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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20789
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ONEWAVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3249618
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE ARSENAL MARKETPLACE, WATERTOWN, MA 02172
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 923-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 26, 1997 was $11,232,651.
The number of shares of the registrant's Common Stock, par value $.001 per
share, outstanding on March 26, 1997 was 14,991,878.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement dated April 7, 1997 for
the Annual Meeting of Stockholders to be held on May 7, 1997 is incorporated
by reference into Part III of this Report on Form 10-K.
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STATEMENTS MADE OR INCORPORATED INTO THIS FORM 10-K INCLUDE A NUMBER OF
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. FORWARD
LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS OF
SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEFS, EXPECTIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE
SECTION ENTITLED "CERTAIN FACTORS THAT MIGHT AFFECT RESULTS" ON PAGE 16 OF
THIS FORM 10-K.
PART I
ITEM 1. BUSINESS.
OneWave, Inc. ("OneWave" or the "Company"), a Delaware corporation, was
incorporated in January 1994. OneWave(TM) is an Internet software and services
company dedicated to unifying disparate information systems and building
integrated business solutions. OneWave technology serves as a common software
environment for accessing existing mainframes, databases and client/server
systems, and extending new business processes across the traditional
boundaries of the enterprise. OneWave utilizes and supports industry standards
and emerging technologies, and works closely with top consulting firms and
technology providers to ensure expertise in areas critical to a complete
solution.
The Company's products are designed for high-volume and real-time
performance capabilities 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 and services can 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 light of OneWave's experience in the marketplace during the second half
of 1996, the Company has recently adjusted its sales and marketing approach,
offering to provide its customers with a combination of consulting services
and software necessary to deliver a comprehensive solution which addresses the
customers' business problems. The Company believes that, in the long term,
this change in approach will result in increased market penetration. However,
revenues will likely be reduced in the short term as the Company makes its
transition to the new sales and marketing approach.
BUSINESS 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. 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 for the next generation of IT solutions.
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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 islands of information which are inaccessible from
certain systems 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
organizations will realize significant gains by deploying "Intranets", which
are internal networks that utilize the same 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.
The Company believes that 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 utilizing Internet technologies.
THE ONEWAVE SOLUTIONS
The Company delivers solutions which leverage OneWave products and which
enable organizations to integrate their existing information systems and
develop and deploy business applications which take advantage of the low cost,
ease-of-use and flexibility of Internet technologies. The Company's products
and services allow organizations to reach beyond the enterprise and conduct
new, dynamic and interactive transactions with key audiences in the extended
enterprise.
. Services: The Company now offers customers a phased, fixed-cost/fixed-
schedule approach to the delivery of a complete software solution to solve
their business problems. In the first phase, OneWave will work closely with
the customer on a limited "project scoping engagement" or "Internet Solution
Workshop", in which OneWave will become familiar with the customer's
challenges, and the customer will become educated on the OneWave architecture
and approach to solving business problems. The next phases in the solutions
delivery process are "design", "development" and "deployment". At each phase,
OneWave will make a firm, fixed schedule proposal for the next phase, and an
estimate of the likely costs for the next succeeding phase. The Company
expects that future software revenue will generally be recognized at the
deployment phase of solutions. This services-led approach to product sales is
expected to result in services revenue becoming the predominant component of
total revenue.
. Technology: The Company's solutions are based on 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 processed by the OneWave
Client and the server-based components are run using the OneWave Application
Integration Server ("AIS") product (formerly named "Openscape Distributed Web
Engine"). Components can be partitioned, or split apart, placing the
appropriate application logic on the server or client. The Company has also
enhanced its products to support applets developed in Java.
OneWave's distributed component architecture allows many disparate back-end
information systems to be "plugged-in" to the same application framework. For
example, OneWave products allow development of an
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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 AIS, which
regulates, manages and secures all traffic from the clients. The OneWave
Extensions ("Extensions") provide pre-configured connectivity to each back-end
system accessed by the AIS. The particular software required to integrate with
a target back-end IT system need only reside on the server with the Extension,
which simplifies licensing and management, ensures version control, and
eliminates the need for installation of such integration software on the
client machine. OneWave Extensions also may be used to support access to data
or applications which are compliant with connectivity standards such as
Microsoft's OLE (Object Linking and Embedding) and the Open Software
Foundation's DCE (Distributed Computing Environment). The Company intends to
develop and release additional Extensions to address its Customers' demand for
connectivity to additional systems, where the magnitude of such demand
justifies the resource expenditure required.
THE ONEWAVE STRATEGY
OneWave's business strategy is based on the following key elements:
Services-Led Approach to Sales. The Company's sales strategy has evolved
from a software-led model to a services-led model since the OneWave AIS was
released in June 1996. The AIS is an integration environment, and therefore
its capabilities may only be demonstrated in conjunction with application
software. As a result, the Company introduced "WaveApps", a set of limited
application programs. WaveApps were used by the Company as a product
demonstration vehicle, and were also offered to customers at no charge as
"starter kits" which could be customized and implemented by the customer.
OneWave also experienced demand for its services, and believes that the
delivery of services together with software can result in more successful
customer implementations of the Company's products. As a result, the Company
has introduced a "Proof of Concept" package, consisting of development
software and consulting services necessary to enable the customer to create a
small scale functioning solution, with the expectation that a limited but
successful experience would lead to future product sales. Management believes
that, over the long term, the Company could achieve greater success by
providing additional services along with its products. During the first
quarter of 1997, the Company adjusted its direct sales model by changing its
focus to delivering complete solutions, comprised of both products and
services. The Company believes that short term revenues will likely be reduced
while the Company makes its transition to a new sales approach and seeks to
develop its business under this new model.
Release New Products to Integrate Emerging Technologies. The Company's
products may be used to access a wide variety of environments and
applications. Due to the modular nature of the Company's core technology, the
Company can rapidly develop Extensions, specific add-on products which enable
communication with proprietary environments, such as SAP R/3 and PeopleSoft,
as appropriate, and integrate new capabilities such as improved security
mechanisms and Java applets. The Company intends to release new products based
upon input from significant customers and alliance partners.
Leverage Relationships with Technology Companies and Customers. 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
and large customers. To this end, the Company has developed relationships with
third-party systems integrators such as Hewlett-Packard Company's Professional
Services Organization and members of the "big six" accounting firms, ERP
software application vendors such as PeopleSoft, Inc., and other technology
providers such as NEC Corporation and Sterling Commerce, Inc. These strategic
relationships should provide the Company with the opportunity to market its
products to a large installed base of organizations in need of Web-enabling
and integration technology 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
the services-led model described above. The Company also intends to develop
relationships with technology companies that wish to integrate the OneWave
solution with their products. As an example of success
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in this area, Sterling Commerce, Inc., a supplier of EDI software, has
released "WebLink", an offering which features OneWave products integrated
with the Sterling GENTRAN product as a combined offering which enables EDI
trading partners to engage in EDI transactions over the Web. In addition, the
Company and NEC Corporation have integrated NEC's workflow product with the
AIS. The combined offering allows multiple applications and IT environments to
participate in integrated workflow processes over the Internet. Over time, the
Company plans to extend the depth and breadth of its market penetration by
augmenting its direct selling efforts and strategic relationships with
additional indirect distribution channels, including Value-Added Resellers
("VARs") and application vendors.
ONEWAVE PRODUCTS AND SERVICES
Deployment Products. The Company's 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. All of the products described below are currently available.
Application Integration Server. The OneWave AIS(TM) is a server-based
product that provides an environment for application integration. The AIS
manages all network communications in OneWave applications and facilitates the
appropriate levels of security for applications on the Internet. Because all
OneWave runtime clients access information via the AIS, third-party networking
or client software is only necessary on the application server, and not on
Internet client machines. Other key features of the AIS include: multi-
threaded operation for high-performance and scaleability; the ability to
facilitate communications encrypted using RSA Data Security, Inc. technology;
and the ability to support single log-on for systems which integrate multiple
enterprise applications and databases. The Company has also integrated NEC's
workflow product that plugs into the AIS; this integrated solution allows
multiple applications, platforms and organizations to participate in
integrated workflow processes over the Internet.
Client. The OneWave runtime Client (the "Client") is a freely distributable
runtime library that allows Intranet or Internet users to execute OneWave user
interfaces within leading Web browsers. The Client also allows OneWave visual
components to run in other desktop applications, such as Visual Basic and
Lotus Notes. In addition, the Client facilitates secure communications over
the Internet to and from OneWave visual components. Other key features of the
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 the AIS. OneWave's AIS also
supports Java applets.
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 products
described below are currently available.
OneWave Enterprise. OneWave Enterprise(TM) provides a single environment for
building all tiers of a distributed enterprise, Intranet or Internet business
application. OneWave Enterprise includes the Workbench, the Visual Component
Builder, the Extension for OLE Automation and the Extension for Open Database
Connectivity ("ODBC"). The Workbench stores and manages 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 language which is compatible with Microsoft's
Visual Basic. 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
Extension for OLE Automation automatically imports function and interface
information from existing OLE Automation servers. The Extension for ODBC
provides graphical
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database browsing and query-building capabilities for quickly exposing ODBC-
compliant data sources as logical components.
OneWave Extensions. OneWave Extensions(TM) communicate with targeted back-
end systems using each system's native protocols, while providing a single,
standard interface to the end-users of integrated OneWave business
applications. The following environments are currently accessible via
Extensions: Open Software Foundation's DCE, ODBC, OLE Automation, SAP R/3,
Borland's Entera and PeopleSoft systems.
Application Products
WaveApps. During the second half of 1996, the Company developed limited
application products used for demonstrating the capabilities of its
development tools and the AIS. These "WaveApps" are OneWave visual components
designed to meet the needs of customers who use the SAP or Peoplesoft ERP
systems. WaveApps provide customers with a "starter kit" of functionality
which may be further tailored to meet their needs. The Company offers the
WaveApps as part of the standard OneWave development product bundle.
Product 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 provides technical support to customers, distributors and strategic
partners throughout the implementation cycle of a OneWave solution as well as
on an ongoing 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, and
Internet access to product information. The Company offers maintenance support
services for an annual fee based upon the Company's then-current list price
license fee of the licensed products. In addition, this maintenance fee
entitles customers to receive software enhancements to their licensed versions
of software.
Consulting Services
The Company's consulting services are designed to deliver, and to assist the
customer in creating complete, comprehensive, effective business solutions
which utilize the Company's products and technology. The Company offers its
services on a fixed-price/fixed-schedule basis. The range of services offered
includes Internet Solutions Workshops ("ISWs"), scoping, design, development,
and implementation of the Company's products and comprehensive solutions. An
important aspect of the Company's consulting service strategy is to leverage
the skills and market reach of the Company's alliance partners. OneWave
believes that its services can play a significant role in generating demand
for its products by demonstrating their capabilities and advantages in the
context of the delivery of business solutions.
STRATEGIC RELATIONSHIPS
The Company is actively developing a network of strategic relationships 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 will allow it to leverage the broad expertise of
third party integrators and to extend the Company's market reach. OneWave, in
turn, offers these systems integrators a focused expertise in the integration
of software application systems and the extension of those systems to the
customer's extended enterprise. For example, OneWave has worked with Hewlett-
Packard Company's Professional Services Organization to create a vertical
retail application for use by Nobody Beats The Wiz, Inc. using OneWave's
technology.
The Company is actively seeking VAR or OEM relationships with software
application vendors. For instance, the Company has worked with Sterling
Commerce to develop and release a combined product offering that enables EDI
trading partners to effect EDI transactions over the Web, using OneWave's AIS
and Sterling's GENTRAN products. In addition, NEC and OneWave have integrated
OneWave's products with NEC's workflow product, and the resulting Web-enabled
Workflow product was released during 1996.
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CUSTOMERS AND MARKETS
The Company has sold software, consulting services and education services to
customers in a wide variety of industries. In 1996, one strategic alliance
partner (Hewlett-Packard Company) accounted for 24% of the Company's revenue,
as a result of a variety of transactions involving the utilization of OneWave
software products and services.
RESEARCH AND DEVELOPMENT
The Company believes that its future growth will depend, in part, on its
ability to enhance its OneWave product line, develop new products, maintain
technological leadership, and satisfy continually changing customer
requirements for Web-based applications. The Company's Engineering group is
responsible for product architecture, development, functionality, quality
assurance, and for compliance with emerging industry standards, additional
third-party application packages and leading database management systems.
OneWave intends to work with its larger customers and alliance partners to
develop and release new products which address validated business needs, and
which have the potential to address broad markets.
The Company has made substantial investments in product development and
technology integration. The OneWave product line has been developed primarily
by the Company's internal development staff. Certain technologies also have
been purchased and integrated into OneWave products. The Company's
expenditures for research and development during the 1994, 1995 and 1996
fiscal years were $894,000, $3,182,000 and $3,525,000, respectively.
During the second half of 1996, the Company extended the functionality of
its products, by adding support for UNIX server platforms, building an
additional Extension for PeopleSoft applications, and enabling its products to
accommodate Japanese character sets and to work in conjunction with Java
applets. The Company also created several "WaveApps", application "starter
kits" that provide customers with components developed for SAP and Peoplesoft
environments which have limited functionality, and which may be tailored and
enhanced to meet the customers' needs. 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 Technologies, Inc.,
Forte Software, Inc., NeXT Software, Inc., BEA Systems, Inc. and Gradient
Technologies, Inc.; established client/server tools and database vendors who
may transfer their technology to take advantage of the Internet, such as
Borland International, Inc., ParcPlace-Digitalk, Inc., Oracle Corporation,
Informix Software, Inc., Centura Software Corporation and Sybase, Inc.;
companies which develop electronic commerce and automated service software
products and services, such as Edify Corporation, Connect Inc., Sterling
Commerce, Inc., Harbinger Corporation, Open Market, Inc. and Premenos
Technology Corporation; major systems vendors such as Digital Equipment
Corporation, International Business Machines Corporation and Sun Microsystems,
Inc.; packaged application developers such as The Baan Company, Peoplesoft,
Inc., SAP America, Inc., Marcam Corporation, J.D. Edwards & Company, Inc., and
vendors such as NetDynamics, Inc. and HAHT Software, Inc. who offer solutions
to Web-enable those packaged applications; software industry leaders such as
Microsoft Corporation and Netscape Communications Corporation;
solutions/services companies such as Sapient Corporation and Cambridge
Technology Partners; and emerging alliances between industry participants such
as the alliances between Microsoft and SAP; Digital, MCI and Microsoft; GE and
Netscape; and Netscape, Oracle, IBM and Sun Microsystems.
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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, name recognition, or more extensive customer bases
that could be leveraged, thereby potentially reducing the Company's market
share. The Company expects to face additional competition as other established
and emerging companies enter the market for Internet-based technologies and
solutions, and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, 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
competitors 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 factors affecting the market for the Company's products and
services are: ease of applications development, deployment, integration and
management; expertise in delivering solutions; functionality and features;
product architecture; product performance, reliability and scaleability;
product quality; expertise in functional areas and in systems implementation;
price; customer support; and product management. 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 effect 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 means to
protect its proprietary rights in its products. All 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 has
filed applications for registration of its various trademarks. 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, or 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 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 arrangements or result in costly
litigation. The Company is not the subject of any legal action alleging the
infringement of 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.
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The Company believes that, due to the rapid pace of technological innovation
for software products, its 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
OneWave 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 into
the Company's products, which could materially adversely affect its business,
operating results and financial condition.
EMPLOYEES
As of March 26, 1997, OneWave had a total of 127 employees. The Company's
future success depends in significant part upon the continued service of its
key technical, consulting, and senior management personnel, and its continuing
ability to attract and retain highly qualified technical, services, 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, services and technical employees or that it will be able to
attract and retain additional and highly technical, services 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.
In order for OneWave to fully exploit the market opportunity for its
products and services, an effective planning and management process is
required. The Company's growth and the industry's rapid rate of change has
placed, and is expected to continue to place a significant strain on
managerial, operational and financial resources. The senior members of the
Company's management team joined OneWave during 1996. In addition, many of the
Company's development and engineering staff were only recently hired and in
the second half of 1996 the Company experienced significant reduction in its
senior management staff. To manage its growth, OneWave 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 product development capabilities
and 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 OneWave is unable to manage growth effectively, the Company's business,
operating results and financial condition could be materially adversely
affected.
ITEM 2. PROPERTIES.
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 1997.
Management believes that adequate facilities for expansion will be available,
if necessary, at competitive rates.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of its operations, the Company is subject to
performance under contracts and has certain legal actions and contingencies
pending. However, in Management's opinion, any such outstanding matters would
not have a material, adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitation of
proxies or otherwise.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The Company's Common Stock, $.001 par value ("Common Stock") has been traded
on the Nasdaq National Market ("Nasdaq") since the Company's initial public
offering on July 2, 1996 and currently trades under the symbol "OWAV." The
following table sets forth the high and low of the closing sales prices for
the Company's Common Stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
MARKET PRICES (1)
-----------------
1996 FISCAL QUARTERS HIGH LOW
-------------------- -----------------
<S> <C> <C>
Third (from July 2).................................... $ 18.00 $ 12.75
Fourth................................................. $ 17.25 $ 7.00
</TABLE>
- --------
(1) The prices listed reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Holders
The number of record holders of the Company's Common Stock as of March 26,
1997 was approximately 78.
Dividends
The Company did not pay cash dividends on its Common Stock during the years
ended December 31, 1996 and December 31, 1995. The Company does not intend to
pay cash dividends on its Common Stock in the foreseeable future.
9
<PAGE>
ITEM 6. 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 Annual Report. The statement of operations
data set forth below for the period from inception (January 19, 1994) to
December 31, 1994, and for the fiscal years ended December 31, 1995 and 1996,
and the balance sheet data as of December 31, 1994, 1995 and 1996, 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 report. The historical results are not indicative of the
results of operations to be expected in the future.
<TABLE>
<CAPTION>
JANUARY 19, 1994 YEAR ENDED YEAR ENDED
(INCEPTION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1994 1995 1996
----------------- ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license and
maintenance..................... $ -- $ 2,151 $ 8,106
Consulting and education
services........................ -- 3,919 5,098
------- ------- --------
Total revenues................. -- 6,070 13,204
Cost of Revenues:
Software license and
maintenance..................... -- 717 1,517
Consulting and education
services........................ -- 2,684 4,001
------- ------- --------
Total cost of revenues......... -- 3,401 5,518
Gross profit................... -- 2,669 7,686
Operating Expenses:
Selling, general and
administrative.................. 286 2,108 10,565
Research and development......... 894 3,182 3,529
Compensation to executive
officer......................... -- -- 6,794
------- ------- --------
Total operating expenses....... 1,180 5,290 20,888
------- ------- --------
Operating loss................. (1,180) (2,621) (13,202)
Interest (Expense) Income, net..... -- (77) 953
------- ------- --------
Net loss before income taxes..... (1,180) (2,698) (12,249)
Income Tax Expense................. -- -- 95
------- ------- --------
Net loss......................... $(1,180) $(2,698) $(12,344)
======= ======= ========
Pro Forma Net Loss per Common and
Common Equivalent Share........... $ (.21) $ (.88)
======= ========
Pro Forma Weighted Average Number
of Common and Common Equivalent
Shares Outstanding................ 12,872 13,961
======= ========
<CAPTION>
DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities............. $ -- $ 105 $ 40,050
Working capital (deficit).......... (932) (1,967) 36,471
Total assets....................... 63 2,626 46,151
Stockholders' equity (deficit)..... (868) (2,804) 39,737
</TABLE>
10
<PAGE>
ITEM 7. 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 generated revenues primarily through the reselling of software
licenses of a related party, providing the 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 OneWave product line (the Company previously sold its
product under the OpenScape name). 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
Company of $490,000, or 80% of total 1995 OpenScape revenues. For the year
ended December 31, 1996, the Company generated total revenues of $13,204,000,
of which $8,106,000, or 61%, were software license and maintenance revenues
and $5,098,000, or 39%, were consulting and education services revenues.
OneWave products accounted for 78% of total software license and maintenance
revenues for the year ended December 31, 1996. The balance of software license
and maintenance revenues for the year ended December 31, 1996 was generated
through reselling third-party software licenses and maintenance. In 1996, the
Company primarily sold its products through alliance partners and its direct
sales force. Alliance partners generated 47% of 1996 revenue, primarily
through a limited number of large software license sales. The direct sales
channel generated 51% of 1996 revenue. The direct sales model did not develop
into a predictable source of revenue during 1996. The remaining 2% of 1996
revenue was primarily generated from value added resellers.
Included in revenues generated from alliance partners during 1996 were
$2,920,000 of software license and $514,000 of consulting services revenues
associated with the development of vertical applications in conjunction with
Internet Business Solutions, Inc. (IBS). IBS provided up to 100% of the
funding of the purchase of software licenses and consulting services in return
for certain rights in the developed applications. IBS is a related party. See
Note 6 (d) of Notes to the Consolidated Financial Statements.
In January 1997, the Company changed its direct sales strategy to a
solutions based model. This model differs from the prior direct sales model in
that the Company now intends to provide customers with a turnkey software
solution to a business problem, rather than with a software architecture which
allows the customer to build the software solution. Management believes that
in the long term the solutions based model will be more effective than the
Company's prior sales strategy, there can be no assurance as to its success.
However, revenues will likely be reduced in the short term as the Company
changes its approach to sales, revises its methods for delivering services and
solutions, and delays the generation of revenue from software licenses until
the complete solutions are delivered to customers.
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, commercialize
products and services which incorporate such technologies, and achieve market
acceptance for its OneWave 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 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.
11
<PAGE>
RESULTS OF OPERATIONS:
The following table sets forth certain operational data as a percentage of
total revenues for the years ended December 31, 1995 and 1996. The table does
not set forth such operational data for the period from inception to December
31, 1994, as the Company did not generate revenues in such period and
therefore such information is not meaningful.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996
------ ------
<S> <C> <C>
Revenues:
Software license and maintenance....................... 35 % 61 %
Consulting and education services...................... 65 39
------ ------
Total revenues....................................... 100 100
Cost of Revenues:
Software license and maintenance....................... 12 12
Consulting and education services...................... 44 30
------ ------
Total cost of revenues............................... 56 42
Gross profit......................................... 44 58
Operating Expenses:
Selling, general and administrative.................... 35 80
Research and development............................... 52 26
Compensation to executive officer...................... -- 51
------ ------
Total operating expenses............................. 87 157
Operating loss....................................... (43) (99)
Interest (Expense)/Income, net........................... (1) 7
------ ------
Net loss before income taxes........................... (44) (92)
Income Tax Expense....................................... -- 1
------ ------
Net loss............................................... (44)% (93)%
====== ======
</TABLE>
1996 COMPARED TO 1995
Revenues:
Total revenues increased $7,134,000 to $13,204,000 in 1996 from $6,070,000
in 1995. The increase was due primarily to the introduction and expansion of
the Company's product offerings, including the OneWave(TM) (formerly
OpenScape) product line, and increased revenue from consulting and education
services. For the fiscal year ended December 31, 1996, software license and
maintenance revenues represented 61% of total revenues with the remaining 39%
resulting from consulting and education services, compared with 35% and 65%,
respectively, for the comparable prior year. During 1996, the Company executed
its plan to develop relationships with strategic partners within the industry.
These relationships generated large non-recurring software license and
consulting service contracts during the year. Additionally, the Company
continued to resell third-party software licenses to its customers. The resale
of third-party software license and maintenance revenues increased $718,000 to
$1,760,000 in 1996 from $1,042,000 in 1995. The Company has achieved only
limited revenues from direct sales of OneWave products to end-users and there
can be no assurance that the Company will sustain revenue growth or market
acceptance for these or other products which it markets. With the inception of
the Company's new solutions based direct sales strategy in 1997, management
expects that consulting and education services revenues will represent a more
significant percentage of revenues in future years.
Gross profit:
Total gross profit increased $5,017,000 to $7,686,000 in 1996 from
$2,669,000 in 1995. Cost of software license and maintenance revenues consists
of the cost of software and maintenance purchased for resale from a
12
<PAGE>
third-party vendor, distribution costs and product support costs. See Note
6(b) of the Notes to the Consolidated Financial Statements. The cost of
consulting and education services consists primarily of consulting and
education personnel salaries, related costs and fees to third-party service
providers. For the year ended December 31, 1996, total gross margin increased
to 58% of total revenue from 44% of total revenues for the comparable prior
year period. The gross margin for software license and maintenance revenues in
1996 was 81% and the gross margin for consulting and education services
revenues was 22%, compared with 67% and 32%, respectively, for the comparable
prior year. The increase in total gross margin from the comparable prior year
is primarily attributable to an increase in software revenue as a percentage
of total revenue, since software revenues have higher profit margins. The
increase in gross margin for software license and maintenance revenues
compared to prior year is attributable to a higher gross profit achieved on
revenues from OneWave(TM) products compared to prior year license and
maintenance revenues which were primarily generated by reselling related-party
licenses and maintenance. The decrease in gross margin for consulting and
education services from the comparable prior year, is attributable to the
continued use of third-party service providers, an increase in consulting and
education personnel and a decrease in the number of educational seminars
provided. Additionally, there were a number of new employees hired during the
second half of the 1996 whose costs were included in cost of revenue, but who
were substantially engaged in the Company's orientation and training process
for the first few months of their employment. Management expects that gross
margin will decline in 1997 as the Company generates a greater percentage of
its total revenues from consulting service contracts. Historically, consulting
services revenues have provided significantly lower gross margin than software
license and maintenance revenues.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses consist primarily 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 $10,565,000 for the year ended December 31, 1996 from $2,108,000 for the
comparable prior year, representing 80% and 35% of total revenues,
respectively. The total dollar increase of $8,457,000 in 1996 versus 1995
reflects the Company's increased selling, general and administrative expenses
associated with the hiring of an experienced management team, creation of a
direct sales force, the building of an IS/IT infrastructure, the move to a new
leased facility and lead generation activities such as advertising and
tradeshows.
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 internal software development costs as incurred.
During the year ended December 31,1996, the Company capitalized approximately
$321,000, or 8% of total annual R&D expenditures, pertaining to third-party
costs for the development of certain WaveApps products. Research and
development expenses increased to $3,529,000 for the year ended December 31,
1996 from $3,182,000 for the comparable prior year, representing 26% and 52%
of total revenues, respectively. The decrease in research and development
expenses as a percentage of total revenues is attributable to the decrease in
purchases of third-party developed technology and a significant increase in
total revenue. 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 year ended December 31, 1996, certain of the Company's
controlling stockholders sold 960,000 shares of common stock to the Chief
Executive Officer for an aggregate purchase price of $1,440,000, and agreed to
make certain payments to the Chief Executive Officer 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 $6,794,000
related to these transactions. This non-cash expense consists of: (i)
$5,760,000, which represents the difference between the purchase price paid by
the Chief Executive Officer for the shares of common stock
13
<PAGE>
that he purchased and the fair market value of those shares at that time; (ii)
$1,000,000, relating to a payment received by the Chief Executive Officer from
one of the Company's controlling stockholders; and (iii) $34,000, representing
the value of a payment guaranty that such stockholder agreed to make to the
Chief Executive Officer due to the decline in the value of certain stock
appreciation rights held by the Chief Executive Officer on capital stock of
his former employer. No future non-cash credits or charges will be recorded
related to these stock appreciation rights. See Note 9 of Notes to the
Consolidated Financial Statements.
Interest Income (Expense), Net:
For the year ended December 31, 1996, the Company recorded net interest
income of $953,000. The interest income is primarily derived from interest
earned on the net proceeds received by the Company from its initial public
offering in July 1996. For the year ended December 31, 1995, the Company
recorded net interest expense of $77,000. The expense was related to interest
on notes payable to stockholders which have been repaid in full as of December
31, 1996 by the Company.
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 revenue. In 1995, the Company began generating revenues through
reselling related-party software licenses 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
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 include $500,000 from a non-recurring sale of source code for an
application unrelated to the OpenScape product line to a related party. See
Note 6(b) of Notes to the Consolidated 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 Company
of $490,000, or 80% of total 1995 OpenScape revenues.
Gross profit:
The Company did not generate revenues in 1994 and therefore did not incur
cost of revenues in this period. Gross margin was 44% in 1995. Gross margin
for software license and maintenance costs and consulting and education
services were 67% and 32%, 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. Such 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 required to grow from a development stage entity to a
business generating direct sales through operations.
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. Through December 31, 1995, the Company expensed all
software development costs 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
14
<PAGE>
$2,550,000 for purchases of technology rights to incorporate in its OpenScape
products. See Note 6(b) of Notes to the Consolidated Financial Statements.
Interest Expense, Net:
For the year ended December 31, 1995, the Company recorded net interest
expense of $77,000. This expense arose from 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.
Liquidity and Capital Resources:
In July 1996, the Company completed its initial public offering of 3,750,000
shares of its Common Stock of which 3,000,000 shares were sold by the Company
and 750,000 shares were sold by certain of the Company's stockholders. The
public offering price was $16.00 per share and the net proceeds to the Company
were approximately $43,256,000, net of underwriting discounts, commissions and
other offering costs. Upon consummation of the IPO, all outstanding shares of
the Company's preferred stock were automatically converted into Common Stock.
The Company used a portion of the proceeds for the repayment of a $2,000,000
note payable to a bank.
In February 1996, the Company entered into a financing agreement with a
bank. The agreement provides for a revolving line of credit of up to
$2,500,000, subject to certain limitations, and an equipment line of credit up
to $500,000 for purchases of new equipment. As of December 31, 1996, the
Company had no outstanding balances under the revolving line of credit or the
equipment line of credit.
The Company's operating activities utilized cash and cash equivalents of
approximately $5,892,000 for the year ended December 31, 1996.
The Company's investing activities, which consisted of capitalized software
development costs, purchases of property and equipment and investments in
short-term marketable securities, utilized cash and cash equivalents of
approximately $30,954,000 for the year ended December 31, 1996. The purchases
of property and equipment were primarily related to increases in headcount and
the move to a new facility in March 1996.
The Company's financing activities provided cash and cash equivalents of
approximately $49,610,000 for the year ended December 31, 1996, primarily from
public and private issuance of equity securities and borrowings under its
notes payable with a bank. The proceeds generated from the issuance of
convertible preferred stock were used to retire Common Stock. The borrowings
under its note payable with a bank were repaid in full in July 1996.
The Company has agreed to loan 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 fair market value. The Company
believes that it will fund the amounts under the loan agreement in the first
half of 1997. The Company has no other significant commitments other than
obligations under its operating leases.
The Company currently anticipates that the existing cash, cash equivalents
and marketable securities balances will be sufficient to meet its anticipated
working capital and capital expenditure requirements through December 31,
1997. Thereafter, the Company may need to raise additional funds. The Company
may in the future seek to expand its business through possible acquisitions.
The Company, however, has no commitments or agreements with respect to any
future acquisition and no assurances can be given with respect to the
likelihood or financial or business effect, of any future acquisition. Future
acquisitions could be financed by internally generated funds, bank borrowings,
public offerings or private placements of equity or debt securities, or a
combination of the foregoing. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company or
at all.
15
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements made or incorporated into this Form 10-K include a number of
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. Forward
looking statements include, without limitation, statements containing the
words "anticipates", "believes", "expects", "intends", "future", and words of
similar import which express Management's beliefs, expectations or intentions
regarding the Company's future performance. The Company's actual results could
differ materially from its historical results and from those set in the
forward-looking statements and may fluctuate between operating periods.
Factors that might cause such differences and fluctuations include the
following: ability to implement and achieve market acceptance of the Company's
solutions based approach to sales, risks related to the management of growth,
the Company's ability to attract, train and retain qualified personnel,
product development risks, new product announcements and introductions,
development and promotional expenses related to the introduction of new
products, changes in technology and industry standards, dependence on certain
strategic partnerships, limited operating history, recent introduction of
OneWave products, delays in development or product releases, changes in the
market for the Company's products and services, the rate of acceptance of the
Company's products and services, dependence of the Company's business on the
Internet, increased competition, changing of pricing policies by the Company
or its competitors, the timing of receipt of orders from major customers,
development of competing products, development of Internet and Intranet
products or enhancements by vendors of existing client/server or legacy
software systems, risk of software defects, disproportionate reliance on
strategic relationships, difficulties in management of growth, dependence on
key personnel, evolving distribution strategy, proprietary technology and the
inherent difficulties in protecting intellectual property, dependence on
third-party technology, and exposure for product and professional services
liability. The market price of the Company's Common Stock has been, and in the
future will likely be, subject to significant fluctuations in response to
variations in quarterly operating results and other factors, such as
announcements of technological innovations or new products by the Company or
its competitors, or other events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Information Regarding
Directors" and "Executive Officers" in the registrant's definitive proxy
statement dated April 7, 1997 relating to the Annual Meeting of Stockholders
to be held on May 7, 1997 is incorporated herein by reference.
The Company's directors and executive officers and their principal
occupations are set forth below:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
---- --------------------
<S> <C>
Albert Carnesale........ Provost, Harvard University
Manuel Diaz............. Vice-President of Sales and Marketing, Hewlett-Packard Company
Stephen R. Levy......... Private Investor and Consultant
Ofer Nemirovsky......... Managing Director, HVP Partners, LLC
Sundar Subramaniam...... President, Cambridge Technology Enterprises, Inc.
Klaus P. Besier......... Chairman and Chief Executive Officer, OneWave, Inc.
John S. Coviello........ Vice President of Engineering, OneWave, Inc.
Mark J. Gallagher....... Chief Financial Officer & Treasurer, OneWave, Inc.
Craig Newfield.......... General Counsel and Secretary, OneWave, Inc.
</TABLE>
16
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation" in the
registrant's definitive proxy statement dated April 7, 1997 relating to the
Annual Meeting of Stockholders to be held on May 7, 1997 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Principal and Management
Stockholders" in the registrant's definitive proxy statement dated April 7,
1997 relating to the Annual Meeting of Stockholders to be held on May 7, 1997
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Relationships and
Related Transactions" in the registrant's definitive proxy statement dated
April 7, 1997 relating to the Annual Meeting of Stockholders to be held on May
7, 1997 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The response to this portion of Item 14 is
submitted as a separate section of this Annual Report beginning on page F-1.
(a)(2) Schedules. The response to this portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page F-1.
(a)(3) Exhibits. Exhibits 10.1 through 10.3 constitute all of the management
contracts and compensation plans and arrangements of the Company required to
be filed as exhibits to this Annual Report. The following is a complete list
of Exhibits filed or incorporated by reference as part of this Annual Report.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Third Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated By-laws(2)
4.1 Specimen Common Stock Certificate(2)
10.1 1995 Stock Plan, as amended(1)
*10.1A Form of Incentive Stock Option Agreement under the 1995 Stock Plan
*10.1B Form of Non-Qualified Stock Option Agreement under the 1995 Stock Plan
10.2 1996 Stock Plan, as amended(2)
*10.2A Form of Incentive Stock Option Agreement under the 1996 Stock Plan
*10.2B Form of Non-Qualified Stock Option Agreement under the 1996 Stock Plan
10.3 Employee Stock Purchase Plan(1)
10.4 Lease for One Arsenal Marketplace, Watertown, Massachusetts(1)
10.5 Source Code License Agreement dated as of August 8, 1995 between the
Company and InterGroup Technologies, Inc.(1)
10.6 Software License Agreement dated as of August 8, 1995 between the
Company and InterGroup Technologies, Inc.(1)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.6A Agreements dated as of May 21, 1996 and May 22, 1996 amending the
Source Code License Agreement and Software License Agreement between
the Company and InterGroup Technologies, Inc(1)
10.7 Source Code License Agreement dated as of February 8, 1996 between the
Company and Mentor Communications Limited(1)
10.8 Software License Agreement dated as of August 10, 1995 between the
Company and Mystic River Software, Inc.(1)
10.9 Software, Education, Services Distribution Agreement dated June 21,
1995 between the Company and Open Environment Corporation(2)
10.10 "SAP Customization Software" Agreement dated October 1, 1995 between
the Company and Open Environment Corporation(2)
10.11 OEM Source License Agreement dated as of December 29, 1995 between the
Company and Open Environment Corporation(2)
10.12 Joint Marketing Agreement effective as of February 27, 1996 between
the Company and Hewlett-Packard Company(2)
10.13 Loan Agreement dated February 16, 1996 between the Company and State
Street Bank and Trust Company, together with Guaranty (unlimited) of
J&S Limited Partnership(1)
10.14 Warrant Purchase Agreement dated as of February 16, 1996 between the
Company and SSB Investments, Inc.(1)
10.15 Common Stock Purchase Warrant dated as of February 16, 1996 issued to
SSB Investments, Inc.(1)
10.16 Series B Convertible Preferred Stock Purchase Agreement dated February
27, 1996 between the Company and Hewlett-Packard Company(1)
10.17 Amendment to Series B Convertible Preferred Stock Purchase Agreement
dated as of March 6, 1996 between the Company and Hewlett-Packard
Company(1)
10.17A Amendment No. 1 to Series B Convertible Preferred Stock Purchase
Agreement dated as of June 7, 1996 between the Company and Hewlett-
Packard Company(2)
10.18 Series B Convertible Preferred Stock Purchase Agreement dated March 6,
1996 among the Company and the purchasers named therein(1)
10.19 Registration Rights Agreement dated March 6, 1996 among the Company
and the investors named therein(1)
10.20 Co-Sale Rights Agreement dated as of March 6, 1996 among the investors
and holders of shares of the Company's Common Stock named therein(1)
10.21 Voting Agreement dated March 6, 1996 among the investors and holders
of shares of the Company's Common Stock named therein(1)
10.22 Series C Convertible Preferred Stock Purchase Agreement dated as of
March 29, 1996 among the Company and the purchasers named therein(1)
10.23 Registration Rights Agreement dated as of March 29, 1996 among the
Company and the investors named therein(1)
10.24 Stock Purchase Agreement dated as of February 1996 between John J.
Donovan and Len Hafetz(1)
10.25 Assignment and Assumption Agreement dated as of March 15, 1996 between
John J. Donovan and the Company(1)
10.26 Stock Repurchase Agreement dated as of April 4, 1996 between the
Company and James Nondorf(1)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.27 Stock Repurchase Agreement dated as of April 15, 1996 between the
Company and J&S Limited Partnership(1)
10.28 Stock Repurchase Agreement dated as of April 15, 1996 between the
Company and Harrington Trust Limited as Trustee of The Appleby
Trust(1)
10.29 Five-Year 9% Subordinated Note dated December 29, 1995 issued to
Harrington Trust Limited as Trustee of The Appleby Trust in the
principal amount of $750,000(1)
10.30 Five-Year 6% Convertible Subordinated Note dated May 3, 1995 issued to
Harrington Trust Limited as Trustee of The Appleby Trust in the
principal amount of $750,000(1)
10.31 Five-Year 6% Convertible Subordinated Note dated May 3, 1995 issued to
J&S Limited Partnership in the principal amount of $250,000(1)
10.32 Loan Agreement dated as of March 31, 1996 between Klaus P. Besier and
the Company(1)
*11 Statement of Computation of Per Share Earnings
*21 List of Subsidiaries
*23.1 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
</TABLE>
- --------
(1) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 13, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
(2) Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 25, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
* Filed herewith.
A COPY OF ANY EXHIBIT TO THIS ANNUAL REPORT MAY BE OBTAINED WITHOUT CHARGE BY
WRITTEN REQUEST TO CRAIG NEWFIELD, ONEWAVE INC., ONE ARSENAL MARKETPLACE,
WATERTOWN, MA 02172.
(b) Reports on Form 8-K. The Registrant did not file any reports on Form 8-K
during the last quarter of the period covered by this Annual Report.
(c) Exhibits. The response to this portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page 17.
(d) Financial Statement Schedules. The response to this portion of Item 14 is
submitted as a separate section of this Annual Report beginning on page F-1.
19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
OneWave, Inc.
By: /s/ Klaus P. Besier
---------------------------------
KLAUS P. BESIER
CHAIRMAN OF THE BOARD, PRESIDENT
AND
CHIEF EXECUTIVE OFFICER
Dated: March 28, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Klaus P. Besier Chairman, President March 28, 1997
- ------------------------------------- and Chief Executive
KLAUS P. BESIER Officer (Principal
Executive Officer &
Director)
/s/ Mark J. Gallagher Chief Financial March 28, 1997
- ------------------------------------- Officer &
MARK J. GALLAGHER Treasurer(Principal
Financial and
Accounting Officer)
/s/ Albert Carnesale Director March 28, 1997
- -------------------------------------
ALBERT CARNESALE
/s/ Manuel Diaz Director March 28, 1997
- -------------------------------------
MANUEL DIAZ
/s/ Stephen R. Levy Director March 28, 1997
- -------------------------------------
STEPHEN R. LEVY
/s/ Ofer Nemirovsky Director March 28, 1997
- -------------------------------------
OFER NEMIROVSKY
/s/ Sundar Subramaniam Director March 28, 1997
- -------------------------------------
SUNDAR SUBRAMANIAM
20
<PAGE>
ONEWAVE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-3
Consolidated Statements of Operations for the Period from Inception
(January 19, 1994) to December 31, 1994 and for the Years Ended December
31, 1995 and 1996........................................................ F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the Period from Inception (January 19,
1994) to December 31, 1994 and for the Years Ended December 31, 1995 and
1996..................................................................... F-5
Consolidated Statements of Cash Flows for the Period from Inception
(January 19, 1994) to December 31, 1994 and for the Years Ended December
31, 1995 and 1996........................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
Report of Independent Public Accountants on Schedule...................... S-1
Schedule II--Valuation of Qualifying Accounts............................. S-2
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OneWave, Inc.:
We have audited the accompanying consolidated balance sheets of OneWave,
Inc. (a Delaware corporation, formerly Business@Web, Inc.) as of December 31,
1995 and 1996, and the related consolidated 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 years ended December 31, 1995 and 1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OneWave,
Inc. as of December 31, 1995 and 1996, 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 years ended December 31, 1995 and 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1997
F-2
<PAGE>
ONEWAVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 1).............. $ 104,622 $12,868,496
Marketable securities (Note 1).................. -- 27,181,222
Accounts receivable, less reserve of $100,000
and $283,000 at December 31, 1995 and 1996,
respectively................................... 1,908,541 1,783,741
Inventories (Note 1)............................ 292,000 303,900
Prepaid expenses and other current assets....... 157,333 691,735
Due from affiliates (Note 6).................... -- 55,402
---------- -----------
Total current assets.......................... 2,462,496 42,884,496
---------- -----------
Property and Equipment, at cost (Note 1):
Computer and office equipment................... 226,550 3,155,384
Furniture and fixtures.......................... -- 462,944
Leasehold improvements.......................... -- 59,964
---------- -----------
226,550 3,678,292
Less--Accumulated depreciation and
amortization................................... 63,118 669,118
---------- -----------
Net property and equipment.................... 163,432 3,009,174
---------- -----------
Other Assets (Note 1)............................. -- 256,865
---------- -----------
Total assets.................................. $2,625,928 $46,150,535
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable................................ $ 575,575 $ 1,454,440
Due to affiliates (Note 6)...................... 2,938,086 --
Accrued expenses (Note 9)....................... 637,613 4,410,615
Deferred revenues (Note 1)...................... 278,572 548,330
---------- -----------
Total current liabilities..................... 4,429,846 6,413,385
---------- -----------
Long-Term Debt to Stockholders (Note 3)........... 1,000,000 --
Commitments (Note 8)
Stockholders' Equity (Deficit) (Note 4):
Preferred stock, $1.00 par value--
Authorized--5,000,000 shares
Issued and outstanding--no shares.............. -- --
Common stock, $.001 par value--
Authorized--50,000,000 shares
Issued and outstanding--10,803,030 and
14,907,696 at December 31, 1995 and 1996,
respectively................................... 10,803 14,908
Additional paid-in capital...................... 1,230,597 58,504,913
Note receivable from executive officer (Note
9)............................................. -- (2,560,000)
Deferred compensation........................... (166,594) --
Accumulated deficit............................. (3,878,724) (16,222,671)
---------- -----------
Total stockholders' equity (deficit).......... (2,803,918) 39,737,150
---------- -----------
Total liabilities and stockholders' equity
(deficit).................................... $2,625,928 $46,150,535
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ONEWAVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 19, 1994)
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Note 1):
Software license and
maintenance................... $ -- $ 2,150,735 $ 8,106,049
Consulting and education
services...................... -- 3,918,927 5,098,402
----------- ----------- ------------
Total revenues............... -- 6,069,662 13,204,451
----------- ----------- ------------
Cost of Revenues (Note 1):
Software license and
maintenance................... -- 716,392 1,517,532
Consulting and education
services...................... -- 2,684,216 4,001,376
----------- ----------- ------------
Total cost of revenues....... -- 3,400,608 5,518,908
----------- ----------- ------------
Gross profit................. -- 2,669,054 7,685,543
----------- ----------- ------------
Operating Expenses:
Selling, general and
administrative................ 285,962 2,107,956 10,564,948
Research and development (Note
1)............................ 894,314 3,181,972 3,528,799
Compensation to executive
officer (Note 9).............. -- -- 6,793,696
----------- ----------- ------------
Total operating expenses..... 1,180,276 5,289,928 20,887,443
----------- ----------- ------------
Operating loss............... (1,180,276) (2,620,874) (13,201,900)
Interest (Expense)/Income, net... -- (77,574) 953,284
----------- ----------- ------------
Net loss before provision for
income taxes................ (1,180,276) (2,698,448) (12,248,616)
Provision for Income taxes....... -- -- 95,331
----------- ----------- ------------
Net loss..................... $(1,180,276) $(2,698,448) $(12,343,947)
=========== =========== ============
Pro Forma Net Loss per Common and
Common Equivalent Share......... $ (.21) $ (.88)
=========== ============
Pro Forma Weighted Average Number
of Common and Common Equivalent
Shares Outstanding.............. 12,871,554 13,961,337
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated 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........ -- --
Issuance of
Series C
convertible
preferred stock
at $5.00 per
share, net of
issuance costs
of $30,000..... -- --
Repurchase and
retirement of
common stock
$7.50 per
share.......... -- --
Issuance of
common stock at
$16.00 per
share related
to initial
public
offering, net
of issuance
costs of
$4,744,000..... -- --
Conversion of
redeemable
convertible
preferred stock
and convertible
preferred stock
into common
stock.......... (1,332,127) (7,379,984)
Compensation
expense related
to stock
options........ -- --
Issuance of
common stock
from stock
option
exercises...... -- --
Deferred
compensation
adjustment
related to
termination of
stock options.. -- --
Net loss........ -- --
---------- ----------
Balance, December
31, 1996........ -- $ --
========== ==========
<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........ -- -- -- -- 6,793,696 -- -- -- 6,793,696
Issuance of note
receivable from
executive
officer........ -- -- -- -- -- (2,560,000) -- -- (2,560,000)
Issuance of
Series C
convertible
preferred stock
at $5.00 per
share, net of
issuance costs
of $30,000..... 1,200,000 1,200,000 -- -- 4,770,000 -- -- -- 5,970,000
Repurchase and
retirement of
common stock
$7.50 per
share.......... -- -- (800,000) (800) (5,999,200) -- -- -- (6,000,000)
Issuance of
common stock at
$16.00 per
share related
to initial
public
offering, net
of issuance
costs of
$4,744,000..... -- -- 3,000,000 3,000 43,253,000 -- -- -- 43,256,000
Conversion of
redeemable
convertible
preferred stock
and convertible
preferred stock
into common
stock.......... (1,200,000) (1,200,000) 1,688,074 1,688 8,578,296 -- -- -- 7,379,984
Compensation
expense related
to stock
options........ -- -- -- -- -- -- 41,169 -- 41,169
Issuance of
common stock
from stock
option
exercises...... -- -- 216,592 217 603,949 -- -- -- 604,166
Deferred
compensation
adjustment
related to
termination of
stock options.. -- -- -- -- (125,425) -- 125,425 -- --
Net loss........ -- -- -- -- -- -- -- (12,343,947) (12,343,947)
----------- ----------- ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance, December
31, 1996........ -- $ -- 14,907,696 $14,908 $58,504,913 $(2,560,000) $ -- $(16,222,671) $39,737,150
=========== =========== =========== ========= ============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ONEWAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR ENDED YEAR ENDED
(JANUARY 19, 1994) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1994 1995 1996
--------------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net loss................... $(1,180,276) $(2,698,448) $(12,343,947)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities--
Depreciation and
amortization............ 12,680 50,438 670,200
Compensation expense to
executive officer....... -- -- 6,793,696
Compensation expense
related to stock
options................. -- 12,806 41,169
Changes in operating
assets and liabilities--
Accounts receivable.... -- (1,908,541) 124,800
Inventories............ -- (292,000) (11,900)
Prepaid expenses and
other current assets.. -- (157,333) (534,402)
Due from affiliates.... -- -- (55,402)
Accounts payable....... 275,000 300,575 878,865
Due to affiliates...... 656,844 2,281,242 (2,938,086)
Accrued expenses....... -- 637,613 1,213,002
Deferred revenues...... -- 278,572 269,758
----------- ----------- ------------
Net cash used in
operating
activities.......... (235,752) (1,495,076) (5,892,247)
----------- ----------- ------------
Cash Flows from Investing
Activities:
Purchases of marketable
securities, net........... -- -- (27,181,222)
Purchases of property and
equipment................. (76,078) (150,472) (3,451,742)
Increase in other assets... -- -- (321,065)
----------- ----------- ------------
Net cash used in
investing
activities.......... (76,078) (150,472) (30,954,029)
----------- ----------- ------------
Cash Flows from Financing
Activities:
Proceeds from (payments on)
long-term debt to
stockholders.............. -- 1,750,000 (1,000,000)
Proceeds from secured note
payable to a bank......... -- -- 2,000,000
Payments on secured note
payable to a bank......... -- -- (2,000,000)
Net proceeds from issuance
of common stock........... 11,900 100 43,256,000
Payment for the repurchase
of common stock........... -- -- (6,000,000)
Net proceeds from issuance
of preferred stock........ 300,000 -- 12,749,984
Proceeds from the exercise
of stock options.......... -- -- 604,166
----------- ----------- ------------
Net cash provided by
financing
activities.......... 311,900 1,750,100 49,610,150
----------- ----------- ------------
Net Increase in Cash and Cash
Equivalents................. 70 104,552 12,763,874
Cash and Cash Equivalents,
beginning of period......... -- 70 104,622
----------- ----------- ------------
Cash and Cash Equivalents,
end of period............... $ 70 $ 104,622 $ 12,868,496
=========== =========== ============
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period
for interest.............. $ -- $ 25,843 $ 79,191
=========== =========== ============
Cash paid for income
taxes..................... $ -- $ -- $ 70,125
=========== =========== ============
Supplemental Disclosure of
Noncash Financing
Activities:
Conversion of long-term
debt to stockholders into
common stock.............. $ -- $ 750,000 $ --
=========== =========== ============
Conversion of preferred
stock into common stock... $ -- $ 250,000 $ 8,579,984
=========== =========== ============
Issuance of note receivable
from executive officer.... $ -- $ -- $ 2,560,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an Internet software and services company
dedicated to unifying disparate information systems and building integrated
business solutions. OneWave technology serves as a common software environment
for accessing existing mainframes, databases and client/server systems, and
extending new business processes across the traditional boundaries of the
enterprise. OneWave utilizes and supports industry standards and emerging
technologies, and works closely with top consulting firms and technology
providers to ensure expertise in areas critical to a complete solution. For
fiscal year 1996, the Company's principal market for its products was North
America.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, OneWave Securities Corporation. Inter-company
accounts and transactions are eliminated in consolidation.
(c) 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 software products licensed from
a related party (see Note 6(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 post-delivery
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 billing and are
recognized ratably over the term of the support period, which is typically one
year.
Deferred revenues primarily relate to prepaid maintenance and consulting
services 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.
(d) 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 held the following cash and cash equivalents at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Corporate Debt Instruments......................... $ -- $ 9,053,091
Cash and Money Market Accounts..................... 104,622 3,815,405
-------- -----------
$104,622 $12,868,496
======== ===========
</TABLE>
F-7
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Marketable Securities
Marketable securities consist of marketable financial instruments with
original maturities greater than 90 days. The Company has established
guidelines relative to concentration, maturities, and credit ratings that
maintain safety and liquidity.
In accordance with Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Company has classified its investments in marketable securities as
"Held-to-Maturity" Securities. Accordingly, marketable securities as of
December 31, 1996 are recorded at amortized cost, which approximates market.
The Company held the following marketable securities at December 31, 1996:
<TABLE>
<S> <C>
U.S. Government and Government Agency Securities
(average maturity of 252 days)........................... $20,545,759
Commercial Paper (average maturity of 73 days)............ 6,635,463
-----------
$27,181,222
===========
</TABLE>
(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 generally not material to the Company's
financial position or result of operations. Therefore, the Company has charged
all internally generated research and development expenses to operations in
the period incurred.
Since inception, the Company has incurred various charges associated with
the purchase of third party developed technology. During 1996 the Company
contracted with a third party to develop applications to be integrated with
the Company's existing product. The Company capitalized $321,065 of cost
associated with the development of this product. The Company has elected to
amortize the cost of this product over its expected useful life of fifteen
months. At December 31, 1996, approximately $64,000 had been amortized.
Included in research and development expenses for the period from inception
(January 19, 1994) to December 31, 1994 and the years ended December 31, 1995
and 1996, is $350,000, $2,550,000 and $450,000, respectively, relating to
purchase of technology, of which $2,200,000 was purchased from a related party
in 1995 (see Note 6(b)).
(h) Inventories
Inventories are stated at the lower of cost or market and consist of
purchased software products from third party vendors held for resale.
F-8
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(i) Post-retirement Benefits
The Company has no obligations for post-retirement 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, cash equivalents and
marketable securities. 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. These
customers represented 35% and 15%, respectively, of the accounts receivable
balance as of December 31, 1995. For the year ended December 31, 1996 these
customers accounted for approximately 24% and 6%, respectively, of total
revenues for the year ended December 31, 1996. These customers represented 19%
and 0%, respectively, of the December 31, 1996 accounts receivable balance.
In the years ended December 31, 1995 and 1996, sales outside the United
States accounted for approximately 17% and 10% of total revenues,
respectively. To reduce accounts receivable credit 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. To reduce cash
equivalent and marketable securities credit risk, the Company invests in
highly liquid U.S. Government and commercial paper obligations with maturities
of less than one year. The Company limits the amount of holdings with any one
particular financial institution or government agency.
(k) Pro Forma Net Loss per Common and Common Equivalent Share
For the years ended December 31, 1995 and 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, including 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. Stock
options granted after March 31, 1995 and prior to July 2, 1996, the effective
date of the Company's initial public offering, have been included in the
calculation of the weighted average number of shares outstanding, as required
by the Securities and Exchange Commission, for periods prior to July 2, 1996.
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.
(l) Use of Estimates in the Preparation of the 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) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, marketable securities and accounts receivable and
accounts payable, approximates their carrying value.
F-9
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 3.5% or the bank's prime rate
plus 1.5%. The $2,000,000 borrowed on the secured term note during the year
was repaid prior to December 31, 1996. The revolving line of credit and
equipment line of credit expire on June 30, 1997. The agreement is
collateralized by all assets of the Company. The financing agreement contains
certain restrictive covenants, including among other items, minimum levels of
tangible net worth and net income (loss). At December 31, 1996 the Company was
not in compliance with certain covenants under the facility. No funds were
available or outstanding under the credit lines at December 31, 1996.
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.
4. STOCKHOLDERS' EQUITY (DEFICIT)
(a) Authorized Capital Stock
As of December 31, 1996, the Company's authorized capital stock consisted of
50,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $1.00 par value per share.
(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.
In April 1996, the Company repurchased and retired 800,000 shares of common
stock for $6,000,000.
In July 1996, the Company completed an initial public offering of its common
stock. The Company issued 3,000,000 shares at $16.00 per share for net
proceeds of $43,256,000.
(c) Conversion of Series A Convertible 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.
(d) Conversion of Series B Redeemable Convertible Preferred Stock
In March 1996, the Company issued 1,332,127 shares of Series B redeemable
convertible preferred stock at $5.54 per share, less offering costs of
$600,000 for net proceeds of $6,779,984. Upon consummation of the
F-10
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's initial public offering, all outstanding shares of redeemable
convertible preferred stock were converted into 888,080 shares of common
stock.
(e) Conversion of Series C Convertible Preferred Stock
In April 1996, the Company issued 1,200,000 shares of Series C convertible
preferred stock at a price of $5.00 per share, less offering costs of $30,000,
for net proceeds of $5,970,000. Upon consummation of the Company's initial
public offering, all outstanding shares of Series C preferred stock were
converted into 799,994 shares of common stock.
(f) 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 have been
affected for the stock splits.
(g) Stock Options
1995 Stock Plan
The Company has a stock plan (the 1995 Plan) that provides for the
issuance of incentive stock options (ISOs), non-qualified stock options and
shares of common stock. Under the terms of the 1995 Plan, non-qualified
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 was recorded as deferred compensation at the date of grant. During
1995 and 1996, the Company recorded compensation expense related to these
options in the amount of $12,806 and $41,169, respectively. The remaining
balance of deferred compensation was reversed upon the cancellation of all
unvested stock options during 1996. 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.
1996 Stock Plan
On May 17, 1996, the Board of Directors and stockholders approved the
Company's 1996 Stock Plan (the 1996 Plan). Each non-employee director will
receive an initial option grant to purchase 7,000 shares of common stock,
at the then fair market value, when such director was first appointed to
the Board of Directors. In addition, each non-employee director will
receive an option grant to purchase 1,700 shares of common stock, at the
then fair market value, on each January 1 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. As of December 31, 1996, there were
approximately 1,323,000 shares available for grant. Generally, the options
granted under both Plans vest equally over four years and expire after ten
years.
F-11
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes incentive and non-qualified stock option
activity under the 1995 and 1996 Stock Plans:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF PRICE PER AVERAGE PRICE
SHARES SHARE PER SHARE
--------- ----------- -------------
<S> <C> <C> <C>
Outstanding, December 31, 1994.......... -- $ -- $ --
Options granted......................... 1,219,533 .015-4.50 3.90
--------- ----------- -------
Outstanding, December 31, 1995.......... 1,219,533 .015-4.50 3.90
Options granted......................... 2,457,648 7.50-16.00 10.53
Options exercised....................... (216,592) .015-13.13 4.25
Options canceled........................ (850,245) 1.50-16.00 8.01
--------- ----------- -------
Outstanding, December 31, 1996.......... 2,610,344 $1.50-16.00 $ 10.42
========= =========== =======
Exercisable, December 31, 1996.......... 782,563 $1.50-13.75 $ 8.21
========= =========== =======
</TABLE>
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options, including stock purchase
plans, or warrants granted to be included in the statement of operations or
disclosed in the notes to financial statements. 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 has computed the pro forma
disclosures required under SFAS No. 123 for options granted in 1995 and 1996
using the Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted average assumptions used for 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Risk-free interest rate................................ 5.86%-7.05% 5.97%-6.69%
Expected dividend yield................................ -- --
Expected life.......................................... 5 years 5 years
Expected volatility.................................... 70% 70%
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The total fair value of the options granted during 1995 and 1996 was
computed as approximately $2,463,000 and $14,030,000, respectively. Of these
amounts approximately $865,000 and $4,941,000 would be charged to operations
for the years ended December 31, 1995 and 1996, respectively. The remaining
amount, approximately $10,687,000, would be amortized over the remaining
vesting periods. The resulting pro forma compensation expense may not be
representative of the amount to be expected in future years as pro forma
compensation expense may vary based upon the number of options granted.
The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax benefit
has not been considered since a substantial portion of the stock options
granted are incentive stock options and the Company does not anticipate a
future deduction associated with the exercise of these stock options.
F-12
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma effect of SFAS No. 123 for the years ended December 31, 1995
and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------ --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss................ $(2,698,448) $(3,563,448) $(12,343,947) $(17,284,947)
Pro forma net loss per
common and common
equivalent share....... $ (.21) $ (.28) $ (.88) $ (1.24)
</TABLE>
(h) 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. The warrant is exercisable in
whole or in part, at any time on or before February 15, 2003.
(i) 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. The Company had not issued shares under
the ESPP as of December 31, 1996. In January 1997, the Company issued 13,839
shares of common stock under the ESPP.
5. 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, 1996, the Company had available net operating loss
carryforwards of approximately $13,120,000 to reduce future federal and state
income taxes, if any. These carryforwards expire through 2011 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>
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $ 1,208,000 $ 5,248,000
Other temporary differences........................ 275,000 1,202,000
----------- -----------
1,483,000 6,450,000
Valuation allowance................................ (1,483,000) (6,450,000)
----------- -----------
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
F-13
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1995 and 1996, respectively.
6. RELATED-PARTY TRANSACTIONS
(a) Cambridge Technology Group, Inc.
During 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 period from
inception (January 19, 1994) to December 31, 1994 and for the years ended
December 31, 1995 and 1996, CTGroup charged the Company $956,844, $1,013,142
and $117,442, respectively, for these costs.
During 1995 and 1996, the Company sold software and services to CTGroup
amounting to $104,993 and $100,000, respectively. In addition, during 1995 and
1996, CTGroup assigned its rights under certain contracts, to the Company. The
Company recorded revenue of $2,403,235 and $100,000, respectively, for the
performance of education and consulting services and the delivery of software
licenses and maintenance services under these contracts.
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.
In March 1996, the Company purchased computer equipment from CTGroup for
$125,000.
In September 1996, the Company obtained third party software licenses from
CTGroup in exchange for certain source code rights previously purchased from
Open Environment Corporation (Note 6(b)). The source code rights were
originally purchased with the intent of embedding the technology into certain
of the Company's future products. The software licenses received and the
source code rights given were deemed to be of equal value. In 1996, the
Company recorded software license revenue of approximately $412,000 from the
subsequent resale of software licenses acquired in this exchange.
Amounts due (to) from CTGroup for these transactions were $(169,939) and
$55,402 at December 31, 1995 and 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.
(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. During the years ended
December 31, 1995 and 1996, the Company generated software license and
maintenance revenues of $1,111,992 and $1,759,639, 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 $837,675, in the years ended
December 31, 1995 and 1996, respectively. In addition, the Company
subcontracted consulting services from OEC totaling $398,271 and $153,622 in
1995 and 1996, respectively.
F-14
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 29, 1995, the Company and OEC entered into a $2,200,000 OEM
source code license agreement which provided the Company with a certain source
code developed by OEC. At the time of the license agreement, the Company
intended to embed this source code into certain of the Company's future
software products which were then currently under development. In accordance
with SFAS No. 86, the Company 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. The initial software license fee was included in 1995
software license revenues. To date the Company has not received any royalties
under this arrangement.
In November 1996, OEC was acquired by Borland International, Inc. To the
best of the Company's knowledge as a result of the acquisition, no stockholder
of the Company holds a significant ownership interest in the combined entity.
Accordingly, effective November 1996, OEC is not a related party.
The total accounts payable to OEC at December 31, 1995 was $2,490,133.
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 and 1996, these consulting services totaled
$662,000 and $32,000, respectively, and were included in cost of revenues. At
December 31, 1995, the Company had outstanding accounts payable to this entity
of $274,444.
The Company believes that the transactions described above were at terms no
less favorable than the Company would have obtained from unaffiliated third
parties.
(d) Internet Business Solutions, Incorporated.
During 1996, the Company generated revenues from unrelated entities of
$2,920,000 for software licenses and $514,450 for consulting services to
develop vertical applications in conjunction with Internet Business Solutions,
Inc. (IBS). IBS provided up to 100% of the funding of the purchase of software
licenses and consulting services in return for certain rights in the developed
applications. IBS is wholly-owned by certain of the Company's significant
stockholders. As of December 31, 1996 the balance included in accounts
receivable related to these transactions was $184,500.
7. EMPLOYEE BENEFIT PLAN
The Company's employees participate in an employee benefit plan under
Section 401(k) of the Internal Revenue Code. 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.
F-15
<PAGE>
ONEWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Previously, the Company's employees were eligible to participate in a plan
sponsored by CTGroup. The Company contributed approximately $2,000 and $53,500
under these plans during the years ended December 31, 1995 and 1996,
respectively.
8. LEASE COMMITMENTS
The Company leases its office facilities and certain office equipment under
operating leases expiring at various dates through 2001. Rental expense
amounted to approximately $69,000, $83,000 and $389,000 for the period of
inception (January 19, 1994) to December 31, 1994, and the years ended
December 31, 1995, and 1996, respectively. At December 31, 1996, future rental
commitments are approximately as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 558,000
1998.......................................................... 485,000
1999.......................................................... 476,000
2000.......................................................... 463,000
2001.......................................................... 77,000
----------
Total....................................................... $2,059,000
==========
</TABLE>
9. 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 year ended December 31, 1996. In
connection with this purchase, the Company agreed to loan the CEO up to
$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
December 31, 1996. The Company expects to fund this commitment in the first
half 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 year ended December 31, 1996 with a corresponding contribution to
additional paid-in capital.
Also in connection with the employment of the CEO, the same 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 were exercised by the
CEO in September 1996. The value of the stock of the unrelated company had
declined to the extent that the stockholder is required to reimburse the CEO
approximately $34,000. The Company has recorded this charge to compensation to
executive officer in the accompanying statement of operations for the year
ended December 31, 1996, with a corresponding contribution to additional paid-
in capital.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To OneWave, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheets of OneWave, Inc. (formerly Business@Web, Inc.)
as of December 1995 and 1996 and the related consolidated 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 the years ended December 31, 1995 and 1996, included in
this Annual Report, and have issued our report thereon dated January 23, 1997.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed on page S-2 is the
responsibility of the Company's management and is presented for the purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1997
S-1
<PAGE>
SCHEDULE II
ONEWAVE, INC.
VALUATION OF QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BAD DEBT WRITE- BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS BEGINNING PERIOD EXPENSE OFFS END OF PERIOD
- ------------------------------- ---------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Period from inception
(January 19, 1994)
to December 31, 1994........ $ -- $ -- $ -- $ --
Year ended December 31,
1995........................ -- 143,000 (43,000) 100,000
Year ended December 31,
1996........................ 100,000 260,000 (77,000) 283,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this Report.
Certain Exhibits are incorporated by reference to documents previously filed
by the Company with the Securities and Exchange Commission pursuant to Rule
12b-32 under the Securities Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 Third Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated By-laws(2)
4.1 Specimen Common Stock Certificate(2)
10.1 1995 Stock Plan, as amended(1)
*10.1A Form of Incentive Stock Option Agreement under the 1995 Stock Plan
*10.1B Form of Non-Qualified Stock Option Agreement under the 1995 Stock
Plan
10.2 1996 Stock Plan, as amended(2)
*10.2A Form of Incentive Stock Option Agreement under the 1996 Stock Plan
*10.2B Form of Non-Qualified Stock Option Agreement under the 1996 Stock
Plan
10.3 Employee Stock Purchase Plan(1)
10.4 Lease for One Arsenal Marketplace, Watertown, Massachusetts(1)
10.5 Source Code License Agreement dated as of August 8, 1995 between
the Company and InterGroup Technologies, Inc.(1)
10.6 Software License Agreement dated as of August 8, 1995 between the
Company and InterGroup Technologies, Inc.(1)
10.6A Agreements dated as of May 21, 1996 and May 22, 1996 amending the
Source Code License Agreement and Software License Agreement
between the Company and InterGroup Technologies, Inc(1)
10.7 Source Code License Agreement dated as of February 8, 1996 between
the Company and Mentor Communications Limited(1)
10.8 Software License Agreement dated as of August 10, 1995 between the
Company and Mystic River Software, Inc.(1)
10.9 Software, Education, Services Distribution Agreement dated June
21, 1995 between the Company and Open Environment Corporation(2)
10.10 "SAP Customization Software" Agreement dated October 1, 1995
between the Company and Open Environment Corporation(2)
10.11 OEM Source License Agreement dated as of December 29, 1995 between
the Company and Open Environment Corporation(2)
10.12 Joint Marketing Agreement effective as of February 27, 1996
between the Company and Hewlett-Packard Company(2)
10.13 Loan Agreement dated February 16, 1996 between the Company and
State Street Bank and Trust Company, together with Guaranty
(unlimited) of J&S Limited Partnership(1)
10.14 Warrant Purchase Agreement dated as of February 16, 1996 between
the Company and SSB Investments, Inc.(1)
10.15 Common Stock Purchase Warrant dated as of February 16, 1996 issued
to SSB Investments, Inc.(1)
10.16 Series B Convertible Preferred Stock Purchase Agreement dated
February 27, 1996 between the Company and Hewlett-Packard
Company(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.17 Amendment to Series B Convertible Preferred Stock Purchase
Agreement dated as of March 6, 1996 between the Company and
Hewlett-Packard Company(1)
10.17A Amendment No. 1 to Series B Convertible Preferred Stock Purchase
Agreement dated as of June 7, 1996 between the Company and
Hewlett-Packard Company(2)
10.18 Series B Convertible Preferred Stock Purchase Agreement dated
March 6, 1996 among the Company and the purchasers named therein
(1)
10.19 Registration Rights Agreement dated March 6, 1996 among the
Company and the investors named therein(1)
10.20 Co-Sale Rights Agreement dated as of March 6, 1996 among the
investors and holders of shares of the Company's Common Stock
named therein(1)
10.21 Voting Agreement dated March 6, 1996 among the investors and
holders of shares of the Company's Common Stock named therein(1)
10.22 Series C Convertible Preferred Stock Purchase Agreement dated as
of March 29,1996 among the Company and the purchasers named
therein(1)
10.23 Registration Rights Agreement dated as of March 29, 1996 among the
Company and the investors named therein(1)
10.24 Stock Purchase Agreement dated as of February 1996 between John J.
Donovan and Len Hafetz(1)
10.25 Assignment and Assumption Agreement dated as of March 15, 1996
between John J. Donovan and the Company(1)
10.26 Stock Repurchase Agreement dated as of April 4, 1996 between the
Company and James Nondorf(1)
10.27 Stock Repurchase Agreement dated as of April 15, 1996 between the
Company and J&S Limited Partnership(1)
10.28 Stock Repurchase Agreement dated as of April 15, 1996 between the
Company and Harrington Trust Limited as Trustee of The Appleby
Trust(1)
10.29 Five-Year 9% Subordinated Note dated December 29, 1995 issued to
Harrington Trust Limited as Trustee of The Appleby Trust in the
principal amount of $750,000(1)
10.30 Five-Year 6% Convertible Subordinated Note dated May 3, 1995
issued to Harrington Trust Limited as Trustee of The Appleby Trust
in the principal amount of $750,000(1)
10.31 Five-Year 6% Convertible Subordinated Note dated May 3, 1995
issued to J&S Limited Partnership in the principal amount of
$250,000(1)
10.32 Loan Agreement dated as of March 31, 1996 between Klaus P. Besier
and the Company(1)
*11 Statement of Computation of Per Share Earnings
*21 List of Subsidiaries
*23.1 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
</TABLE>
- --------
(1) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 13, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
(2) Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 25, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
* Filed herewith.
<PAGE>
Exhibit 10.1A
-------------
OBJECT POWER, INCORPORATED
Incentive Stock Option Agreement
--------------------------------
Object Power, Incorporated, a Delaware corporation (the "Company"), by
execution of Schedule I annexed hereto grants, as of the grant date set forth in
Schedule I, to the optionee named in Schedule I (the "Optionee"), an option to
purchase up to the number of shares of its Common Stock, $0.01 par value, set
forth in Schedule I at the exercise price per share set forth in Schedule I, on
the following terms and conditions:
1. Grant under 1995 Stock Plan. This option is granted pursuant to and is
---------------------------
governed by the Company's 1995 Stock Plan (the "Plan") and, unless the context
otherwise requires, terms used herein shall have the same meaning as in the
Plan. Determinations made in connection with this option pursuant to the Plan
shall be governed by the Plan as it exits on this date.
2. Grant as Incentive Stock Option; Other Options. This option is
----------------------------------------------
intended to qualify as an incentive stock option under Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code"). This option is in
addition to any other options heretofore or hereafter granted to the Optionee by
the Company, but a duplicate original of this instrument shall not effect the
grant of another option.
3. Extent of Option if Employment Continues. If the Optionee has
----------------------------------------
continued to be employed by the Company on the dates indicated in Schedule I,
the Optionee may exercise this option for the number of shares set forth as
Vested Shares opposite the applicable date on Schedule I. The foregoing vesting
of rights is cumulative and, while the Optionee continues to be employed by the
Company, may be exercised up to and including the date which is 10 years from
the date this option is granted. All of the foregoing rights are subject to
Articles 4 and 5, as appropriate, if the Optionee ceases to be employed by the
Company or dies or becomes disabled while in the employ of the Company.
4. Termination of Employment. If the Optionee ceases to be employed by
-------------------------
the Company, other than by reason of death or disability as defined in Article
5, no further installments of this option shall become exercisable and this
option shall terminate after the passage of 60 days from the date employment
ceases, but in no event later than the scheduled expiration date. In such a
case, the Optionee's only rights hereunder shall be those which are properly
exercised before the termination of this option.
5. Death; Disability. If the Optionee dies while in the employ of the
-----------------
Company, this option may be exercised, to the extent of the number of shares
with respect to which the Optionee could have exercised it on the date of his
death, by his estate, personal representative or beneficiary to whom this option
has been assigned pursuant to Article 10, at any time within 60 days after the
date of death, but not later than the scheduled
<PAGE>
expiration date. If the Optionee ceases to be employed by the Company by reason
of his disability (as defined in the Plan), this option may be exercised, to the
extent of the number of shares with respect to which he could have exercised it
on the date of the termination of his employment, at any time within 60 days
after such termination, but not later than the scheduled expiration date. At the
expiration of such 60-day period or the scheduled expiration date, whichever is
the earlier, this option shall terminate and the only rights hereunder shall be
those as to which the option was properly exercised before such termination.
6. Partial Exercise. Exercise of this option up to the extent above
----------------
stated may be made in part at any time and from time to time within the above
limits, except that this option may not be exercised for a fraction of a share
unless such exercise is with respect to the final installment of stock subject
to this option and a fractional share (or cash in lieu thereof) must be issued
to permit the Optionee to exercise completely such final installment. Any
fractional share with respect to which an installment of this option cannot be
exercised because of the limitation contained in the preceding sentence shall
remain subject to this option and shall be available for later purchase by the
Optionee in accordance with the terms hereof.
7. Payment of Price. The option price is payable in United States dollars
----------------
and may be paid in cash or by check.
8. Agreement to Purchase for Investment. By acceptance of this option,
------------------------------------
the Optionee agrees that a purchase of shares under this option will not be made
with a view to their distribution, as that term is used in the Securities Act of
1933, as amended, unless in the opinion of counsel to the Company such
distribution is in compliance with or exempt from the registration and
prospectus requirements of that Act, and the Optionee agrees to sign a
certificate to such effect at the time of exercising this option and agrees that
the certificate for the shares so purchased may be inscribed with a legend to
ensure compliance with the Securities Act of 1933.
9. Method of Exercising Option. Subject to the terms and conditions of
---------------------------
this Agreement, this option may be exercised by written notice to the Company,
at the principal executive office of the Company, or to such transfer agent as
the Company shall designate. Such notice shall state the election to exercise
this option and the number of shares in respect of which it is being exercised
and shall be signed by the person or persons so exercising this option. Such
notice shall be accompanied by payment of the full purchase price of such
shares, and the Company shall deliver a certificate or certificates representing
such shares as soon as practicable after the notice shall be received. The
certificate or certificates for the shares as to which this option shall have
been so exercised shall be registered in the name of the person or persons so
exercising this option (or, if this option shall be exercised by the Optionee
and if the Optionee shall so request in the notice exercising this option, shall
be registered in the name of the Optionee and another person jointly, with right
of survivorship) and shall be delivered as provided above to or upon the written
order of the person or persons exercising this option. In the event this option
shall
<PAGE>
be exercised, pursuant to Article 5 hereof, by any person or persons other than
the Optionee, such notice shall be accompanied by appropriate proof of the right
of such person or persons to exercise this option. All shares that shall be
purchased upon the exercise of this option as provided herein shall be fully
paid and nonassessable.
10. Option Not Transferable. This option is not transferable or
-----------------------
assignable except by will or by the laws of descent and distribution. During
the Optionee's lifetime only the Optionee can exercise this option.
11. No Obligation to Exercise Option. The grant and acceptance of this
--------------------------------
option imposes no obligation on the Optionee to exercise it.
12. No Obligation to Continue Employment. The Company and any Related
------------------------------------
Corporations are not by the Plan or this option obligated to continue the
Optionee in employment.
13. No Rights as Stockholder until Exercise. The Optionee shall have no
---------------------------------------
rights as a stockholder with respect to shares subject to this Agreement until a
stock certificate therefor has been issued to the Optionee and is fully paid
for. Except as is expressly provided in the Plan with respect to certain
changes in the capitalization of the Company, no adjustment shall be made for
dividends or similar rights for which the record date is prior to the date such
stock certificate is issued.
14. Capital Changes and Business Successions. It is the purpose of this
----------------------------------------
option to encourage the Optionee to work for the best interests of the Company
and its stockholders. The Plan contains extensive provisions designed to
preserve options at full value in a number of contingencies. Therefore,
provisions in the Plan for adjustment with respect to stock subject to options
and the related provisions with respect to successors to the business of the
Company are hereby made applicable hereunder and are incorporated herein by
reference. In particular, without affecting the generality of the foregoing, it
is understood that for the purposes of Articles 3 through 5 hereof, both
inclusive, employment by the Company includes employment by a Related
Corporation as defined in the Plan.
15. Early Disposition. The Optionee agrees to notify the Company in
-----------------
writing immediately after the Optionee makes a Disqualifying Disposition
(including a sale to the Company pursuant to Article 17 or 18) of any Common
Stock receives pursuant to the exercise of this option. A Disqualifying
Disposition is any disposition (including any sale) of such Common Stock before
the later of (a) two years after the date the Optionee was granted this option
or (b) one year after the date the Optionee acquired Common Stock by exercising
this option. If the Optionee has dies before such stock is sold, these holding
period requirements do not apply and no Disqualifying Disposition would occur.
The Optionee also agrees to provide the Company with any information which it
shall request concerning any such disposition. The Optionee acknowledges that
he or she will forfeit the favorable income tax treatment otherwise available
with respect to the exercise of this
<PAGE>
incentive stock option if he or she makes a Disqualifying Disposition of the
stock received on exercise of this option.
16. Withholding Taxes. If the Company in its discretion determines that
-----------------
it is obligated to hold tax with respect to a Disqualifying Disposition (as
defined in Article 15) of Common Stock received by the Optionee on exercise of
this option, the Optionee hereby agrees that the Company may withhold from the
Optionee's wages the appropriate amount of federal, state and local withholding
taxes attributable to such Disqualifying Disposition. If any portion of this
option is treated as a Non-Qualified Option, the Optionee hereby agrees that the
Company may withhold from the Optionee's wages the appropriate amount of
federal, state and local withholding taxes attributable to the Optionee's
exercise of such Non-Qualified Option. At the Company's discretion,t eh amount
requires to be withheld may be withheld in cash from such wages, or (with
respect to compensation income attributable to the exercise of this option) in
kind from the Common Stock otherwise deliverable to the Optionee on exercise of
this Option. The Optionee further agrees that, if the Company does not withhold
an amount from the Optionee's wages sufficient to satisfy the Company's
withholding obligation, the Optionee will reimburse the Company on demand, in
cash, for the amount underwithheld.
17. Refusal Rights. If the Optionee desires to sell all or any part of
--------------
the shares acquired under this option (including any securities received in
respect thereof pursuant to recapitalizations and the like), and an offeror (the
"Offeror") has made an offer therefor, which offer the Optionee desires to
accept, the Optionee shall: (i) obtain in writing an irrevocable and
unconditional bona fide offer (the "Bona Fide Offer") for the purchase thereof
from the Offeror; and (ii) give written notice (the "Option Notice") to the
Company setting forth his desire to sell such shares, which Option Notice shall
be accompanied by a photocopy of the original executed Bona Fide Offer and shall
set forth at least the name and address of the Offeror and the price and terms
of the Bona Fide Offer. Upon receipt of the Option Notice, the Company shall
have an option to purchase any or all of such shares specified in the Option
Notice, such option to be exercisable by giving, within 90 days after receipt of
the Option Notice, a written counter-notice to the Optionee. If the Company
elects to purchase any or all of such shares, it shall be obligated to purchase,
and the Optionee shall be obligated to sell to the Company, such shares at the
price and terms indicated in the Bona Fide Offer within 120 days from the date
of receipt by the Company of the Option Notice.
The Optionee may sell, pursuant to the terms of the Bona Fide Offer,
any or all of such shares not purchase or agreed to be purchased by the Company
at any time during the 30 days immediately following the expiration of the 90-
day period during which the Company may give the aforesaid counter-notice;
provided, however, that the Optionee shall not sell such shares to the Offeror
- -------- -------
if the Company, in its sole discretion, determines that the Offeror is a
competitor of the Company and the Company gives written notice of such
determined to the Optionee, within 90 days of its receipt of the Option Notice.
If any or all of such shares are not sold pursuant to a Bona Fide Offer within
the time permitted above, the unsold shares shall remain subject to the terms of
this Article 17.
<PAGE>
18. Repurchase Right Upon Termination of Employment. If for any reason
-----------------------------------------------
the Optionee ceases to be employed by the Company (including, without
limitation, by reason of the Optionee's voluntary resignation, the Optionee's
death or disability, or the Company's dismissal of the Optionee, with or without
cause), the termination of his employment shall be deemed to be an irrevocable
offer by the Optionee (or his executor, guardian or personal representative) to
sell to the Company all or any of the shares acquired under this option
(including any securities received in respect thereof pursuant to
recapitalizations and the like) not previously sold by the Optionee pursuant to
Article 17, at a purchase price per share equal to the fair market value of a
share of the Company's Common Stock on the date the Optionee's employment
terminated (the "Repurchase Right"). The Company may exercise the Repurchase
Right, in whole or in part, in one or more installments at any time or times
within 180 days after the date of termination of the Optionee's employment, by
giving to the Optionee written notice of its intention to exercise such
Repurchase Right, which notice shall set forth the number of shares the Company
desires to repurchase, the fair market value of such shares (as determined in
accordance with this Article 18) and the date (not more than 30 days after the
date of such notice) on which the Company intends to effect the repurchase such
shares (the "Closing Date"). On the Closing Date, the Company shall tender to
the Optionee payment, in cash, of the full purchase price of the shares being
repurchased, against delivery by the Optionee of the certificate or certificates
for such shares, duly endorsed for transfer to the Company. Notwithstanding any
failure by the Optionee to deliver the certificates for the shares being
repurchased hereunder, the Optionee's rights in such shares shall, upon the
Company's tender of payment therefor, terminate automatically, and the Company
may, upon written notice to the Optionee, cancel such certificate or
certificates on its books and issue to the Company or its designee replacement
certificates therefor. For purposes of this Article 18, the fair market value
of a share of the Company's Common Stock on the date of termination of the
Optionee's employment shall be deemed to be equal to the fair market value of
such a share as determined by the Board of Directors of the Company in
connection with the last grant of an incentive stock option under the Plan prior
to the date of such termination.
19. Special Termination Provisions. The refusal and repurchase rights of
------------------------------
the Company set forth in Articles 17 and 18 shall remain in effect until such
time, if ever, as a distribution to the public is made of shares of the
Company's Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or a successor statute, at which time such
rights will automatically expire.
20. Governing Law. This Agreement shall be governed by and interpreted in
-------------
accordance with the internal laws of Massachusetts.
<PAGE>
Exhibit 10.1B
-------------
OBJECT POWER, INCORPORATED
Non-qualified Stock Option Agreement
Object Power, Incorporated, a Delaware corporation (the "Company"), by
execution of Schedule I annexed hereto grants, as of the grant date set forth in
Schedule I, to the optionee named in Schedule I (the "Optionee"), an option to
purchase up to the number of shares of its Common Stock, $0.01 par value, set
forth in Schedule I at the exercise price per share set forth in Schedule I, on
the following terms and conditions:
1. Grant under 1995 Stock Plan. This option is granted pursuant to and is
---------------------------
governed by the Company's 1995 Stock Plan (the "Plan") and, unless the context
otherwise requires, terms used herein shall have the same meaning as in the
Plan. Determinations made in connection with this option pursuant to the Plan
shall be governed by the Plan as it exits on this date.
2. Grant as Incentive Stock Option; Other Options. This option is not
----------------------------------------------
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). This option is in
addition to any other options heretofore or hereafter granted to the Optionee by
the Company, but a duplicate original of this instrument shall not effect the
grant of another option.
3. Extent of Option if Employment Continues. If the Optionee has
----------------------------------------
continued to be employed by the Company on the dates indicated in Schedule I,
the Optionee may exercise this option for the number of shares set forth as
Vested Shares opposite the applicable date on Schedule I. The foregoing vesting
of rights is cumulative and, while the Optionee continues to be employed by the
Company, may be exercised up to and including the date which is 10 years from
the date this option is granted. All of the foregoing rights are subject to
Articles 4 and 5, as appropriate, if the Optionee ceases to be employed by the
Company or dies or becomes disabled while in the employ of the Company.
4. Termination of Employment. If the Optionee ceases to be employed by
-------------------------
the Company, other than by reason of death or disability as defined in Article
5, no further installments of this option shall become exercisable and this
option shall terminate after the passage of three months from the date
employment ceases, but in no event later than the scheduled expiration date. In
such a case, the Optionee's only rights hereunder shall be those which are
properly exercised before the termination of this option.
5. Death; Disability. If the Optionee dies while in the employ of the
-----------------
Company, this option may be exercised, to the extent of the number of shares
with respect to which the Optionee could have exercised it on the date of his
death, by his estate, personal representative or beneficiary to whom this option
has been assigned pursuant to Article 10, at any time within 360 days after the
date of death, but not later than the scheduled expiration date. If the
Optionee ceases to be employed by the Company by reason of his disability (as
defined in the Plan), this option may be exercised, to the extent of the number
of shares with respect to which he could have exercised it on the date of the
termination of his employment, at any time within 360 days after such
termination, but not later than the scheduled
<PAGE>
expiration date. If the Optionee ceases to be employed by the Company by reason
of his disability (as defined in the Plan), this option may be exercised, to the
extent of the number of shares with respect to which he could have exercised it
on the date of the termination of his employment, at any time within 360 days
after such termination, but not later than the scheduled expiration date. At the
expiration of such 360-day period or the scheduled expiration date, whichever is
the earlier, this option shall terminate and the only rights hereunder shall be
those as to which the option was properly exercised before such termination.
6. Partial Exercise. Exercise of this option up to the extent above
----------------
stated may be made in part at any time and from time to time within the above
limits, except that this option may not be exercised for a fraction of a share
unless such exercise is with respect to the final installment of stock subject
to this option and a fractional share (or cash in lieu thereof) must be issued
to permit the Optionee to exercise completely such final installment. Any
fractional share with respect to which an installment of this option cannot be
exercised because of the limitation contained in the preceding sentence shall
remain subject to this option and shall be available for later purchase by the
Optionee in accordance with the terms hereof.
7. Payment of Price. The option price is payable in United States dollars
----------------
and may be paid in cash or by check.
8. Agreement to Purchase for Investment. By acceptance of this option,
------------------------------------
the Optionee agrees that a purchase of shares under this option will not be made
with a view to their distribution, as that term is used in the Securities Act of
1933, as amended, unless in the opinion of counsel to the Company such
distribution is in compliance with or exempt from the registration and
prospectus requirements of that Act, and the Optionee agrees to sign a
certificate to such effect at the time of exercising this option and agrees that
the certificate for the shares so purchased may be inscribed with a legend to
ensure compliance with the Securities Act of 1933.
9. Method of Exercising Option. Subject to the terms and conditions of
---------------------------
this Agreement, this option may be exercised by written notice to the Company,
at the principal executive office of the Company, or to such transfer agent as
the Company shall designate. Such notice shall state the election to exercise
this option and the number of shares in respect of which it is being exercised
and shall be signed by the person or persons so exercising this option. Such
notice shall be accompanied by payment of the full purchase price of such
shares, and the Company shall deliver a certificate or certificates representing
such shares as soon as practicable after the notice shall be received. The
certificate or certificates for the shares as to which this option shall have
been so exercised shall be registered in the name of the person or persons so
exercising this option (or, if this option shall be exercised by the Optionee
and if the Optionee shall so request in the notice exercising this option, shall
be registered in the name of the Optionee and another person jointly, with right
of survivorship) and shall be delivered as provided above to or upon the written
order of the person or persons exercising this option. In the event this option
shall
<PAGE>
be exercised, pursuant to Article 5 hereof, by any person or persons other than
the Optionee, such notice shall be accompanied by appropriate proof of the right
of such person or persons to exercise this option. All shares that shall be
purchased upon the exercise of this option as provided herein shall be fully
paid and nonassessable.
10. Option Not Transferable. This option is not transferable or
-----------------------
assignable except by will or by the laws of descent and distribution. During
the Optionee's lifetime only the Optionee can exercise this option.
11. No Obligation to Exercise Option. The grant and acceptance of this
--------------------------------
option imposes no obligation on the Optionee to exercise it.
12. No Obligation to Continue Employment. The Company and any Related
------------------------------------
Corporations are not by the Plan or this option obligated to continue the
Optionee in employment.
13. No Rights as Stockholder until Exercise. The Optionee shall have no
---------------------------------------
rights as a stockholder with respect to shares subject to this Agreement until a
stock certificate therefor has been issued to the Optionee and is fully paid
for. Except as is expressly provided in the Plan with respect to certain
changes in the capitalization of the Company, no adjustment shall be made for
dividends or similar rights for which the record date is prior to the date such
stock certificate is issued.
14. Capital Changes and Business Successions. It is the purpose of this
----------------------------------------
option to encourage the Optionee to work for the best interests of the Company
and its stockholders. The Plan contains extensive provisions designed to
preserve options at full value in a number of contingencies. Therefore,
provisions in the Plan for adjustment with respect to stock subject to options
and the related provisions with respect to successors to the business of the
Company are hereby made applicable hereunder and are incorporated herein by
reference. In particular, without affecting the generality of the foregoing, it
is understood that for the purposes of Articles 3 through 5 hereof, both
inclusive, employment by the Company includes employment by a Related
Corporation as defined in the Plan.
15. Withholding Taxes. If the Company in its discretion determines that
-----------------
it is obligated to hold tax with respect to a Disqualifying Disposition (as
defined in Article 15) of Common Stock received by the Optionee on exercise of
this option, the Optionee hereby agrees that the Company may withhold from the
Optionee's wages the appropriate amount of federal, state and local withholding
taxes attributable to such Disqualifying Disposition. If any portion of this
option is treated as a Non-Qualified Option, the Optionee hereby agrees that the
Company may withhold from the Optionee's wages the appropriate amount of
federal, state and local withholding taxes attributable to the Optionee's
exercise of such Non-Qualified Option. At the Company's discretion,t eh amount
requires to be withheld may be withheld in cash from such wages, or (with
respect to compensation income
<PAGE>
attributable to the exercise of this option) in kind from the Common Stock
otherwise deliverable to the Optionee on exercise of this Option. The Optionee
further agrees that, if the Company does not withhold an amount from the
Optionee's wages sufficient to satisfy the Company's withholding obligation, the
Optionee will reimburse the Company on demand, in cash, for the amount
underwithheld.
16. Refusal Rights. If the Optionee desires to sell all or any part of
--------------
the shares acquired under this option (including any securities received in
respect thereof pursuant to recapitalizations and the like), and an offeror (the
"Offeror") has made an offer therefor, which offer the Optionee desires to
accept, the Optionee shall: (i) obtain in writing an irrevocable and
unconditional bona fide offer (the "Bona Fide Offer") for the purchase thereof
from the Offeror; and (ii) give written notice (the "Option Notice") to the
Company setting forth his desire to sell such shares, which Option Notice shall
be accompanied by a photocopy of the original executed Bona Fide Offer and shall
set forth at least the name and address of the Offeror and the price and terms
of the Bona Fide Offer. Upon receipt of the Option Notice, the Company shall
have an option to purchase any or all of such shares specified in the Option
Notice, such option to be exercisable by giving, within 90 days after receipt of
the Option Notice, a written counter-notice to the Optionee. If the Company
elects to purchase any or all of such shares, it shall be obligated to purchase,
and the Optionee shall be obligated to sell to the Company, such shares at the
price and terms indicated in the Bona Fide Offer within 120 days from the date
of receipt by the Company of the Option Notice.
The Optionee may sell, pursuant to the terms of the Bona Fide Offer, any or
all of such shares not purchase or agreed to be purchased by the Company at any
time during the 30 days immediately following the expiration of the 90-day
period during which the Company may give the aforesaid counter-notice; provided,
--------
however, that the Optionee shall not sell such shares to the Offeror if the
- -------
Company, in its sole discretion, determines that the Offeror is a competitor of
the Company and the Company gives written notice of such determined to the
Optionee, within 90 days of its receipt of the Option Notice. If any or all of
such shares are not sold pursuant to a Bona Fide Offer within the time permitted
above, the unsold shares shall remain subject to the terms of this Article 17.
17. Repurchase Right Upon Termination of Employment. If for any reason
-----------------------------------------------
the Optionee ceases to be employed by the Company (including, without
limitation, by reason of the Optionee's voluntary resignation, the Optionee's
death or disability, or the Company's dismissal of the Optionee, with or without
cause), the termination of his employment shall be deemed to be an irrevocable
offer by the Optionee (or his executor, guardian or personal representative) to
sell to the Company all or any of the shares acquired under this option
(including any securities received in respect thereof pursuant to
recapitalizations and the like) not previously sold by the Optionee pursuant to
Article 17, at a purchase price per share equal to the fair market value of a
share of the Company's Common Stock on the date the Optionee's employment
terminated (the "Repurchase Right"). The Company may exercise the Repurchase
Right, in whole or in part, in one or more installments at any time or times
within 180 days after the date of termination of the
<PAGE>
Optionee's employment, by giving to the Optionee written notice of its intention
to exercise such Repurchase Right, which notice shall set forth the number of
shares the Company desires to repurchase, the fair market value of such shares
(as determined in accordance with this Article 18) and the date (not more than
30 days after the date of such notice) on which the Company intends to effect
the repurchase such shares (the "Closing Date"). On the Closing Date, the
Company shall tender to the Optionee payment, in cash, of the full purchase
price of the shares being repurchased, against delivery by the Optionee of the
certificate or certificates for such shares, duly endorsed for transfer to the
Company. Notwithstanding any failure by the Optionee to deliver the certificates
for the shares being repurchased hereunder, the Optionee's rights in such shares
shall, upon the Company's tender of payment therefor, terminate automatically,
and the Company may, upon written notice to the Optionee, cancel such
certificate or certificates on its books and issue to the Company or its
designee replacement certificates therefor. For purposes of this Article 18, the
fair market value of a share of the Company's Common Stock on the date of
termination of the Optionee's employment shall be deemed to be equal to the fair
market value of such a share as determined by the Board of Directors of the
Company in connection with the last grant of an incentive stock option under the
Plan prior to the date of such termination.
18. Special Termination Provisions. The refusal and repurchase rights of
------------------------------
the Company set forth in Articles 17 and 18 shall remain in effect until such
time, if ever, as a distribution to the public is made of shares of the
Company's Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or a successor statute, at which time such
rights will automatically expire.
19. Governing Law. This Agreement shall be governed by and interpreted in
-------------
accordance with the internal laws of Delaware.
<PAGE>
Exhibit 10.2A
-------------
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
UNDER THE ONEWAVE, INC.
1996 STOCK PLAN
Pursuant to the OneWave, Inc. 1996 Stock Plan (the "Plan") as amended
through the date hereof, OneWave, Inc. (the "Company") hereby grants to the
Optionee named in Exhibit A attached hereto a Stock Option (the "Stock Option")
---------
to purchase on or prior to the Expiration Date specified in Exhibit A all or
---------
part of the number of shares ("Option Shares") of Common Stock, par value $.001
per share (the "Stock"), of the Company specified in Exhibit A at the Option
---------
Exercise Price per Share specified in Exhibit A subject to the terms and
---------
conditions set forth herein and in the Plan.
1. Vesting Schedule. No portion of this Stock Option may be exercised
----------------
until such portion shall have vested. Except as set forth below, and subject to
the discretion of the Committee (as defined in paragraph 2 of the Plan) to
accelerate the vesting schedule hereunder, this Stock Option shall vest in four
equal annual installments commencing one year following the date of employment
of the Optionee or, if different, in accordance with such other vesting schedule
as may be specified in Exhibit A.
---------
Unless alternate provisions are made, this Stock Option will terminate upon
the occurrence of (i) the dissolution or liquidation of the Company, (ii) a
merger, consolidation or other business combination in which the Company is
acquired by another entity (other than a holding company formed by the Company)
or in which the Company is not the surviving entity ("Acquisition") or (iii) the
sale of all or substantially all of the assets of the Company to another entity
("Sale"). In the event of a termination due to an Acquisition or Sale, such
portions of this Stock Option which have vested plus such additional portions
which by their terms vest upon an Acquisition or Sale, shall be exercisable for
at least fifteen (15) days prior to the date of such termination.
2. Manner of Exercise.
------------------
(a) The Optionee may exercise this Stock Option only in the following
manner: from time to time on or prior to the Expiration Date of this Stock
Option, the Optionee may give written notice to the Company of his or her
election to purchase some or all of the vested Option Shares purchasable at the
time of such notice. This notice shall specify the number of Option Shares to
be purchased.
Payment of the purchase price for the Option Shares may be made by one or
more of the following methods: (i) in cash, by certified or bank check or other
instrument acceptable to the Committee; (ii) in the form of shares of Stock that
are not then subject to restrictions under any Company plan and that have been
held by the Optionee for at least six months; (iii) at the discretion of the
Committee, by delivery of the Optionee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
<PAGE>
federal rate, as defined in Section 1274(d) of the Internal Revenue Code of
1986, as amended (the "Code"); (iv) by the Optionee delivering to the Company a
properly executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company cash or a check payable and acceptable
to the Company to pay the Stock Option purchase price, provided that in the
event the Optionee chooses to pay the Stock Option purchase price as so
provided, the Optionee and the broker shall comply with such procedures and
enter into such agreements of indemnity and other agreements as the Committee
shall prescribe as a condition of such payment procedure; or (v) at the
discretion of the Committee by any combination of (i), (ii), (iii) and (iv)
above. Payment instruments will be received subject to collection.
The delivery of certificates representing the Option Shares will be
contingent upon the Company's receipt from the Optionee of full payment for the
Option Shares, as set forth above and any agreement, statement or other evidence
that the Company may require to satisfy itself that the issuance of Stock to be
purchased pursuant to the exercise of Stock Options under the Plan and any
subsequent resale of the shares of Stock will be in compliance with applicable
laws and regulations.
(b) Certificates for the shares of Stock purchased upon exercise of
this Stock Option shall be issued and delivered to the Optionee upon compliance
to the satisfaction of the Committee with all requirements under applicable laws
or regulations in connection with such issuance and with the requirements hereof
and of the Plan. The determination of the Committee as to such compliance shall
be final and binding on the Optionee. The Optionee shall not be deemed to be
the holder of, or to have any of the rights of a holder with respect to, any
shares of Stock subject to this Stock Option unless and until this Stock Option
shall have been exercised pursuant to the terms hereof, the Company shall have
issued and delivered the shares of Stock to the Optionee, and the Optionee's
name shall have been entered as the stockholder of record on the books of the
Company. Thereupon, the Optionee shall have full voting, dividend and other
ownership rights with respect to such shares of Stock.
(c) The minimum number of shares with respect to which this Stock
Option may be exercised at any one time shall be 100 shares, unless the number
of shares with respect to which this Stock Option is being exercised is the
total number of shares subject to exercise under this Stock Option at the time.
(d) Notwithstanding any other provision hereof or of the Plan, no
portion of this Stock Option shall be exercisable after the Expiration Date
hereof.
3. Termination of Employment. If the Optionee's employment by the Company
-------------------------
or all of its majority-owned subsidiaries is terminated, the period within which
to exercise the Stock Option may be subject to earlier termination as set forth
below.
(a) Termination Due to Death. If the Optionee's employment terminates
------------------------
by reason of death, any Stock Option held by the Optionee, to the extent
exercisable, may
Page 2
<PAGE>
thereafter be exercised by the Optionee's personal representative or beneficiary
who has acquired the Stock Option by will or by the laws of descent and
distribution for a period of 12 months from the date of death or until the
Expiration Date, if earlier.
(b) Termination Due to Disability. If the Optionee's employment
-----------------------------
terminates by reason of disability (as defined in Paragraph 11 of the Plan), any
Stock Option held by the Optionee shall become fully exercisable and may
thereafter be exercised by the Optionee for a period of 12 months from the date
of termination or until the Expiration Date, if earlier.
(c) Termination of Employment. If the Optionee's employment
-------------------------
terminates for any reason other than death or disability (as defined in
paragraph 11 of the Plan), and unless otherwise determined by the Committee, any
Stock Option held by the Optionee may be exercised, to the extent exercisable on
the date of termination, for a period of three months from the date of
termination or until the Expiration Date, if earlier. Any Stock Option that is
not exercisable at such time shall terminate immediately and be of no further
force or effect.
4. Incorporation of Plan. Notwithstanding anything herein to the
---------------------
contrary, this Stock Option shall be subject to and governed by the general
terms and conditions of the Plan. Capitalized terms in this Agreement shall
have the meaning specified in the Plan, unless a different meaning is specified
herein or in Exhibit A attached hereto and incorporated herein.
---------
5. Transferability. This Agreement is personal to the Optionee, is non-
---------------
assignable and is not transferable in any manner, by operation of law or
otherwise, other than by will or the laws of descent and distribution. This
Stock Option is exercisable, during the Optionee's lifetime, only by the
Optionee, and thereafter, only by the Optionee's personal representative or
beneficiary.
6. Status of the Stock Option. This Stock Option is intended to qualify
--------------------------
as an "Incentive Stock Option" under Section 422 of the Code, but the Company
does not represent or warrant that this Stock Option qualifies as such. The
Optionee should consult with his or her own tax advisors regarding the tax
effects of this Stock Option and the requirements necessary to obtain favorable
income tax treatment under Section 422 of the Code, including, but not limited
to, holding period requirements. If the Optionee intends to dispose or does
dispose (whether by sale, gift, transfer or otherwise) of any Option Shares
within the one-year period beginning on the date after the transfer of such
shares to him or her, or within the two-year period beginning on the day after
the grant of this Stock Option, he or she will notify the Company within 30 days
after such disposition.
7. Miscellaneous.
-------------
(a) Notice hereunder shall be given to the Company at its principal
place of business, and shall be given to the Optionee at the address set forth
below, or in either case at such other address as one party may subsequently
furnish to the other party in writing.
Page 3
<PAGE>
(b) This Stock Option does not confer upon the Optionee any rights
with respect to continuance of employment by the Company or any of its
subsidiaries or any Related Corporation.
(c) Pursuant to paragraph 16 of the Plan, the Committee may at any
time amend or cancel any outstanding portion of this Stock Option, but no such
action may be taken which adversely affects the Optionee's rights under this
Agreement without the Optionee's consent.
OneWave, Inc.
By:_____________________________________
Craig Newfield, General Counsel
Date: As of March 10, 1997
--------------------
The foregoing Agreement is hereby accepted and the terms and conditions thereof
hereby agreed to by the undersigned.
Dated:_______________________ ________________________________________
Optionee's Signature
Optionee's Name:________________________
Optionee's Address:_____________________
________________________________________
________________________________________
Page 4
<PAGE>
Exhibit 10.2B
-------------
NON-QUALIFIED STOCK OPTION AGREEMENT
------------------------------------
UNDER THE ONEWAVE, INC.
1996 STOCK PLAN
Pursuant to the OneWave, Inc. 1996 Stock Plan (the "Plan") as amended
through the date hereof, OneWave, Inc. (the "Company") hereby grants to the
Optionee named in Exhibit A attached hereto an option (the "Stock Option") to
---------
purchase on or prior to the Expiration Date specified in Exhibit A all or part
---------
of the number of shares ("Option Shares") of Common Stock, par value $.001 per
share (the "Stock"), of the Company specified in Exhibit A at the Option
---------
Exercise Price per Share specified in Exhibit A subject to the terms and
---------
conditions set forth herein and in the Plan.
1. Vesting Schedule. No portion of this Stock Option may be exercised
----------------
until such portion shall have vested. Except as set forth below, and subject to
the discretion of the Committee (as defined in paragraph 2 of the Plan) to
accelerate the vesting schedule hereunder, this Stock Option shall vest in four
equal annual installments commencing one year following the date of employment
of the Optionee or, if different, in accordance with such other vesting schedule
as may be specified in Exhibit A.
---------
Unless alternate provisions are made, this Stock Option will terminate upon
the occurrence of (i) the dissolution or liquidation of the Company, (ii) a
merger, consolidation or other business combination in which the Company is
acquired by another entity (other than a holding company formed by the Company)
or in which the Company is not the surviving entity ("Acquisition") or (iii) the
sale of all or substantially all of the assets of the Company to another entity
("Sale"). In the event of a termination due to an Acquisition or Sale, such
portions of this Stock Option which have vested plus such additional portions
which by their terms vest upon an Acquisition or Sale, shall be exercisable for
at least fifteen (15) days prior to the date of such termination.
2. Manner of Exercise.
------------------
(a) The Optionee may exercise this Option only in the following
manner: from time to time on or prior to the Expiration Date of this Option,
the Optionee may give written notice to the Company of his or her election to
purchase some or all of the vested Option Shares purchasable at the time of such
notice. This notice shall specify the number of Option Shares to be purchased.
Payment of the purchase price for the Option Shares may be made by one or
more of the following methods: (i) in cash, by certified or bank check or
other instrument acceptable to the Committee; (ii) in the form of shares of
Stock that are not then subject to restrictions under any Company plan and
that have been held by the Optionee for at least six months; (iii) at the
discretion of the Committee, by delivery of the Optionee's personal recourse
note bearing interest payable not less than annually at no less than 100% of
the lowest applicable federal rate, as defined in Section 1274(d) of the
Internal Revenue Code of 1986, as amended (the "Code"); (iv) by the Optionee
delivering to the Company a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Company cash
or a check payable and acceptable to the Company to pay the option purchase
price, provided that in the event the Optionee chooses to pay the option
purchase price as so
<PAGE>
provided, the Optionee and the broker shall comply with such procedures and
enter into such agreements of indemnity and other agreements as the Committee
shall prescribe as a condition of such payment procedure; or (v) at the
discretion of the Committee by any combination of (i), (ii), (iii) and (iv)
above. Payment instruments will be received subject to collection.
The delivery of certificates representing the Option Shares will be
contingent upon the Company's receipt from the Optionee of full payment for
the Option Shares, as set forth above and any agreement, statement or other
evidence that the Company may require to satisfy itself that the issuance of
Stock to be purchased pursuant to the exercise of Stock Options under the Plan
and any subsequent resale of the shares of Stock will be in compliance with
applicable laws and regulations.
(b) Certificates for shares of Stock purchased upon exercise of this
Stock Option shall be issued and delivered to the Optionee upon compliance to
the satisfaction of the Committee with all requirements under applicable laws
or regulations in connection with such issuance and with the requirements
hereof and of the Plan. The determination of the Committee as to such
compliance shall be final and binding on the Optionee. The Optionee shall not
be deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares of Stock subject to this Stock Option unless and until
this Stock Option shall have been exercised pursuant to the terms hereof, the
Company shall have issued and delivered the shares of Stock to the Optionee,
and the Optionee's name shall have been entered as the stockholder of record
on the books of the Company. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Stock.
(c) The minimum number of shares with respect to which this Stock
Option may be exercised at any one time shall be 100 shares, unless the number
of shares with respect to which this Stock Option is being exercised is the
total number of shares subject to exercise under this Stock Option at the
time.
3. Termination of Employment. If the Optionee's employment by the
-------------------------
Company or all of its majority-owned subsidiaries is terminated, the period
within which to exercise the Option may be subject to earlier termination as
set forth below.
(a) Termination Due to Death. If the Optionee's employment
------------------------
terminates by reason of death, any Stock Option held by the Optionee, to the
extent exercisable, may thereafter be exercised by the Optionee's personal
representative or beneficiary who has acquired the Stock Option by will or by
the laws of descent and distribution for a period of 12 months from the date
of death or until the Expiration Date, if earlier.
(b) Termination Due to Disability. If the Optionee's employment
-----------------------------
terminates by reason of disability (as defined in Paragraph 11 of the Plan),
any Stock Option held by the Optionee shall become fully exercisable and may
thereafter be exercised by the Optionee for a period of 12 months from the
date of termination or until the Expiration Date, if earlier.
2
<PAGE>
(c) Termination of Employment. If the Optionee's employment
-------------------------
terminates for any reason other than death or disability (as defined in
paragraph 11 of the Plan), and unless otherwise determined by the Committee,
any Stock Option held by the Optionee may be exercised, to the extent
exercisable on the date of termination, for a period of three months from the
date of termination or until the Expiration Date, if earlier. Any Stock
Option that is not exercisable at such time shall terminate immediately and be
of no further force or effect.
(d) Notwithstanding any other provision hereof or of the Plan, no
portion of this Stock Option shall be exercisable after the Expiration Date
hereof.
4. Incorporation of Plan. Notwithstanding anything herein to the
---------------------
contrary, this Stock Option shall be subject to and governed by the general
terms and conditions of the Plan. Capitalized terms in this Agreement shall
have the meaning specified in the Plan, unless a different meaning is
specified herein or in Exhibit A attached hereto and incorporated herein.
---------
5. Transferability. This Agreement is personal to the Optionee, is non-
---------------
assignable and is not transferable in any manner, by operation of law or
otherwise, other than by will or the laws of descent and distribution. This
Stock Option is exercisable, during the Optionee's lifetime, only by the
Optionee, and thereafter, only by the Optionee's personal representative or
beneficiary.
6. Tax Withholding. No later than the date as of which part or all of
---------------
the value of any shares of Stock received under the Plan first becomes
includible in the Optionee's gross income for Federal tax purposes, the
Optionee shall make arrangements with the Company in accordance with paragraph
20 of the Plan regarding payment of any Federal, state or local taxes required
to be withheld with respect to such income.
7. Miscellaneous.
-------------
(a) Notice hereunder shall be given to the Company at its principal
place of business, and shall be given to the Optionee at the address set forth
below, or in either case at such other address as one party may subsequently
furnish to the other party in writing.
(b) This Stock Option does not confer upon the Optionee any rights
with respect to continuance of employment by the Company or any of the
Company's subsidiaries or by any Related Corporation.
[Balance of page left blank intentionally.]
3
<PAGE>
(c) Pursuant to paragraph 16 of the Plan, the Committee may at any time amend
or cancel any outstanding portion of this Stock Option, but no such action may
be taken which adversely affects the Optionee's rights under this Agreement
without the Optionee's consent.
OneWave, Inc.
Dated: August 16, 1996 By:
--------------- ----------------------------------
Craig Newfield, General Counsel
The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.
Dated:
---------------------- -------------------------------------
Optionee's Signature
Optionee's Name:
---------------------
Optionee's Address:
-------------------------------------
-------------------------------------
4
<PAGE>
Exhibit 11
----------
OneWave, Inc.
Statement Regarding Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1996
--------------------------
<S> <C> <C>
Net loss $(2,698) $(12,344)
Weighted average shares outstanding
during the period (1) 10,468 12,707
Common stock equivalent shares (1) 2,404 1,254
------- --------
Weighted average number of common and
common stock equivalents 12,872 13,961
Pro forma net loss per common and $ (.21) $ (.88)
common equivalent share ======= ========
</TABLE>
(1) In accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No.83 ("SAB 83") all common and common equivalent shares and
other potentially dilutive instruments (including stock options,
redeemable convertible preferred stock and convertible preferred stock)
issued during the last twelve month period prior to the public offering
date have been included in the calculation as if they were outstanding for
all periods prior to the date of the Initial Public Offering.
<PAGE>
Exhibit 21
----------
OneWave, Inc
List of Subsidiaries
--------------------
The following is a list of all subsidiaries of OneWave, Inc., their jurisdiction
of incorporation, and the name(s) under which they do business:
<TABLE>
<CAPTION>
<S> <C> <C>
Name(s) under which
Subsidiary Jurisdiction of Incorporation subsidiary does business
- ------------------------- ---------------------------------- -------------------------------
OneWave Securities Massachusetts OneWave Securities
Corporation Corporation
</TABLE>
<PAGE>
Exhibit 23
----------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-09101.
Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIALS IN 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,868,496
<SECURITIES> 27,181,222
<RECEIVABLES> 1,783,741
<ALLOWANCES> (283,000)
<INVENTORY> 303,900
<CURRENT-ASSETS> 42,884,496
<PP&E> 3,678,292
<DEPRECIATION> 669,118
<TOTAL-ASSETS> 46,150,535
<CURRENT-LIABILITIES> 6,413,385
<BONDS> 0
0
0
<COMMON> 14,908
<OTHER-SE> 39,722,242
<TOTAL-LIABILITY-AND-EQUITY> 46,150,535
<SALES> 13,204,451
<TOTAL-REVENUES> 13,204,451
<CGS> 5,518,908
<TOTAL-COSTS> 5,518,908
<OTHER-EXPENSES> 20,887,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 953,284
<INCOME-PRETAX> (12,248,616)
<INCOME-TAX> 95,331
<INCOME-CONTINUING> (12,343,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,343,947)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
</TABLE>
