1)............... -- 278,572 317,421 317,421
----------- ----------- ------------ ------------
Total current lia-
bilities........... 931,844 4,429,846 8,491,191 8,491,191
----------- ----------- ------------ ------------
Long-Term Debt to
Stockholders (Note 3)... -- 1,000,000 -- --
Commitments (Note 9)
Redeemable Convertible
Preferred Stock
(Note 5)................ -- -- 7,379,984 --
----------- ----------- ------------ ------------
Stockholders' Equity
(Deficit) (Note 6):
Preferred stock, $1.00
par value--
Authorized--5,000,000
shares
Issued and outstand-
ing--no shares....... -- -- -- --
Common stock, $.001 par
value--
Authorized--50,000,000
shares
Issued and
outstanding--
7,933,333 shares at
December 31, 1994,
10,803,030 shares at
December 31, 1995 and
March 31, 1996 and
11,691,104 shares at
March 31, 1996
pro forma............ 7,933 10,803 10,803 11,691
Additional paid-in cap-
ital................... 303,967 1,230,597 8,145,597 15,494,693
Note receivable from
executive officer...... -- -- (2,560,000) (2,560,000)
Deferred compensation... -- (166,594) (135,480) (135,480)
Accumulated deficit..... (1,180,276) (3,878,724) (12,393,564) (12,393,564)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit)... (868,376) (2,803,918) (6,932,644) 417,340
----------- ----------- ------------ ------------
Total liabilities
and stockholders'
equity (deficit)... $ 63,468 $ 2,625,928 $ 8,938,531 $ 8,908,531
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ONEWAVE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 19, 1994) THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------------ ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (Note 1):
Software license and maintenance... $ -- $ 2,150,735 $ 42,940 $ 710,181
Consulting and education services.. -- 3,918,927 373,495 1,670,520
----------- ----------- --------- -----------
Total revenues.................. -- 6,069,662 416,435 2,380,701
----------- ----------- --------- -----------
Cost of Revenues (Note 1):
Software license and maintenance... -- 716,392 22,400 288,980
Consulting and education services.. -- 2,684,216 171,920 974,244
----------- ----------- --------- -----------
Total cost of revenues.......... -- 3,400,608 194,320 1,263,224
----------- ----------- --------- -----------
Gross profit.................... -- 2,669,054 222,115 1,117,477
----------- ----------- --------- -----------
Operating Expenses:
Selling, general and
administrative.................... 285,962 2,107,956 337,488 1,701,196
Research and development (Note 1).. 894,314 3,181,972 174,723 398,592
Compensation to executive officer
(Note 10)......................... -- -- -- 7,515,000
----------- ----------- --------- -----------
Total operating expenses........ 1,180,276 5,289,928 512,211 9,614,788
----------- ----------- --------- -----------
Operating loss.................. (1,180,276) (2,620,874) (290,096) (8,497,311)
Interest Expense, net............... -- 77,574 -- 17,529
----------- ----------- --------- -----------
Net loss........................ $(1,180,276) $(2,698,448) $(290,096) $(8,514,840)
=========== =========== ========= ===========
Pro Forma Net Loss per Common and
Common Equivalent Share (Note 1)... $ (.21) $ (.65)
=========== ===========
Pro Forma Weighted Average Number of
Common and Common Equivalent Shares
Outstanding (Note 1)............... 12,871,554 13,140,961
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ONEWAVE, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK
-----------------------
NUMBER
OF CARRYING
SHARES VALUE
---------- -----------
<S> <C> <C>
Initial issuance
of stock at
inception at
$.0015 per
share........... -- $ --
Contribution
from
stockholders
for purchase of
Series A
preferred
stock.......... -- --
Net loss........ -- --
---------- -----------
Balance, December
31, 1994........ -- --
Issuance of
common stock at
$.0015 per
share.......... -- --
Issuance of
Series A
preferred stock
at $1.20 per
share.......... -- --
Conversion of
Series A
preferred stock
into common
stock.......... -- --
Conversion of
long-term debt
to stockholders
into common
stock at $.66
per share...... -- --
Deferred
compensation
related to
grant of stock
options........ -- --
Compensation
expense related
to stock
options........ -- --
Net loss........ -- --
---------- -----------
Balance, December
31, 1995........ -- --
Issuance of
Series B
redeemable
convertible
preferred stock
at $5.54 per
share, net of
issuance costs
of $600,000.... 1,332,127 7,379,984
Compensation
expense to
executive
officer........ -- --
Issuance of note
receivable from
executive
officer........ -- --
Compensation
expense related
to stock
options........ -- --
Net loss........ -- --
---------- -----------
Balance,
March 31, 1996
(Unaudited)..... 1,332,127 7,379,984
Pro forma effect
of issuance of
Series C
convertible
preferred stock
at $5.00 per
share, net of
issuance costs
of $30,000
(unaudited).... -- --
Pro forma effect
of repurchase
and retirement
of common stock
at $7.50 per
share
(unaudited).... -- --
Pro forma effect
of conversion
of redeemable
convertible
preferred stock
and convertible
preferred stock
into common
stock
(unaudited).... (1,332,127) (7,379,984)
---------- -----------
Pro Forma
Balance, March
31, 1996
(Unaudited)..... -- $ --
========== ===========
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK NOTE
------------------------ --------------------- RECEIVABLE TOTAL
NUMBER NUMBER ADDITIONAL FROM STOCKHOLDERS'
OF $1.00 OF $.001 PAID-IN EXECUTIVE DEFERRED ACCUMULATED EQUITY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL OFFICER COMPENSATION DEFICIT (DEFICIT)
----------- ------------ ----------- --------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance
of stock at
inception at
$.0015 per
share........... -- $ -- 7,933,333 $ 7,933 $ 3,967 $ -- $ -- $ -- $ 11,900
Contribution
from
stockholders
for purchase of
Series A
preferred
stock.......... -- -- -- -- 300,000 -- -- -- 300,000
Net loss........ -- -- -- -- -- -- -- (1,180,276) (1,180,276)
----------- ------------ ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance, December
31, 1994........ -- -- 7,933,333 7,933 303,967 -- -- (1,180,276) (868,376)
Issuance of
common stock at
$.0015 per
share.......... -- -- 66,667 67 33 -- -- -- 100
Issuance of
Series A
preferred stock
at $1.20 per
share.......... 250,000 250,000 -- -- (250,000) -- -- -- --
Conversion of
Series A
preferred stock
into common
stock.......... (250,000) (250,000) 1,666,667 1,667 248,333 -- -- -- --
Conversion of
long-term debt
to stockholders
into common
stock at $.66
per share...... -- -- 1,136,363 1,136 748,864 -- -- -- 750,000
Deferred
compensation
related to
grant of stock
options........ -- -- -- -- 179,400 -- (179,400) -- --
Compensation
expense related
to stock
options........ -- -- -- -- -- -- 12,806 -- 12,806
Net loss........ -- -- -- -- -- -- -- (2,698,448) (2,698,448)
----------- ------------ ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance, December
31, 1995........ -- -- 10,803,030 10,803 1,230,597 -- (166,594) (3,878,724) (2,803,918)
Issuance of
Series B
redeemable
convertible
preferred stock
at $5.54 per
share, net of
issuance costs
of $600,000.... -- -- -- -- (600,000) -- -- -- (600,000)
Compensation
expense to
executive
officer........ -- -- -- -- 7,515,000 -- -- -- 7,515,000
Issuance of note
receivable from
executive
officer........ -- -- -- -- -- (2,560,000) -- -- (2,560,000)
Compensation
expense related
to stock
options........ -- -- -- -- -- -- 31,114 -- 31,114
Net loss........ -- -- -- -- -- -- -- (8,514,840) (8,514,840)
----------- ------------ ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance,
March 31, 1996
(Unaudited)..... -- -- 10,803,030 10,803 8,145,597 (2,560,000) (135,480) (12,393,564) (6,932,644)
Pro forma effect
of issuance of
Series C
convertible
preferred stock
at $5.00 per
share, net of
issuance costs
of $30,000
(unaudited).... 1,200,000 1,200,000 -- -- 4,770,000 -- -- -- 5,970,000
Pro forma effect
of repurchase
and retirement
of common stock
at $7.50 per
share
(unaudited).... -- -- (800,000) (800) (5,999,200) -- -- -- (6,000,000)
Pro forma effect
of conversion
of redeemable
convertible
preferred stock
and convertible
preferred stock
into common
stock
(unaudited).... (1,200,000) (1,200,000) 1,688,074 1,688 8,578,296 -- -- -- 7,379,984
----------- ------------ ----------- --------- ------------ ------------ ------------ ------------- -------------
Pro Forma
Balance, March
31, 1996
(Unaudited)..... -- $ -- 11,691,104 $11,691 $15,494,693 $(2,560,000) $(135,480) $(12,393,564) $ 417,340
=========== ============ =========== ========= ============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ONEWAVE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD FROM INCEPTION YEAR ENDED MARCH 31,
(JANUARY 19, 1994) TO DECEMBER 31, ----------------------
DECEMBER 31, 1994 1995 1995 1996
--------------------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operat-
ing Activities:
Net loss.............. $(1,180,276) $(2,698,448) $(290,096) $(8,514,840)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities--
Depreciation and
amortization of
property and
equipment.......... 12,680 50,438 6,413 52,365
Compensation expense
to executive
officer............ -- -- -- 7,515,000
Compensation expense
related to stock
options............ -- 12,806 -- 31,114
Changes in operating
assets and
liabilities--
Accounts receiv-
able............. -- (1,908,541) (224,305) 133,342
Inventories....... -- (292,000) -- 65,000
Prepaid expenses
and other current
assets........... -- (157,333) -- (415,996)
Due from affili-
ates............. -- -- -- (168,793)
Accounts payable.. 275,000 300,575 (42,846) 1,577,497
Due to affili-
ates............. 656,844 2,281,242 463,167 (2,384,784)
Accrued expenses.. -- 637,613 104,126 269,783
Deferred reve-
nues............. -- 278,572 -- 38,849
----------- ----------- --------- -----------
Net cash provided
by (used in)
operating
activities...... (235,752) (1,495,076) 16,459 (1,801,463)
----------- ----------- --------- -----------
Cash Flows from Invest-
ing Activities:
Purchases of property
and equipment........ (76,078) (150,472) -- (1,261,016)
----------- ----------- --------- -----------
Net cash used in
investing
activities...... (76,078) (150,472) -- (1,261,016)
----------- ----------- --------- -----------
Cash Flows from Financ-
ing Activities:
Proceeds from (pay-
ments on) long-term
debt to stockhold-
ers.................. -- 1,750,000 -- (1,000,000)
Proceeds from secured
note payable to a
bank................. -- -- -- 2,000,000
Net proceeds from
issuance of preferred
stock................ 300,000 -- -- 6,779,984
Proceeds from issuance
of common stock...... 11,900 100 100 --
----------- ----------- --------- -----------
Net cash provided
by financing
activities...... 311,900 1,750,100 100 7,779,984
----------- ----------- --------- -----------
Net Increase in Cash
and Cash Equivalents.. 70 104,552 16,559 4,717,505
Cash and Cash Equiva-
lents, beginning of
period................ -- 70 70 104,622
----------- ----------- --------- -----------
Cash and Cash Equiva-
lents, end of period.. $ 70 $ 104,622 $ 16,629 $ 4,822,127
=========== =========== ========= ===========
Supplemental Disclosure
of Cash Flow Informa-
tion:
Cash paid during the
period for interest... $ -- $ 25,843 $ -- $ 13,336
=========== =========== ========= ===========
Supplemental Disclosure
of Noncash Financing
Activities:
Conversion of long-
term debt to stock-
holders into common
stock................ $ -- $ 750,000 $ -- $ --
=========== =========== ========= ===========
Issuance of note re-
ceivable from execu-
tive officer......... $ -- $ -- $ -- $ 2,560,000
=========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1)OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
OneWave, Inc. (the Company) was incorporated in Delaware (under the
name Object Power, Incorporated) and commenced operations on January
19, 1994 and changed its name to Business@Web, Inc. in February 1996
and to OneWave, Inc. in June 1996. The Company is a provider of "Web-
enabled" software which allows the development and deployment of
mission-critical business applications across an organization's
disparate information technology systems and the extension of those
applications to Intranets and the Internet.
The Company is subject to risks common to rapidly growing, technology-
based companies, including rapid technological change, the need to
raise equity capital, competition from substitute products and larger
companies, and the successful development and marketing of commercial
products and services. At March 31, 1996, the Company had cash and cash
equivalents of approximately $4,822,000 and a working capital deficit
of approximately $925,000. Based upon its current operating plan, the
Company believes that it had sufficient capital resources on hand at
March 31,1996 to sustain operations through December 31, 1996. In
addition, in the event that the proposed initial public offering is not
consummated, certain stockholders have committed to provide the
necessary funding to allow the Company to operate through December 31,
1996 if the existing capital resources are not sufficient to fund the
Company's operations.
(b) Interim Financial Statements
The accompanying balance sheet as of March 31, 1996, the statements of
operations and cash flows for the three months ended March 31, 1995 and
1996, and the statement of redeemable convertible preferred stock and
stockholders' equity (deficit) for the three months ended March 31,
1996 are unaudited, but, in the opinion of management, have been
prepared on a basis substantially consistent with the audited financial
statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results
of these interim periods. The results of the three months ended March
31, 1996 are not necessarily indicative of the results to be expected
for the year ended December 31, 1996.
(c) Unaudited Pro Forma Presentation
The unaudited pro forma balance sheet and unaudited statement of
redeemable convertible preferred stock and stockholders' equity
(deficit) as of March 31, 1996 reflect (i) the issuance of 1,200,000
shares of Series C convertible preferred stock at $5.00 per share to
new stockholders for net proceeds of $5,970,000; (ii) the repurchase
and retirement of 800,000 shares of common stock from existing
stockholders at $7.50 per share, for an aggregate cost of $6,000,000;
and (iii) the automatic conversion of all outstanding shares of
Series B redeemable convertible preferred stock and Series C
convertible preferred stock into an aggregate of 1,688,074 shares of
common stock, upon the closing of the Company's proposed initial public
offering.
(d)Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), Software Revenue
Recognition. The Company generates software and maintenance revenues
from licensing the rights to use its software products and the resale
of
F-7
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d)Revenue Recognition (Continued)
software products licensed from a related party (see Note 7(b)). The
Company also generates service revenues from the sale of consulting and
education services.
Revenues from software license fees are recognized upon delivery, net
of estimated returns, provided there are no significant postdelivery
obligations, and payment is due within one year and is probable of
collection. If acceptance is required, software license revenues are
recognized upon customer acceptance. Fees for consulting and education
services are recognized upon customer acceptance or over the period in
which services are provided if customer acceptance is not required and
the revenues are fixed and determinable. Maintenance revenues are
deferred at the time of software license revenue recognition and are
recognized ratably over the term of the support period, which is
typically one year.
Deferred revenues primarily relate to prepaid maintenance fees.
Cost of software license and maintenance revenues consists of the cost
of software and maintenance purchased for resale from a related party;
distribution costs; and support personnel costs. Cost of consulting and
education services consists primarily of consulting and support
personnel salaries and related costs and fees to third party service
providers.
(e)Cash and Cash Equivalents
The Company classifies all short-term, highly liquid investments with
original maturities at purchase of three months or less as cash
equivalents. The Company accounts for its investments in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under
SFAS No. 115, the Company's cash equivalents are classified as held-to-
maturity securities and recorded at amortized cost. At March 31, 1996,
cash equivalents consisted of an overnight repurchase agreement with a
bank.
(f)Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization expense is computed using the straight-line method over
the estimated useful lives of the assets (three to five years).
(g)Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Software To
Be Sold, Leased or Otherwise Marketed, the Company has evaluated the
establishment of technological feasibility of its various products
during the development phase. Due to the dynamic changes in the market,
the Company has concluded that it cannot determine technological
feasibility until a fully functional working model is complete. The
time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product
release is very short, and consequently, the amounts that could be
capitalized are not material to the Company's financial position or
results of operations. In addition, the Company believes that the
estimated useful life of any potential product is uncertain due to the
rapid
F-8
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g)Research and Development and Software Development Costs (Continued)
technological change in the industry. Therefore, the Company charges
all research and development expenses to operations in the period
incurred. Included in research and development expenses for the period
from inception (January 19, 1994) to December 31, 1994 and the year
ended December 31, 1995 is $350,000 and $2,550,000, respectively,
relating to purchases of technology, of which $2,200,000 was purchased
from a related party in 1995 (see Note 7(b)).
(h)Inventories
Inventories are stated at the lower of cost or market and consist of
purchased software products of a related party held for resale. (See
Note 7(b))
(i)Postretirement Benefits
The Company has no obligations for postretirement benefits.
(j)Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any significant
off-balance-sheet and credit risk concentrations. Financial instruments
that potentially subject the Company to concentrations of credit risk
are accounts receivable. Concentration of credit risk with respect to
accounts receivable is limited to two customers that accounted for 21%
and 10%, respectively, of total revenues in the year ended December 31,
1995. One of these customers accounted for approximately 14% of total
revenues for the three months ended March 31, 1996. In the year ended
December 31, 1995 and the three months ended March 31, 1996, sales
outside the United States accounted for approximately 17% and 11% of
total revenues, respectively. To reduce risk, the Company routinely
assesses the financial strength of its customers and, as a consequence,
believes that its accounts receivable credit risk exposure is limited.
The Company maintains an allowance for potential credit losses but has
not experienced any significant losses related to individual customers
or groups of customers in any particular industry or geographic area.
(k)Pro Forma Net Loss per Common and Common Equivalent Share
For the year ended December 31, 1995 and the three months ended March
31, 1996, pro forma net loss per common and common equivalent share is
computed by dividing the net loss by the pro forma weighted average
number of common and common equivalent shares outstanding during the
period, which consist of (i) the weighted average number of common
shares outstanding, (ii) the number of shares of common stock issuable
upon conversion of all outstanding shares of Series B redeemable
convertible preferred stock and Series C convertible preferred stock,
and (iii) stock options granted after March 31, 1995, which have been
reflected as outstanding for all periods presented using the treasury
stock method as required by the Securities and Exchange Commission.
Common stock equivalents issued in earlier periods have not been
included as their effect would be antidilutive. Historical net loss per
share data have not been presented, as such information is not
considered to be relevant or meaningful.
F-9
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l)Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(m)New Accounting Standard
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. The Company has
determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123.
The Company will be required to disclose the pro forma net income or
loss and per share amounts in the notes to the financial statements
using the fair-value-based method beginning in the year ending
December 31, 1996, with comparable disclosures for the year ended
December 31, 1995. The Company has not determined the impact of these
pro forma adjustments.
(n)Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, accounts receivable and long-term debt,
approximates their carrying value.
(2)BANK AGREEMENT
In February 1996, the Company entered into a financing agreement with a
bank. The agreement provides for a revolving line of credit, an equipment
line of credit and a secured term note. Borrowings under the revolving line
of credit are limited to the lesser of $2,500,000 or 80% of qualified
accounts receivable and bear interest at either the bank's prime rate plus
1%, or LIBOR. Borrowings under the equipment line are limited to $500,000
for the purchase of new equipment. Advances under the equipment line of
credit will be repaid over a three-year period. Borrowings under the
equipment line bear interest at either the bank's cost of funds plus 3 1/2%
or the bank's prime rate plus 1 1/2%. The secured term note of $2,000,000
was used for the repayment of the amount payable for purchased technology
(see Note 7(b)). In March 1996, the Company borrowed the $2,000,000 under
the secured term note. The secured term note is repayable on September 30,
1996. Borrowings under the secured term note bear interest at the bank's
prime rate plus 1%. The revolving line of credit and equipment line of
credit expire on June 30, 1997. The financing agreement contains certain
restrictive covenants, including among other items, minimum levels of
tangible net worth. The agreement is collateralized by all assets of the
Company and is guaranteed by certain stockholders.
(3)LONG-TERM DEBT TO STOCKHOLDERS
In May 1995, the Company issued a $250,000 subordinated note payable to a
stockholder. The note bore interest at 6% per annum and was payable on
April 30, 2000.
In December 1995, the Company issued a $750,000 subordinated note payable
to a stockholder. The note bore interest at 9% per annum and was payable on
December 31, 2000.
Both notes were outstanding as of December 31, 1995 and were repaid in full
in March 1996.
F-10
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4)INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or
liability is measured by the enacted tax rates expected to be in effect
when the differences between the financial statement and tax bases of
assets and liabilities reverse.
As of December 31, 1995, the Company had available net operating loss
carryforwards of approximately $3,020,000 to reduce future federal and
state income taxes, if any. These carryforwards expire through 2010 and are
subject to review and possible adjustment by the Internal Revenue Service.
The Tax Reform Act of 1986 contains provisions that may limit the amount of
net operating loss carryforwards that the Company may utilize in any one
year in the event of certain cumulative changes in ownership over a three
year period in excess of 50%, as defined.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Net operating loss carryforwards........... $221,000 $1,208,000 $4,265,000
Other temporary differences................ 268,000 275,000 372,000
-------- ---------- ----------
489,000 1,483,000 4,637,000
Valuation allowance........................ (489,000) (1,483,000) (4,637,000)
-------- ---------- ----------
Net deferred tax asset..................... $ -- $ -- $ --
======== ========== ==========
</TABLE>
It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes, and the operating losses incurred to date, and believes that,
given the significance of this evidence, a full valuation reserve against
its deferred tax asset is required as of December 31, 1994 and 1995 and
March 31, 1996.
(5)REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March 1996, the Company authorized and issued 1,332,127 shares of Series
B redeemable convertible preferred stock (Series B Preferred Stock) at
$5.54 per share, less offering costs of $600,000 for net proceeds of
$6,779,984.
The Series B Preferred Stock has the following rights, preferences and
privileges:
Redemption
At any time after December 31, 2002, the holders of a majority of the
outstanding shares of Series B Preferred Stock may require the Company to
redeem all of the outstanding Series B Preferred Stock in three annual
installments of 33 1/3% per year.
The redemption price per share is $5.54 plus any accrued but unpaid
dividends.
F-11
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5)REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Conversion and Antidilution
The Series B Preferred Stock is convertible into common stock at a rate of
two shares of common stock for every three shares of preferred stock. The
conversion rate is adjustable for certain dilutive events, including the
issuance of shares below $15.375 in an initial public offering. The
conversion is at the option of a majority of the outstanding stockholders
but becomes automatic upon the closing of an initial public offering at a
per share price that is at least $12.375 per share and generates aggregate
proceeds to the Company of at least $15,000,000.
Voting Rights
The holders of the Series B Preferred Stock shall be entitled to vote on
all matters and shall be entitled to the number of votes equal to the
number of shares of common stock into which each share of the Series B
Preferred Stock could be converted.
Dividends
Dividends accrue on outstanding shares of Series B Preferred Stock at an
annual rate of $0.3324 per share. Additional dividends may be paid on the
Series B Preferred Stock when declared by the Board of Directors.
Liquidation Preference
The holders of the preferred stock have preference in the event of
liquidation or dissolution of the Company at a rate of $5.54 per share of
Series B Preferred Stock and thereafter participate with the holders of the
Series C Preferred Stock and common stock on a share for share basis in the
distribution of the remaining assets of the Company, as if there were no
Series C Preferred Stock liquidation preference.
(6)STOCKHOLDERS' EQUITY (DEFICIT)
(a) Authorized Capital Stock
As of March 31, 1996, the Company's authorized capital stock consisted
of 30,000,000 shares of common stock $.001, par value per share, and
3,000,000 of preferred stock, $1.00 par value per share. Of the
preferred stock 1,431,412 shares were designated Series B preferred
stock (Series B Preferred Stock) and 1,568,588 shares were
undesignated. In April 1996, the Company amended its Certificate of
Incorporation to decrease the number of designated shares of Series B
Preferred Stock to 1,332,127 shares, to decrease the number of
undesignated shares of preferred stock to 447,873 and to designate
1,220,000 shares for the issuance of Series C convertible preferred
stock (Series C Preferred Stock). All shares of preferred stock that
had been designated Series A convertible preferred stock had been
surrendered for conversion into common stock and retired.
F-12
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6)STOCKHOLDERS' DEFICIT (CONTINUED)
(a) Authorized Capital Stock (Continued)
On May 20, 1996, the Company's stockholders approved an increase in the
number of authorized shares of common stock to 50,000,000 shares, $.001
par value and authorized the issuance of 5,000,000 shares of $1.00 par
value preferred stock.
(b) Common Stock
In May 1995, the Company issued a convertible note payable to a
stockholder for $750,000. In accordance with the provisions of the note
payable agreement, the outstanding principal of the note was converted
into 1,136,362 shares of common stock in November 1995.
(c) Preferred Stock
In December 1994, certain stockholders contributed $300,000 to the
Company for the purchase of 250,000 shares of Series A convertible
preferred stock. The shares of Series A convertible preferred stock
were issued to the stockholders in February 1995 and were subsequently
converted to 1,666,667 shares of common stock in November 1995.
In April 1996, the Company issued 1,200,000 shares of Series C
Preferred Stock at a price of $5.00 per share, less offering costs of
30,000, for net proceeds of $5,970,000.
The Series C Preferred Stock has the following rights, preferences and
privileges:
Conversion and Antidilution
The Series C Preferred Stock is convertible into common stock at a rate
of two shares of common stock for every three shares of preferred
stock. The conversion rate is adjustable for certain dilutive events,
including the issuance of shares below the effective conversion price
of the preferred stock. The conversion is at the option of a majority
of the outstanding stockholders but becomes automatic upon the closing
of a public offering at a per share price that is at least $12.375 per
share and generates aggregate proceeds to the Company of at least
$15,000,000.
Voting Rights
The holders of the Series C Preferred Stock are entitled to vote on all
matters and shall be entitled to the number of votes equal to the
number of shares of common stock into which each share of the preferred
stock could be converted.
Liquidation Preference
The holders of the Series C Preferred Stock have preference in the
event of liquidation or dissolution of the Company at a rate of $5.00
per share of Series C Preferred Stock, payable only after the full
liquidation preference of the holders of Series B Preferred Stock has
been paid or reserved; thereafter the remaining assets of the Company
are to be distributed to the holders of Series C Preferred Stock and
common stock on a share for share basis.
F-13
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6)STOCKHOLDERS' DEFICIT (CONTINUED)
(d)Stock Split
In February 1995, the Company effected a 10-for-1 stock split of the
common stock in the form of a stock dividend. On May 20, 1996, the
Company effected a 2-for-3 reverse stock split. The accompanying
financial statements and notes have been retroactively adjusted to
reflect the stock splits.
(e)1995 Stock Plan
The Company has a stock plan (the 1995 Plan) that provides for the
issuance of incentive stock options (ISOs), nonqualified stock options
and shares of common stock. Under the terms of the 1995 Plan,
nonqualified options may be granted at a price not less than the lesser
of (i) the book value per share of common stock as of the end of the
fiscal year of the Company immediately preceding the date of such
grant, or (ii) 50% of the fair market value per share of common stock
on the date of such grant and, in the case of ISOs, not less than the
fair market value per share at the date of grant. Options generally
vest over a four-year period, commencing one year after the date of the
grant. In 1995, the Company granted an option to purchase 40,000 shares
of common stock to an employee at an exercise price of $.015 per share.
The difference between the estimated fair market value of the common
stock and the aggregate exercise price of $179,400 will be charged to
operations as these options vest. All other options have been granted
at exercise prices that represent the estimated fair market value of
the common stock as determined by the Company's Board of Directors at
the time of the grant and accordingly the Company has not recorded any
compensation on these option grants. In March 1996, the Company granted
options to purchase 366,666 shares of common stock at $7.50 per share
to several key executives which vest ratably over a 6-year period and
are subject to acceleration based on the Company achieving certain
levels of market capitalization. In addition, the vesting of options to
purchase 133,333 shares of Common Stock held by an officer of the
Company will accelerate upon the effectiveness of the Company's
proposed initial public offering.
The following table summarizes incentive and nonqualified stock option
activity under the 1995 Plan:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Balance, December 31, 1994......................... -- $ --
Options granted.................................... 1,219,533 .015--4.50
--------- -----------
Balance, December 31, 1995......................... 1,219,533 .015--4.50
Options granted.................................... 1,281,333 7.50
Options canceled................................... (23,400) 1.50--4.50
--------- -----------
Balance, March 31, 1996............................ 2,477,467 $.015--7.50
========= ===========
Exercisable, March 31, 1996........................ 199,603 $.015--7.50
========= ===========
</TABLE>
In April 1996, an officer of the Company exercised an option to
purchase 66,666 shares at a price of $1.50 per share.
(f) Warrants
In February 1996, the Company issued a warrant to purchase 23,333
shares of common stock at a price of $8.31 per share in connection with
the Company's financing agreement as discussed in Note 2.
F-14
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6)STOCKHOLDERS' DEFICIT (CONTINUED)
(g)Employee Stock Purchase Plan
On May 17, 1996, the stockholders approved the Company's Employee Stock
Purchase Plan (ESPP). The Company has reserved 150,000 shares for
issuance under the ESPP. The ESPP permits eligible employees of the
Company to purchase common stock through payroll deductions of up to
10% of their total compensation. The price of common stock purchased
under the ESPP will be 85% of the lower of the fair market value of the
common stock on the first or last day of each six-month purchase
period.
(h)1996 Stock Plan
On May 17, 1996, the Board of Directors and stockholders approved the
Company's 1996 Stock Plan (the 1996 Plan). Each nonemployee director
will receive an option grant to purchase 7,000 shares of common stock,
at the then fair market value, when such director is first appointed or
elected to the Board of Directors. In addition, each nonemployee
director will receive an option grant to purchase 1,700 shares of
common stock, at the then fair market value, on each June 30 that such
director is a member of the Board of Directors. The Company has
reserved 4,150,000 shares of Common Stock for issuance under the 1995
Plan and the 1996 Plan. Subsequent to March 31, 1996, the Company
granted options to purchase 951,800 and 667 shares at $12.00 and $7.50
per share, respectively, under the 1996 Plan.
(7)RELATED-PARTY TRANSACTIONS
(a)Cambridge Technology Group, Inc.
During 1994, 1995 and the first two months of 1996, the Company shared
office space with Cambridge Technology Group, Inc. (CTGroup), a company
under the control of a significant stockholder of the Company. CTGroup
charged the Company for a portion of certain common costs incurred in
addition to any specific items paid by CTGroup on the Company's behalf.
These costs were allocated based on head count or actual cost incurred.
During the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, CTGroup charged the Company $956,844,
$1,013,142, $271,702 and $117,442, respectively, for these costs.
During 1995, the Company sold software and services to CTGroup
amounting to $104,993. In addition, during 1995 and the three months
ended March 31, 1996, the Company fulfilled certain obligations of
CTGroup under education, service and product contracts, including the
resale of software discussed in Note 7(b), for which the Company
recorded revenues of $2,403,235 and $100,000, respectively.
During the three months ended March 31, 1996, the Company purchased
$125,000 of computer equipment from CTGroup.
In July 1995, the Company gave an unlimited guarantee of all of
CTGroup's obligations under its credit facility. The Company's
obligations under the unlimited guaranty were terminated in February
1996.
Amounts (due to) from CTGroup for these costs were $(656,844),
$(169,939) and $218,793 at December 31, 1994 and 1995 and March 31,
1996, respectively.
The Company believes that the transactions described above were at
terms no less favorable than the Company would have obtained from
unaffiliated third parties.
F-15
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7)RELATED-PARTY TRANSACTIONS (CONTINUED)
(b)Open Environment Corporation
In 1995, the Company entered into a reseller agreement with Open
Environment Corporation (OEC) to license software developed by OEC, an
entity that was founded by significant stockholders of the Company.
These stockholders continue to hold an ownership interest in OEC at
December 31, 1995 and March 31, 1996. In addition, an executive of the
Company serves on OEC's Board of Directors. During the year ended
December 31, 1995 and the three months ended March 31, 1996, the
Company generated software license and maintenance revenues of
$1,111,992 and $222,617, respectively, from the resale of OEC products
and services. Total expenses relating to purchases of OEC software and
OEC software bundled with the Company's product and related maintenance
contracts totaled $716,392 and $288,980, in the year ended December 31,
1995 and the three months ended March 31, 1996, respectively. In
addition, the Company subcontracted consulting services from OEC
totaling $398,271 in 1995.
On December 29, 1995, the Company and OEC entered into a $2,200,000 OEM
source code license agreement which will provide the Company with a
certain source code developed by OEC. At the time of the purchase, the
Company intended to embed this source code into certain of the
Company's future software products which are currently under
development. In accordance with SFAS No. 86, the Company has charged
the cost of this source code to research and development expenses in
the year ended December 31, 1995.
On October 31, 1995, the Company sold to OEC the source code for
certain software technology relating to the customization and
enhancement of SAP software products. OEC paid the Company an initial
software license fee of $500,000 under the agreement by which the
source code was transferred, and agreed to pay the Company a royalty in
an amount equal to 20% of the first $1,000,000 of sales revenue
recognized by OEC related to products incorporating components of the
transferred source code and 10% of such sales revenues in excess of
$1,000,000. OEC's royalty obligations expire on the earlier of October
1, 1997 or the date on which OEC's aggregate sales revenues related to
products incorporating components of the transferred source code exceed
$3,000,000. This amount is included in 1995 software license revenues.
To date the Company has not received any royalties under this
arrangement.
The total accounts payable to OEC at December 31, 1995 and March 31,
1996 was $2,490,133 and $375,288, respectively.
The Company believes that the transactions described above were at
terms no less favorable than the Company would have obtained from
unaffiliated third parties.
(c)International Integration, Incorporated
The Company subcontracted consulting services from International
Integration, Incorporated, a company controlled by a significant
stockholder of the Company. During 1995, these consulting services
totaled $662,000 and are included in cost of revenues. At December 31,
1995 and March 31, 1996, the Company had outstanding accounts payable
to this entity of $274,444 and $174,444, respectively.
The Company believes that the transactions described above were at
terms no less favorable than the Company would have obtained from
unaffiliated third parties.
F-16
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8)EMPLOYEE BENEFIT PLAN
The Company's employees participate in an employee benefit plan under
Section 401(k) of the Internal Revenue Code, sponsored by CTGroup. The plan
is available to substantially all employees. The plan allows for employees
to make contributions up to a specified percentage of their compensation.
For all participants with greater than one year of continuous service, the
Company contributes 25% of the first 6% of employees' pay contributed to
the plan. The Company contributed $1,851 during the year ended December 31,
1995 and $1,741 during the three months ended March 31, 1996.
(9)COMMITMENTS
In March 1996, the Company executed a noncancelable operating lease for
office space. Future minimum rental payments for this lease are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 310,000
1997........................................................... 463,000
1998........................................................... 463,000
1999........................................................... 463,000
2000........................................................... 463,000
Thereafter..................................................... 77,000
----------
Total.......................................................... $2,239,000
==========
</TABLE>
(10)COMPENSATION TO EXECUTIVE OFFICER
In January 1996, a significant stockholder of the Company entered into an
agreement with the Company's Chief Executive Officer (CEO) under which the
CEO purchased 960,000 shares of the Company's common stock held by the
stockholder at a price of $1.50 per share. To fund the purchase, the CEO
entered into a $1,440,000 note payable agreement with the stockholder. The
note payable accrues interest at 6.56% per annum and provides for full
recourse against the CEO. At the time of this sale transaction, the fair
market value of the Company's common stock was $7.50 per share. The Company
has recorded the aggregate difference between the fair market value of the
common stock and the price paid by the CEO, $5,760,000, in compensation to
executive officer in the accompanying statement of operations for the three
months ended March 31, 1996. In connection with this purchase, the Company
agreed to loan the CEO $2,560,000 which represents the CEO's estimated tax
liability resulting from the compensation on the purchase of shares at less
than fair market value. The Company has recorded this commitment as an
accrued expense and a corresponding note receivable from executive officer
in the accompanying balance sheet as of March 31, 1996. The Company expects
to fund this commitment in the first quarter of 1997. Borrowings under the
loan will be secured by shares of Common Stock purchased, will accrue
interest at 6.21% per annum and will be due and payable no later than
December 31, 2001.
In connection with the employment of the CEO in January 1996, the CEO
received a nonrefundable $1,000,000 cash payment from a significant
stockholder. The Company believes the nature of this payment to be a sign-
on bonus. Accordingly, the Company has recorded a $1,000,000 charge to
compensation to executive officer in the accompanying statement of
operations for the three months ended March 31, 1996 with a corresponding
contribution to additional paid-in capital.
F-17
<PAGE>
ONEWAVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10)COMPENSATION TO EXECUTIVE OFFICER (CONTINUED)
Also in connection with the employment of the CEO, that significant
stockholder agreed to reimburse the CEO for any potential decline in value
(from January 1996 to the date of exercise) for certain stock appreciation
rights held by the CEO in an unrelated company. At the time this agreement
was entered into, the unrealized appreciation on the stock appreciation
rights was approximately $4,400,000. The stock appreciation rights are
exercisable by the CEO in September 1996. At March 31, 1996, the value of
the stock of the unrelated company had declined to the extent that if the
stock rights were exercised on that date, the stockholder would be required
to reimburse the CEO approximately $755,000 for the decline in
appreciation. Accordingly, the Company has recorded a $755,000 charge to
compensation to executive officer in the accompanying statement of
operations for the three months ended March 31, 1996, with a corresponding
contribution to additional paid-in capital. To the extent that the value of
the stock fluctuates below the value agreed to by the CEO and the
stockholder, the Company will continue to record charges or credits to the
accompanying statement of operations until the stock appreciation right is
exercised by the CEO.
F-18
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co. and Hambrecht & Quist LLC are acting as representatives, has
severally agreed to purchase from the Company and the Selling Stockholders,
the respective number of shares of Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co.................................................. 1,250,000
Hambrecht & Quist LLC................................................ 1,250,000
Alex. Brown & Sons Incorporated...................................... 250,000
Furman Selz LLC...................................................... 250,000
Montgomery Securities................................................ 250,000
Robertson, Stephens & Company LLC.................................... 250,000
Wessels, Arnold & Henderson, l.l.c................................... 250,000
---------
Total............................................................... 3,750,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $0.66 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 562,500
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,750,000 shares of Common
Stock offered.
The Company has agreed that, subject to certain exceptions, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, it will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than pursuant to employee stock option or purchase plans
existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding on the date of this Prospectus) which are substantially
similar to the shares of Common Stock or which are convertible or exchangeable
into securities which are substantially similar to the shares of Common Stock
without the prior written consent of the representatives, except for the
shares of Common Stock offered in connection with the offering. The Company's
executive officers and directors and certain securityholders of the Company
(including the Selling Stockholders), who in the aggregate will hold
approximately 10,946,999 shares of Common Stock after completion of the
offering, have agreed not to offer, sell, contract to sell or otherwise
dispose of or agree to dispose of any shares of Common Stock or substantially
similar securities owned beneficially by them for a period of 180 days after
the date of this Prospectus, without the prior written consent of the
representatives, except for the shares of Common Stock offered hereby. See
"Shares Eligible for Future Sale".
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
U-1
<PAGE>
Under Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), the Company may be deemed an affiliate
of Goldman, Sachs & Co. This offering is being conducted in accordance with
Rule 2720, which provides that, among other things, when an NASD member
participates in the underwriting of an affiliate's equity securities, the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards. In accordance
with this requirement, Hambrecht & Quist LLC has served in such role and has
recommended a price in compliance with the requirements of Rule 2720. In its
role as qualified independent underwriter, Hambrecht & Quist LLC has performed
due diligence investigations and reviewed and participated in the preparation
of this Prospectus and the Registration Statement of which this Prospectus
forms a part. In addition, the Underwriters may not confirm sales to any
discretionary account without the prior specific written approval of the
customer.
In April 1996, an affiliate of Alex. Brown & Sons Incorporated, an
Underwriter in this offering ("Alex. Brown"), purchased 100,000 shares of the
Company's Series C Preferred Stock for a purchase price of $500,000. The
shares received by the affiliate of Alex. Brown may be deemed to be
underwriters' compensation to Alex. Brown in connection with this offering,
and, in accordance with the Rules of the NASD, the affiliate of Alex. Brown
has agreed not to sell, transfer, assign or hypothecate such securities for
one year following the effective date of this offering.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price was negotiated among the Company, the
Selling Stockholders and the representatives. Among the factors considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "OWAV".
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 38
Principal and Selling Stockholders........................................ 45
Certain Transactions...................................................... 47
Description of Capital Stock.............................................. 50
Shares Eligible for Future Sale........................................... 54
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
THROUGH AND INCLUDING JULY 27, 1996 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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3,750,000 SHARES
ONEWAVE, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
------------------
PROSPECTUS
------------------
GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST
REPRESENTATIVES OF THE UNDERWRITERS
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